Did Mergers Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks

Kimie Harada, Takatoshi Ito

NBER Working Paper No. 14518
Issued in December 2008
NBER Program(s):International Finance and Macroeconomics

In the late 1990s, several large Japanese banks failed for the first time in its postwar history. As the financial environment was deteriorating further, several remaining banks decided to merge among themselves, presumably, to make their operations more efficient to avoid failures. This paper defines, calculates and analyzes the distance to default (DD), a concept of credit risk in corporate finance, of Japanese large banks. The DD helps us to answer a question whether mergers in the late 1990s and 2000s made the merged banks financially more robust as intended. The novelty of the paper is to develop a method of analyzing the DD for banks that experience a merger, and to apply the method to the Japanese banking data. Our findings include: (1) A merged bank fundamentally inherits financial soundness of pre-merged banks, without adding special value from the merger. A merger of sound (unsound) banks produced a sound (unsound, respectively) merged financial institution; and (2) In some cases, a merged bank experienced a negative DD right after the merger. The findings are consistent with a view that a primary objective of a merger was to take advantage of the perceived too-big-to-fail policy, rather than to pursue a radical reform. Another interpretation is that mergers with intention of enhancing efficiency resulted in failed implementation of true operational efficiency, such as quick integration of computer operation systems and elimination of duplicating branches.

download in pdf format
   (503 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14518

Published: Harada, Kimie & Ito, Takatoshi, 2011. "Did mergers help Japanese mega-banks avoid failure? Analysis of the distance to default of banks," Journal of the Japanese and International Economies, Elsevier, vol. 25(1), pages 1-22, March. citation courtesy of

Users who downloaded this paper also downloaded* these:
Harada, Ito, and Takahashi w16182 Is the Distance to Default a Good Measure in Predicting Bank Failures? Case Studies
Hosono, Sakai, and Tsuru w13399 Consolidation of Banks in Japan: Causes and Consequences
Hoshi and Kashyap w7250 The Japanese Banking Crisis: Where Did It Come From and How Will It End?
Hoshi and Kashyap The Japanese Banking Crisis: Where Did It Come From and How Will It End?
Calomiris and Karceski Is the Bank Merger Wave of the 1990s Efficient? Lessons from Nine Case Studies
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us