Has Competition in the Japanese Banking Sector Improved?



the loan market for city banks has been perfectly competitive during the 1980s and the mid
1990s. Fourth, the loan market for regional banks has never been perfectly competitive or
a Cournot oligopoly, while joint profit maximization is also rejected. Fifth, competition
became laxer again after 1998.

5. Robustness Checks of the Basic Results

In this section, we provide a check on the robustness of the results in the previous section.

5.1 Cost of capital

Although the model in this paper indicates that the deposit interest rate is the relevant
financial cost of the loan, this outcome depends on the assumption that the bank manipulates
only the amount of deposit. If the bank manipulates all the liability side including capital,
the deposit interest rate
rid,t in equation (7) should be replaced with the cost of capital r ,
which is defined as:

debt interest paid for debt + capital current profit
debt
+ capital amount of debt debt + capital capital

where debt consists of deposits, certificate of deposits, call money, borrowing from
other financial institutions, including the Bank of Japan, etc.

The estimates of θt using r are shown in Figure 4 (city banks) and Figure 5
(regional banks). Figure 4 is quite similar to Figure 2 except for the period after 1992.
θt was significantly negative in the middle of the 1990s and in 1999. Figure 5 shows

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