Determinants of Branch Expansion by Japanese Regional Banks

This study aims to identify the motivations for Japanese regional banks to expand their branch networks, and to clarify whether banks with wide networks of branches can practice region-based relationship banking. We use the data on Japanese regional banks for the Fiscal Years (FY) 2002-06, which is approximately the time period during which Financial Services Agency (FSA) required regional financial institutions to practice relationship banking. First, we examine the background of branch expansion and the differences in the extent of branch networks. Next, we test whether banks with wide networks of branches practice region-based relationship according to the purpose of FSA’s ‘Relationship Banking Policy’. Results indicate that (1) regional banks whose headquarters are located in less competitive and less wealthy markets more frequently tend to expand their branch networks geographically; and (2) branch expansions have a negative influence upon the results of relationship banking. Thus, from a policy perspective, our findings suggest that the current complicated situation of the Japanese regional banks is inconsistent with region-based relationship banking.