regional banks

Daiwa Institute of Research: Cross-Prefectural Restructuring of Regional Banks

Norbert Gehrke

20 Jul 2025 — 8 min read

The Daiwa Institute of Research published a paper titled "Cross-Prefectural Restructuring of Regional Banks: The Reorganization of Local Economic Zones at its Foundation" on July 11, 2025, providing a detailed analysis of the ongoing restructuring of Japan's regional banking sector, and arguing that these realignments are fundamentally driven by the reorganization of underlying local and regional economic zones. The author posits that the consolidation of regional banks, particularly the significant reduction in the number of "second-tier regional banks," is not a random process but follows distinct patterns that mirror shifts in economic power and integration.

The core arguments presented are:

Consolidation of Second-Tier Banks: The sharp decline in the number of regional banks since 1990 is primarily attributable to the absorption and merger of second-tier regional banks (第二地方銀行, Daini Chihou Ginko).
Intra-Prefectural Dynamics: Most restructuring occurs within prefectural boundaries, often reflecting a trend of economic centralization towards the prefectural capital. This leads to "intra-prefectural cross-border" mergers, where banks from different economic districts within the same prefecture combine.
Cross-Prefectural Integration: A smaller but significant number of "cross-prefectural" (越県, ekken) mergers and integrations are occurring. These are not arbitrary but are based on the existence of larger, "regional bloc economic zones" (地域ブロック経済圏) centered around major hub cities like Fukuoka and Osaka.
Functional Roles and Risk-Sharing: The paper introduces a crucial concept of a functional division of labor between the top-ranked bank (#1 bank, or 地域一番行) and the second-ranked bank (#2 bank, or 二番手行) within an economic zone. The #1 bank often acts as the stable provider of the local payments infrastructure, while the #2 bank plays a complementary role in financial intermediation, often serving higher-risk borrowers. The paper warns that consolidation threatens this delicate risk-sharing ecosystem, which is vital for the diversity and sustainability of local economies.

Section 1: The Restructuring of Regional Banks

This section lays the factual groundwork for the analysis by documenting the decline in the number of regional banks and establishing the analytical framework.

The Decline of Second-Tier Regional Banks:
The number of regional banks in Japan decreased from 132 at the end of 1990 to a projected 97 by 2025. Of this 35-bank reduction, 32 were second-tier regional banks. These second-tier banks, which largely originated from post-war mutual savings and loan banks (sogo ginko), have been reduced by nearly half, from 67 in 1990 to just 36. In contrast, the number of "first-tier regional banks" (第一地方銀行, Dai-ichi Chihou Ginko), many of which were established under the pre-war "One Prefecture, One Bank" policy, remained relatively stable at 64 for decades before recent mergers brought the number down to 61.

The paper notes that exceptions to the "One Prefecture, One Bank" principle existed in prefectures with multiple, distinct economic centers (e.g., Niigata, Hyogo, Shizuoka), allowing for the existence of more than one first-tier bank. This historical context is important, as it shows that banking structures have long reflected economic geography.

Analytical Framework:
To analyze the 28 primary consolidation cases since 1991, the author proposes a multi-layered framework for understanding economic geography:

District Economic Zone (地区経済圏): The most granular level, often centered on a specific city or area within a prefecture.
Prefectural Economic Zone (県域経済圏): The entire prefecture, which may contain multiple district zones.
Regional Bloc Economic Zone (地域ブロック経済圏): A larger area that transcends prefectural boundaries, typically centered on a major metropolitan hub (e.g., Greater Fukuoka, Greater Osaka).

The analysis also categorizes banks by their market position: the #1 bank, the #2 bank, and other financial institutions. Evidence from Fair Trade Commission documents on bank mergers in Niigata and Nagasaki prefectures validates this framework. The data shows that the #1 bank in a prefecture by overall market share is not necessarily the dominant bank in every single district within that prefecture, highlighting the existence of distinct local economic strongholds.

Section 2: Intra-Prefectural Restructuring Patterns

This section analyzes the most common type of consolidation: mergers that occur within a single prefecture. The author identifies four distinct patterns.

Absorption Merger (吸収合併): A large bank, typically the prefecture's #1 bank, absorbs a smaller, often struggling, second-tier bank. This is the most frequent pattern, accounting for about half of the cases. Examples include Kiyo Bank's absorption of Wakayama Bank and the more recent strategic mergers of Hachijuni Bank with Nagano Bank (Nagano) and Fukui Bank with Fukuhou Bank (Fukui).
Intra-District Merger (域内合併): The merger of two or more banks headquartered in the same district economic zone (e.g., the same city). This often involves the consolidation of smaller, second-tier banks. The formation of Kumamoto Family Bank (now Kumamoto Bank) in Kumamoto and Kirayaka Bank in Yamagata are key examples. This pattern accounts for roughly one-third of cases.
Intra-Prefectural Cross-Border Merger (県内越境パターン): This is a crucial pattern where banks from different economic districts within the same prefecture merge. It signifies the economic integration of the prefecture and the extension of a dominant bank's influence. For example, the 2004 merger of Hiroshima Sogo Bank (based in Hiroshima City) and Setouchi Bank (based in Kure City) to form Momiji Bank. Another significant historical case is the 1976 merger that created Michinoku Bank in Aomori, which combined a bank in Aomori City with the leading bank from the Hirosaki district, transforming it into a prefecture-wide entity.
Merger of the Top Two (2トップ合併パターン): A recent and highly impactful trend where the prefecture's #1 and #2 banks, often based in different district economic zones, merge. This creates a single, overwhelmingly dominant bank.
- Nagasaki (2020): The merger of Juhachi Bank (Nagasaki City) and Shinwa Bank (Sasebo City) created Juhachi-Shinwa Bank, which now holds a commanding 55.6% of the prefecture's deposits.
- Niigata (2021): Daishi Bank (Niigata City) and Hokuetsu Bank (Nagaoka City) merged to form Daishi Hokuetsu Bank.
- Aomori (2025): The merger of Aomori Bank and Michinoku Bank is set to create an entity with a 58.6% deposit share.

The author concludes that these latter two patterns, especially the merger of the top two, are clear evidence of prefectural economies consolidating around their capital cities, eroding the independence of secondary economic districts.

Section 3: Cross-Prefectural Restructuring Patterns

This section explores the less frequent but strategically significant consolidations that cross prefectural boundaries. The author argues these are not random but are rooted in the logic of "regional bloc economic zones."

The paper first acknowledges historical precedents like San-in Godo Bank (serving both Shimane and Tottori) and Hokkoku Bank (serving the three Hokkoku prefectures), whose business areas have long reflected deep-seated cultural and economic ties.

Modern cross-prefectural patterns include:

Cross-Prefectural Merger (越県合併パターン): Direct mergers between banks in different prefectures. Examples include the formation of Kansai Mirai Bank (linking Osaka and Shiga) and Tokushima Taisho Bank (linking Osaka and Tokushima). The author stresses that these are driven by integration into larger metropolitan spheres, such as the Kinki metropolitan area, facilitated by infrastructure like the Akashi Kaikyo Bridge.
Cross-Prefectural Integration (of #1 Banks) (越県統合パターン): This involves #1 banks from different prefectures coming together under a single holding company. This is a "merger of equals" at a strategic level.
- Kyushu Financial Group: Higo Bank (Kumamoto) and Kagoshima Bank (Kagoshima).
- Mebuki Financial Group: Joyo Bank (Ibaraki) and Ashikaga Bank (Tochigi).
- Fukuoka Financial Group (FFG): This model also connects Fukuoka Bank with Juhachi-Shinwa Bank in Nagasaki, effectively creating a regional banking network.
Regional Expansion Pattern (広域拡大パターン): A #1 bank from a hub prefecture acquires or integrates with a #2 bank from a neighboring prefecture, expanding its sphere of influence.
- Resona Bank (Osaka) absorbing Nara Bank.
- Yamaguchi Financial Group integrating Yamaguchi Bank (#1 in Yamaguchi) with Momiji Bank (#2 in Hiroshima).
- Fukuoka Financial Group integrating Fukuoka Bank (#1 in Fukuoka) with Kumamoto Bank.

The central thesis of this section is that these cross-prefectural moves are driven by the gravitational pull of regional hub cities. Data on the distribution of corporate headquarters shows a powerful concentration in Tokyo, but also a notable secondary concentration in Fukuoka, which acts as the undisputed economic center of Kyushu. This economic reality is the foundation for banking realignments in the region.

This final section moves from description to prescription, highlighting the critical risks associated with consolidation and outlining a path forward.

The Functional Division of Labor:
The paper's most salient contribution is its theory of a "risk-sharing structure" (リスク分担構造) in local economies.

The #1 Bank: Functions primarily as the payments infrastructure provider. It is typically conservative, maintaining high stability, low loan-to-deposit ratios, and low non-performing loan (NPL) rates. Its primary role is to ensure the safe and smooth functioning of the local payments system.
The #2 Bank (and Credit Unions): Plays a complementary role as the financial intermediary. These institutions are generally more willing to take on risk, lending to SMEs that may not meet the strict criteria of the #1 bank. They excel at "relationship banking," assessing a firm's true potential beyond its formal financial statements.

This creates a "senior-subordinated" risk structure where the #1 bank holds the safest assets, and the #2 bank absorbs a greater degree of credit risk, ensuring that a wider range of businesses has access to capital.

The Dangers of Consolidation:
The ongoing consolidation, particularly mergers between #1 and #2 banks, threatens to dismantle this vital ecosystem. When a single dominant bank emerges, there is a serious risk that its conservative, "infrastructure provider" mindset will prevail. This could lead to a credit contraction for viable but superficially risky SMEs. Furthermore, it creates a "monopoly/oligopoly problem" (寡占・独占の弊害), where a small business that falls out of favor with the dominant bank has no alternative source for essential banking and payment services.

Conclusion and Policy Recommendations:
The paper concludes that evaluating bank restructuring cannot be limited to metrics of efficiency, such as cost reductions from closing overlapping branches. The analysis must be far more nuanced, considering the following:

The Multi-Layered Economic Structure: Policymakers and regulators must understand the specific dynamics of the district, prefectural, and regional bloc economic zones relevant to any given merger.
The Sustainability of the Credit Ecosystem: The primary concern should be preserving the diversity and sustainability of the local economy. This requires ensuring that the complementary, risk-taking function of the #2 bank is not lost. The newly enlarged bank must be held accountable for serving the entire spectrum of local businesses, or other institutions like credit unions must be empowered to fill the gap.

Ultimately, the paper calls for a careful, case-by-case examination of any proposed bank restructuring, grounded in a deep understanding of the local economic structure and the delicate credit ecosystem that supports it. A "one-size-fits-all" approach based on simple efficiency gains is insufficient and risks undermining the very local economies that regional banks are meant to serve.