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A Contemporary Aspect of Japanese Commercial Banking:

Expansion of Fee-Based Business and Its Impact on Management Stability

May 2007
Kei-ichiro Inaba*1
Masazumi Hattori*2

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Recently, Japanese commercial banks have been expanding their fee-based business. The present study conducts a panel-data analysis to investigate the impact of such a diversification of commercial banking on the variability of banks' profitability and the stability of their management. Our findings include the following. As in the literature regarding US commercial banks, a positive correlation was seen between Japanese commercial banks' fee business income and net interest income in the second half of the 1990s. Such a relationship led to an increase in the variability of their ROA but did not affect their management stability over that period. During the period from FY2001 to FY2005, by contrast, such a positive correlation was not clearly observed. Reflecting this change, the fee business expansion did not increase the variability of their ROA in recent years. Moreover, it contributed to an enhancement in their management stability through increasing net profits. These findings suggest that if changes in the Japanese financial environment or other factors restore the positive correlation between the two types of incomes, the variability of Japanese commercial banks' ROA will increase. Whether this will lead to decreasing their management stability depends on to what degree they can enhance ROA due to increases in fee business income, and on how they use the increased income in the context of capital adequacy management. It is of note whether Japanese commercial banks' expanding the fee business contributes to securing the stability of their management without excessively increasing the variability of their profitability.

Japanese commercial banks; diversification; fee-based income.

JEL Classification Code: G21

In the preparation of this paper, we received insightful comments from Hidehiko Ichimura (University of Tokyo), Yukinobu Kitamura (Hitotsubashi University), Toshitaka Sekine (Bank for International Settlements) and the participants of "Current State of Monetary Economics Conference" jointly held by Tohoku Economics Workshop (Tohoku University) and Kansai Macroeconomics Workshop (Osaka University, Kyoto University) as well as the staff members of the Financial Systems and Bank Examination Department, Bank of Japan. In addition, we would like to express our appreciation to our two colleagues at the Bank, for their helping in collection of the data used for the analysis: Yoshiyuki Yamagaka (currently at Nikko-Citi Securities) and Mitsuru Katagiri. The opinions expressed herein do not represent the official view of the Bank of Japan or the Department, and any mistakes are the responsibility of the authors.

  • *1 Surveillance of Large Banks, Financial Systems and Bank Examination Department, Bank of Japan
  • *2 Financial Analysis and Research, Financial Systems and Bank Examination Department, Bank of Japan


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