Utilization of Soft Information on Bank Performance

The Roles of Relationship Lending in Competitive Local Markets

verfasst von: Prof. Tadanori Yosano, Prof. Takayoshi Nakaoka

Verlag: Springer Singapore

Buchreihe : SpringerBriefs in Economics

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

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.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract

This chapter highlights the significance of relationship lending in lenders’ decision-making process, especially concerning small and medium-sized enterprises (SMEs) in Japanese regional markets. Generally, relationship lending has been a common practice in credit financing for financial institutions of all sizes; it is in contrast to the term “main bank,” which is specifically used to describe the close bank–firm relationship for large firms in Japan. Although the main bank relationship has tended toward decline, relationship lending has particularly gained attention not only due to the Japanese Financial Services Agency introducing its 2003 action program, but also due to rather close ties between regional banks and SMEs owing to these small businesses’ opacity. Contemporary literature suggest that the firm-bank relationship produces an invaluable asset when it is long lasting by using proxies for relationship lending. Meanwhile, this article uses a questionnaire survey to identify the components of the information used in relationship lending. Further, it investigates soft information factors’ influence on a lender’s performance, specifically in a competitive local market. Therefore, this chapter summarizes the characteristics of soft information, and the role and functions of these pieces of information in the lending decision process.

Tadanori Yosano, Takayoshi Nakaoka

Chapter 2. Theory and Hypotheses: The Effects of Using Soft Information on a Lender’s Performance, Specifically in Interbank Competition

Abstract

This chapter provides a survey of recent literature on the utilization and role of soft information in relationship lending, especially as it concerns SMEs in regional markets. Contemporary literature suggests that a complex relationship exists between using soft information and lender performance, although some empirical evidence supports soft information’s positive effect on loan profitability, and convincingly argues that such information effectively functions under greater interbank competition. This chapter summarizes recent theoretical and empirical advancements in literature, and consequently develops hypotheses regarding how such information might prove advantageous to financial institutions in both normal conditions and with interbank competition. First, a highly marginalized lending market creates monopoly rents allowing lenders that strategically collect and use soft information to achieve better lending performance. Second, lenders in competitive local markets can acquire an informational advantage to limit their own losses through relationship lending, although interbank competition negatively affects loan performance. Chapter 4 then tests the authors’ proposed arguments.

Tadanori Yosano, Takayoshi Nakaoka

Chapter 3. Survey Data from Japanese Regional Banks and Using Soft Information in Lending Decisions

Abstract

This book investigates the role of relationship lending in Japanese local competitive markets. The authors used data from a 2008 survey by the Organization for Small and Medium Enterprises and Regional Innovation, Japan (SME Support, Japan) to extract soft information factors from questionnaire answers relative to the use of soft information in making lending decisions. Ultimately, the authors analyzed the influence of using soft information on lender performance. Therefore, this chapter first provides an overview of Japanese banking institutions as well as the characteristics of the small and medium-sized/regional financial institutions that comprise the analysis sample: regional banks, second-tier regional banks, and shinkin banks. Second, this chapter describes the survey questionnaire’s objectives and methods, and presents regional institutions’ current status regarding their use of soft information. Third, the chapter explains the factor analysis and the procedures to determine the number of underlying factors and retain the items that correlate to them. This chapter then incorporates the univariate analysis to further report the preliminary results of soft information’s influence on lender performance.

Tadanori Yosano, Takayoshi Nakaoka

Chapter 4. The Influence of Using Soft Information on Lender Performance in Competitive Local Markets: An Empirical Analysis

Abstract

This chapter uses data from a survey conducted by the Organization for Small and Medium Enterprises and Regional Innovation, Japan (SME Support, Japan) to explore soft information factors’ effects upon lender performance in competitive regional markets, especially as it concerns small and medium-sized/regional financial institutions. In the previous chapter, the authors extracted three latent factors: organizational systems, networks or alliances/partnerships, and business and management leadership. This chapter explores which type of soft information factor that impacts lender performance—profitability and bad loan ratios in particular—by multivariate analyses; and also determines how any combination of soft information factors contributes to lender performance. Further, this chapter investigates soft information factors’ potent influence on lender performance in the face of interbank competition. The authors’ multivariate models include all the possible control variables that might influence lender performance, including bank- and locally specific variables. Finally, this chapter conducts robustness tests to evaluate the multivariate models’ analytical quality.

Tadanori Yosano, Takayoshi Nakaoka

Chapter 5. Soft Information’s Role in Lending Decisions

Abstract

In this chapter, the authors interpret the empirical results from soft information usage’s effects on lenders’ decision making, especially concerning SMEs in regional banks as presented in Chap. 4. This chapter also interprets empirical evidence regarding interbank competition’s influence on lender performance in the context of soft information usage. Soft information takes on abstract and elusive characteristics, and is considerably uncertain at the beginning of its collection. First, the results indicate that lenders encouraging intimate personal interactions that gather internally stored information—as exemplified by the firm’s business plan and its managerial abilities to enforce and implement this plan within the firm—gain an enormous advantage in terms of profitability, specifically in interbank competition. Internally stored information is conceptualized as related to soft information in business and management leadership. As soft information knowledge spreads throughout local areas, it is easier for competitors and entrants to intervene in the extant lender–borrower relationship. Second, the empirical evidence illustrates that soft information from networks or appliances/partnerships generally leads to lenders’ profitability, and further achieves a substantially greater effect in interbank competition compared to non-competitive markets.

Tadanori Yosano, Takayoshi Nakaoka

Backmatter

Titel: Utilization of Soft Information on Bank Performance
verfasst von: Prof. Tadanori Yosano
Prof. Takayoshi Nakaoka
Verlag: Springer Singapore
Electronic ISBN: 978-981-13-8472-1
Print ISBN: 978-981-13-8471-4
DOI: https://doi.org/10.1007/978-981-13-8472-1