How many Regional Banks does Japan need?
By: Norbert Gehrke
Tags: Fintech, Japan, Regulation, Innovation, Banking

Thank you for the question! After we baselined our discussion of Regional Banks vis-à-vis City Banks and “Other” Banks in our previous article, let us go one step further. The “need” for a regional bank can be highly subjective, so that a Governor might insist that her prefecture must have its own regional bank. That is roughly comparable to the attitude of national governments towards their airline industry in the last century — every country had to have its national carrier. Then consolidation set in.

The much more incisive question to ask, we think, is how many regional banks the economic activity in a given prefecture can profitably sustain. And voilà, the answer is surprisingly straightforward. The Financial Services Agency (FSA), through the “Review meeting for improving financial intermediation”, actually published a paper in 2018 titled “Regional Financial Challenges and Competition”, which included the following assessment.

Regional banking sustainability (Source: FSA, April 2018)

Based on financial data for the fiscal year ending March 2016, a simple calculation of competitiveness is performed. This determines, by prefecture, how many banks’ operating expenses the revenue of the main banking business, through lending and commission income, can support.

The FSA comes to the conclusion that there are 23 prefectures where the economic activity cannot even support a single bank (red in the chart above), while there are 13 prefectures that can support a single bank (white in the chart above). Many of these prefectures have multiple regional banks. As stated previously, there are currently more than 100 regional banks.

The report comes to the conclusion that there is a high possibility that financial institutions will withdraw or be eliminated in the future. The decrease in the number of regional financial institutions, the natural monopoly situation in a given prefecture, and the emergence of a situation where financial institution cannot survive in some towns and villages are considered to be a natural trend due to the declining population. Under these circumstances, the important issue for financial administration is how to maintain a healthy regional financial infrastructure that can support the growth and development of local companies and the economy.

Given the declining population and further urbanization (pre-pandemic), the banking sector certainly is not alone in facing these challenges. In the healthcare sector, for example, there appears to be a growing acceptance that “tele-health” will be a significant factor in the future. So why would not “tele-banking”, or digital banking it would be more commonly referred to, be a similar contributor to broad geographical financial services coverages, independent of physical presence?

But we digress — the point of this article was to demonstrate the degree of over-saturation in the regional banking space. Half of Japan’s prefectures cannot sustain a regional bank by themselves. Please keep that number in mind when, in our next article, we dive deeper into the BOJ measures announced this past week.