Utilization Of Soft Information On Bank Performance: The Roles Of Relationship Lending In Competitive Local Markets (springerbriefs In Economics)

This book explores the effects of soft information utilization in the decision process for lenders, especially concerning small and medium-sized enterprises (SMEs) in regional markets. This study is one of the first to use questionnaire survey data from lender representatives, and analyzes the relationship between the financial metrics of a lender’s performance and soft information factors in inter-bank competition. The authors’ empirical results suggest that utilizing soft information allows banks to attain a more precise lending decision. The Financial Services Agency in Japan introduced an action program in 2003 that requires regional banks to shift from transaction banking to relationship lending. Against that background, this book examines the influence of relationship lending on a lender’s performance. This study found that relationship lending allows lenders to charge a higher premium to counteract the high risk involved with SMEs. The book also examines how relationship lending affects lending performance in inter-bank competition. The conclusion is that, even though inter-bank competition has negative effects, a bank in a competitive local market can acquire an informational advantage to limit its own loss. This book categorizes three soft information factors: organizational systems, networks or alliances/partnerships, and business/management leadership based on survey data. The authors’ findings suggest that information production, especially network and business/leadership information, plays an essential role in promoting a bank’s profitability. These effects are strong even when banks face high inter-bank competition. Relationship lending not only improves bankers’ lending techniques, but also fosters and enhances their community knowledge and enables them to survive in a highly competitive market. Preface 6 Acknowledgements 8 Contents 9 About the Authors 11 1 Introduction 12 1.1 The Bank–Firm Relationship in Japan 12 1.2 Enhancing Functions of Relationship Lending in Japan Since the Early 2000s 17 1.3 Soft and Hard Information 18 1.4 Centralized and Decentralized Organizations 20 1.5 Small, Medium-Sized, and Large Enterprises 21 1.6 Lending Technologies for SMEs: Transactional and Relationship Lending 21 1.7 Conclusions 23 1.8 Outlook 24 References 25 2 Theory and Hypotheses: The Effects of Using Soft Information on a Lender’s Performance, Specifically in Interbank Competition 28 2.1 Informational Asymmetry and Lock-In 28 2.2 Interbank Competition, the Shift to Relationship Lending, and Relationship Lending’s Effect on Profitability 31 2.3 The Informational Advantage of Relationship-Based Lending and Regional Banks’ Credit Analysis Skills 34 2.4 Interbank Competition’s Effect on Loan Risk 35 2.5 Interbank Competitions and the Effect of Relationship Lending on Bad Loan Ratios 37 2.6 Conclusions 38 References 39 3 Survey Data from Japanese Regional Banks and Using Soft Information in Lending Decisions 41 3.1 Characteristics of Japanese Banks 41 3.2 Survey Description and a Data Sample 44 3.3 Using Soft Information in Lending Decision Processes 48 3.4 A Factor Analysis for Soft Information and Our Sample’s Descriptive Data 50 3.5 Univariate Tests: The Relationship Between Soft Information Factor Scores and a Bank’s Performance 52 3.6 Conclusions 61 Appendix 3.1: Survey Questionnaire Items (Conducted by SME Support, Japan) 61 Appendix 3.2: The Underlying Factors in the Factor Analysis 62 References 65 4 The Influence of Using Soft Information on Lender Performance in Competitive Local Markets: An Empirical Analysis 67 4.1 Multivariate Regression Models 67 4.2 Dependent and Explanatory Variables 69 4.2.1 Soft Information Factors 69 4.2.2 Loan Performance 72 4.2.3 Bank-Specific and Local Market-Specific Variables 73 4.3 Regression Results 75 4.3.1 Multivariate Analysis of Loan Profitability 75 4.3.2 Multivariate Analysis of the Bad Loan Ratio 84 4.4 Robustness Tests 91 4.4.1 F-Test 91 4.4.2 Assessment of the Factor Scores’ Validity 92 4.4.3 Random Effects GLS Regressions 93 4.5 Conclusions 99 Appendix 4.1: Interbank Competition and Loan Performance 99 Appendix 4.2: Interbank Competition and the Non-performing Loan Ratio 99 References 101 5 Soft Information’s Role in Lending Decisions 103 5.1 Introduction 103 5.2 Soft Information’s Effects on Loan Profitability 104 5.3 Soft Information’s Role in Lending Decisions 105 5.4 Three Latent Factors and Information Efficacy 106 5.4.1 Business and Management Leadership 106 5.4.2 Networks or Alliances/Partnerships 109 5.4.3 Organizational Systems 111 5.5 Concluding Remarks 113 References 114 Index 116 Front Matter ....Pages i-xi Introduction (Tadanori Yosano, Takayoshi Nakaoka)....Pages 1-16 Theory and Hypotheses: The Effects of Using Soft Information on a Lender’s Performance, Specifically in Interbank Competition (Tadanori Yosano, Takayoshi Nakaoka)....Pages 17-29 Survey Data from Japanese Regional Banks and Using Soft Information in Lending Decisions (Tadanori Yosano, Takayoshi Nakaoka)....Pages 31-56 The Influence of Using Soft Information on Lender Performance in Competitive Local Markets: An Empirical Analysis (Tadanori Yosano, Takayoshi Nakaoka)....Pages 57-92 Soft Information’s Role in Lending Decisions (Tadanori Yosano, Takayoshi Nakaoka)....Pages 93-105 Back Matter ....Pages 107-110 "This book is written for readers like you who are fond of or would like to learn Spanish, Portuguese, Italian and French simultaneously or just to get an all-round knowledge of all these four Romance languages. It is designed not only for beginners who do not have an extensive knowledge of grammar, yet need a guide through the grammatical concepts of all mentioned above languages, but also intermediate and advanced students who would like to have a reference book of several Romance languages at once."--back cover