Fall of "organ bank" relationship over bank failure and consolidation wave: Experience in pre-war Japan

Abstract

This paper examines how the close ties between banks and non-bank firms - so called "organ bank" relationship in Japanese banking literature - declined through bank failures and banking consolidations in pre-war Japan. With a unique dataset compiled for 1,007 Japanese banks from 1926 to 1936, we measure the degree of "organ bank" relationship by the number of persons who worked as directors or auditors for a bank and a non-bank firm at the same time. We observe that this number of "director interlocking" declined along our sample period, when there were lots of bank failure, bank merger and acquisition events. Our findings suggest that banking consolidation and selection thorough failures may help to eliminate the detrimental connections between banks and non-bank firms, based on Japan's experience.