Branch Banking and Regional Financial Markets:
Evidence from Prewar Japan
The banking sector in Japan experienced a substantial organizational change in the early twentieth century, including an expansion of branch networks. In this paper, we explore the implications of branch banking in regional economies, using unique bank branch office-level data for four rural regions: Fukushima, Tottori, Kumamoto, and Miyazaki Prefectures. We find that branch banking had a positive scale effect on lending. However, compared with branch offices of banks headquartered in the same municipality, branch offices of banks headquartered in other municipalities, especially in other prefectures, tended to have a lower propensity to issue loans. In particular, branch offices of banks headquartered in urban areas, such as Osaka and Tokyo, tended to collect deposits rather than to lend money through their branch networks, which restricted regional finance.