Era of restructuring: Deposit demand estimation and welfare consequences during the Japanese mega-bank mergers wave

I estimate a structural model of the Japanese bank deposit market, and evaluate the welfare impact of the mega-bank mergers in the early 2000s. Banks compete for deposits through their deposit rates to achieve profit maximization, whereas depositors choose among banks with given deposit rates. The estimation results show that depositors’ demand is insensitive to the deposit rate. Moreover, I find that the demand for deposits decreases when banks experience financial distress, even with deposit insurance coverage. Furthermore, when calculating welfare, I find that most of the mega-bank mergers lead to a reduction in consumer surplus compared with the counterfactual case of no mergers. The contributions of this study are that it quantifies the welfare effect of the mergers for the deposit market in Japan, where the financial market is heavily dominated by banks, and that it is likely to encourage future research on bank consolidation in Japan, which may contribute to verifying and resolving the long-discussed problem of overbanking in the Japanese financial market.