Measuring the Systemic Risk of Regional Banks in Japan with PLS-SEM

Abstract

I embark to measure the systemic risk of regional banks in Japan through shadow banking (microlevel and macrolevel linkages) using partial least squares structural equation modeling (PLS-SEM). Non-parametric PLS-SEM is used for the first time in the context of Japanese banks. I collect indicator-based data from Orbis Bank Focus but do not find all the indicators suggested by theory. Results indicate systemic risk is explained by 12.5% of shadow banking. I use generalized structured component analysis (GSCA) for robustness test because it belongs to the same family of methods as PLS-SEM; PLS-SEM results are confirmed by GSCA. Regulators need to collect more data regarding shadow banking activities in relation to regional banks in Japan. The missing indicators are critical for explaining systemic risk in regional banks through shadow banking. Once more data are available, researchers can explore whether shadow banking has a substantial effect on the systemic risk of regional banks in Japan.