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Research outline

Aim and background of the Research

This research project aims to provide useful insights on the long-term evolution of the financial intermediation in Japan by constructing a database that enables a quantitative assessment of financial intermediation and by conducting an empirical analysis with a historical perspective. First, we will collect Japanese financial data from various sources for post-World War II period and measure the unit cost of financial intermediation proposed by Philippon (2015) and the Liquidity Creation Measure (LCM) by Berger and Bouwman (2009). Second, we conduct an empirical analysis of financial intermediation costs and LCM in Japan. Specifically, we analyze the effects of the transformation of finance industry such as the increasing presence of non-banks and the originate-to-distribute model, changes in financial regulations, and changes in economic growth rates, nominal interest rate levels, and monetary policy on financial intermediation costs and LCM. Using bank-level panel data, we will also analyze the relationship between LCM and bank soundness, risk-taking, and the real economy. To the best of our knowledge, there are no previous studies that have precisely measured and analyzed the unit cost of financial intermediation and LCM in Japan.

Research plan

The project has two main components: (1) construction of database and measurement of financial intermediation costs and LCM, and (2) empirical research on financial intermediation costs and LCM.

(1) Construction of database and measurment of financial intermediation costs and LCM

The unit cost of financial intermediation and LCM are defined as in equations (1) and (2), respectively:

ψ\(=\frac y q（1）\)

\(LCM=\displaystyle \sum_i w_iAssets_i+\displaystyle \sum_i w_jAssets_j（2）\)

In equation (1), y and q respectively represents financial income and financial output (intermediated financial services).
In equation (2), \(Assets_i\) and \(w_j\) respectively represents the outstanding of bank asset i and its weight. Similarly, \(Liabilities_j\) and \(w_j\) respectively represents the outstanding of bank liability j and its weight.

To measure financial intermediation costs and LCM, we will collect and integrate data from a variety of sources and construct database. Specifically, we plan to collect from the following sources. First, financial income y, i.e., the numerator of financial intermediation costs, is measured in terms of value added (VA), which is the sum of revenues received by the financial industry minus intermediate consumption for the production of financial services, and we use financial industry VA from Japan’s System of National Accounts (SNA). However, there are two problems with Japan’s financial industry VA: long-term time series data do not exist, and the breakdown of the financial industry VA is not publicly available. These problems make it difficult to examine which financial intermediation service drove the growth of the financial income. To address these issues, we use semi-aggregated financial statements of deposit-taking financial institutions, securities firms, and insurance companies, and estimate financial income. The semi-aggregated financial statements are compiled by various industry associations and government agencies such as the Ministry of Finance. We also collect financial statements of individual financial institutions. Second, financial output q, i.e., the denominator of financial intermediation costs, we consider the supply of funds through debt and equity, liquidity provision, investment banking (underwriting and distribution of corporate bonds and equity, M&A, etc.), and insurance. To measure financial output, we use Flow of Funds statistics, Money Stock statistics, data compiled by the Japan Securities Dealers Association, and RECOF. Third, to measure LCM, we use semi-aggregated financial statements of deposit-taking financial institutions mentioned above. However, since the liquidity of loans and deposits (weight w in equation (2)) varies depending on maturity and use of funds, we will obtain complementary information from the Bank of Japan’s Annual Report of Economic Statistics and other sources.

(2) Empirical analyses

We plan to conduct the following empirical analyses.

First, we examine the effects of the transformation of finance industry, changes in financial regulations, and changes in economic growth rates, nominal interest rate levels, and monetary policy on financial intermediation costs and LCM. Second, using bank-level micro data, we will examine the relationship between LCM, bank behaviors, and the real economy.

References

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