The impact of universal banking on the risks and returns of Japanese financial institutions

Abstract

By setting the stage for universal banking in Japan, the Financial System Reform Act (FSRA) of 1992 has tremendous implications for the competitiveness, efficiency, and stability of the Japanese financial services industry. This study examines the effects of the FSRA on the risks and returns of Japanese commercial banks, long-term credit banks, trust banks, and securities firms. Using an event study methodology, the results of this study show that universal banking in Japan has significant effects on the risks and returns of financial institutions. Universal banking, in particular, increases the Japanese financial institutions' exposure to market risk, but lowers their exposure to interest rate risk. The evidence also supports the argument of Posner (1974) and Peltzman (1976) that there are inter-industry differences to the effects of regulation. Among the Japanese financial institutions examined, only the trust banks and the securities firms seem to benefit from the FSRA in terms of increased returns.