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Dynamic Network Performance with an Application to Japanese Cooperative Shinkin Banks. Hirofumi Fukuyama 1* and William L. Weber 2 1. Faculty of Commerce, Fukuoka University, Japan 2. Department of Economics and Finance, Southeast Missouri State University, U.S.A.

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Dynamic network performance with an application to japanese cooperative shinkin banks

Dynamic Network Performancewith an Application to Japanese Cooperative Shinkin Banks

Hirofumi Fukuyama1* and William L. Weber2

1. Faculty of Commerce, Fukuoka University, Japan

2. Department of Economics and Finance, Southeast Missouri State University, U.S.A.


  • Efficiency Measures-Distance Functions

  • Farrell (JRSS-1957), Shephard (1970)

  • Data Envelopment Analysis-Charnes, Cooper, Rhodes (EJOR-1978)

  • Färe, Grosskopf, and Lovell (Production Frontiers-1994)

  • Directional Distance Functions-Chambers, Chung, and Färe (JET-1996, JOTA-1998), Färe and Grosskopf (2004)


Production with undesirable outputs
Production With Undesirable Outputs

  • Färe, Grosskopf, and Weber (Ecol. Ec.-2006)-Agriculture

  • Färe, Grosskopf, Noh, and Weber (J.Econometrics-2005)- Färe, Grosskopf, Pasurka, and Weber (App. Ec- 2011)-Electric Utilities

  • Fukuyama and Weber (2008, 2009, 2010, 2011)-Financial Institutions

  • Rogers and Weber (2011)-Transportation


Standard Black Box Model

y=(y1,…,yM) desirable outputs

b=(b1,…,bJ) undesirable outputs

P(x)=the output possibility set

={(y,b): x can produce (y,b)}

x=(x1,…xN) inputs


Directional distance function
Directional Distance Function

y

y+βgy

P(x)

(b,y)

gy

b

gb

b-βgb


y1

P(xd, xu)

P(xd’,xu’)

y2

0


y

P(xd,xu)

P(xd’,xu’)

0

b



y=loans, securities investments

xd=desirable inputs=labor, physical capital, net assets (equity

capital)

b=non-performing (bad) loans

xu=undesirable input=bt-1


Are deposits an input (x) or an output (y)? Both?

Sealey and Lindley (J. of Finance -1977)-intermediation approach

Hancock (JPE-1985)-User cost approach

Core deposits=input

Transaction deposits=output

Berger and Humphrey (NBER-1992, EJOR-1997)

Barnett and Hahm (J. Bus. Ec. Stat.-1994)-Banks produce the money supply

Fukuyama and Weber (2010)-Deposits are an input to one stage of production and an output at another stage of production.


Network production models
Network Production Models

  • Färe and Grosskopf (Ec.Letters-1996, SEPS-2000)

  • Färe and Whitaker (1996) (Dynamic and Network)

  • Kao and Hwang (EJOR-2008)

  • Tone and Tsutsui (EJOR-2009)

  • Fukuyama and Weber (Omega-2010)

  • Färe, Fukuyama, and Weber (IJISSC-2011)

  • Akther, Fukuyama, and Weber (Omega-2012))


A two stage network model
A Two Stage Network Model

y t=(yt1,…,ytM) bt=(bt1,…,btJ)

Stage 2

P2(z)={(y,b) that can be produced by z}

zt=intermediate output=deposits

Stage 1

P1(x,b)={z that can be produced by (x,b)}

xt=(xt1,…xtN), bt-1=(bt-11,…bt-1J)



The two constraints

First Stage

Second Stage

Can be rewritten as


  • Dynamic Models

  • Färe and Grosskopf (1996, 1997)

  • Bogetoft, Färe, Grosskopf, Hayes, and Taylor (JORSJ-2009)

  • Färe, Grosskopf, Margaritis, and Weber (JPA-2011)


Dynamic Model

Production in period t-1 affects the technology in period t

Intermediate output produced in the second stage of production= ct

ctaffects stage 2 production in period t+1

ct= carryover assets=

Assets – Required Reserves – physical capital – loans - securities

Total output consists of final outputs and carryover assets

Bad loans produced in period t-1, bt-1, become an undesirable input

in stage 1 production in period t


Dynamic Network Model (y=fy+c)

(yt, bt)

(yt+1,bt+1)

(yt+2,bt+2)

ct

ct+1

P2(zt

P2(zt+1, ct)

ct-1

P2(zt+2, ct+1)

ct+2

, ct-1)

zt

zt+1

zt+2

P1(xt,bt-1)

P1(xt+1,bt)

P1(xt+2,bt+1)

bt+2

xt,bt-1

xt+1

bt

xt+2,

bt+1








  • Dynamic links:

  • Between t and t+1, Undesirable output at stage 2 in t becomes and input to stage 1 in t+1

    Carryover assets from period t become an input to stage 2 in period t+1

  • Similar dynamic links between t+1 and t=2, etc.


269 japanese shinkin banks 2002 2009
269 Japanese Shinkin Banks, 2002-2009

  • Shinkin Banks are cooperative

  • Accept deposits from members, make loans (real estate and commercial) to member firms within a given prefecture.

  • Decline in Shinkin banks from 401 to 271 during 1998-2011 and shrank in size relative to for profit Regional Banks and City Banks

  • Research by Nishikawa (1973) , Miyamura (1992) , Miyakoshi (1993) , and Hirota and Tsutsui (1992) has generally found some scale economies, not many scope economies.

  • Fukuyama (1996) - large banks more technically efficient than small banks: better managerial oversight dominates any scale economies.

  • Färe, Fukuyama, and Weber (2010)-ex ante merger gains: for infra-prefecture mergers biggest gains in Fukuoka and Saga, for inter-prefecture mergers, biggest gains between banks in Miyazaki and Nagasaki.

  • Fukuyama and Weber (2008)-For profit regional banks were more efficient, had greater technical progress, but a higher shadow cost of reducing bad loans than cooperative Shinkin banks.


Descriptive Statistics (Pooled data 269 banks x 8 years, 2002-2009

Except labor, all variables in billions of Japanese yen deflated

by the Japanese GDP deflator


Directional vector
Directional Vector 2002-2009

Is the percent of mean inputs and undesirable outputs

that can be contracted and percent of mean desirable outputs

that can be simultaneously expanded.

Model uses a three period window: t, t+1, t+2

Need 4 years of data, t-1, t, t+1, t+2




Frontier Banks 2002-2009





  • Extension 2002-2009

  • Dynamic Luenberger Productivity Growth

  • Policy Implication-”Easy to fix” versus “Hard to Break”


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