Estimating Inefficiency, Technological Change and Shadow Prices of Problem Loans for Regional Banks and Shinkin Banks in Japan

We examine the effects of different organizational structures between Japanese cooperative Shinkin banks and stockholder owned regional banks on technical inefficiency, technological change, and shadow prices of problem loans during fiscal years 2001 to 2004. We estimate a frontier production technology where banks knowingly generate an undesirable output (problem loans) in the process of producing a portfolio of loans and securities. The frontier technology of production is derived from the work of Fare et al. (2005) and estimated using the deterministic linear programming method of Aigner and Chu (1968). Regional banks are less efficient in absolute terms, but not in relative terms, than Shinkin banks. Regional banks also experienced faster technological progress and had a higher cost of reducing problem loans than than Shinkin banks.