CIRJE-J-63. Okazaki, Tetsuji, "Selection, Exits and Efficiency in the Japanese Banking Industry: An Historical Perspective", August 2001.

In this paper we explore the long-term change of the industrial organization of the Japanese banking industry and its efficiency implication. In postwar Japan, the "convoy administration" by the Ministry of Finance rigidly controlled the entry into and exit from the banking industry, as well as the competition among the incumbent banks. Exits of banks were not only few, but also all of the exits were through mergers. On the other hand, in prewar Japan, a lot of banks exited through dissolution and bankruptcy, as well as thorough mergers. Using the data of the individual bank exits, we analyze the relationship between the exit of the bank and its performance. We find that, in prewar period, the lower the bank's performance was, the larger the probability of its exit through dissolution and bankruptcy was. Interestingly, this relationship cannot be observed concerning the exit thorough merger. The result concerning the exit thorough merger in the postwar period is the same. What differed from the prewar period was that there was no exit through the dissolution and bankruptcy in postwar period. We can conclude that while the selection mechanism of the inefficient banks worked in prewar Japan, it did not in the postwar period.