Effects of branch expansion on bank efficiency: evidence from Japanese regional banks

The purpose of this paper is to examine whether branch expansions have realized efficiency gains by focussing on regional banks in Japan.

The authors use a single-step estimation procedure, where both cost frontier parameters and inefficiency effects are addressed simultaneously, and examine the impact of expanding branch networks on bank performance.

The findings show that regional banks expanding their branch networks to certain levels exhibit lower cost inefficiencies. Robustness results are also obtained from the samples, excluding the regional banks located in urban regions.

The findings suggest that adequate levels of branch expansion have beneficial impacts for regional banks, although this result is contrary to the current region-based relationship banking policy promoted by Japan’s financial regulators.