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<p>This study investigates the impact of loan portfolio diversification on the performance of regional banks in Japan during 2009–2018. Due to the decline in the demand&#xa0;for&#xa0;business loans and the ongoing ultra-low interest rate policy, many regional banks&#xa0;increased real estate loans given the rise in land prices. Excessive lending is a major factor in creating poor performance through non-performing loans. The primary driver of bank&#xa0;failures during the&#xa0;Great Recession&#xa0;was&#xa0;exposure to the real estate&#xa0;sector. We use four measures of loan portfolio concentration and compare cost and profit efficiency, the Lerner index, and the Z-score as bank performance measures. Our results indicate that, at least for the traditional concentration measures (the Herfindahl–Hirschman Index and Shannon Entropy), high loan portfolio concentration lowers bank performance. As the robustness check, we confirmed the same relationship even after excluding merger-related banks, periods of the global financial crisis, and banks located in metropolitan areas. The results suggest the possibility of reverse causality, where regional banks with poor performance tend to focus more on real estate loans.</p>

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Exposure to Real Estate in Bank Portfolios: Evidence from Japan’s Regional Banks

  • 期刊论文

  • 出版模式：

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  • 发表日期：

    2025年10月6日

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  • Kozo Harimaya,
  • Toshiki Jinushi

摘要

This study investigates the impact of loan portfolio diversification on the performance of regional banks in Japan during 2009–2018. Due to the decline in the demand for business loans and the ongoing ultra-low interest rate policy, many regional banks increased real estate loans given the rise in land prices. Excessive lending is a major factor in creating poor performance through non-performing loans. The primary driver of bank failures during the Great Recession was exposure to the real estate sector. We use four measures of loan portfolio concentration and compare cost and profit efficiency, the Lerner index, and the Z-score as bank performance measures. Our results indicate that, at least for the traditional concentration measures (the Herfindahl–Hirschman Index and Shannon Entropy), high loan portfolio concentration lowers bank performance. As the robustness check, we confirmed the same relationship even after excluding merger-related banks, periods of the global financial crisis, and banks located in metropolitan areas. The results suggest the possibility of reverse causality, where regional banks with poor performance tend to focus more on real estate loans.