Japanese Bank Productivity, 2007–2012: A Dynamic Network Approach

Abstract

We estimate a dynamic network (DN) directional output distance function for 100 Japanese banks operating during 2007–2012. Network production occurs in that deposits and other funds raised are produced as intermediate products in stage 1 and those intermediate products are used to generate a portfolio of assets in stage 2. The dynamic technology links production periods via nonperforming loans (NPL) and carryover assets, which take the form of excess reserves. Carryover assets expand the future production possibility set while NPL shrink future production possibilities. We extend previous DN methods to measure the performance of three types of Japanese commercial banks: city banks, regional banks and second regional banks. We test for and find differences in the three bank technologies relative to a common technology. Such differences are likely due to different institutional and regulatory structures. Unlike previous DN studies, we also allow for a non‐uniform abatement factor between previously‐produced NPL and other inputs in stage 1 and between performing loans and NPL in the current period. Measured productivity change is greater when each bank faces their own group technology rather than the pooled technology consisting of all bank types.