"Measuring the Extent and Implications of Director Interlocking in the Pre-war Japanese Banking Industry"

In pre-war Japan, many banks were controlled by industrial companies through capital and personal relationships. Those banks are known as "organ banks" (kikan ginko). Organ banks engaged in unsound lending to their related companies, which resulted in damage to the banks' financial positions and consequently destabilized the financial system. This is a popularly held view of the financial history of pre-war Japan (organ bank hypothesis). However, this view has been based largely on case studies and casual observations. In this paper we examine the organ bank hypothesis using quantitative data and econometric methodology. To measure the extent of connections between banks and non-banking companies, we compiled a comprehensive database of directors and auditors of banks and non-banking companies in 1926. It was found that interlocking of directors and auditors between banks and non-banking companies was very pervasive. More than 80% of ordinary banks had at least one director or auditor who was at the same time a director or auditor of at least one non-banking company. Also, regression analyses confirmed that director interlocking had a negative effect on bank performance, especially for smaller banks.