Technical Report A Generalized User-Revenue Model of Financial Firms under Dynamic Uncertainty : An Interdisciplinary Analysis of Producer Theory, Industrial Organization, and Finance

Homma, Tetsushi

2012-06 , Faculty of economics, university of toyama
Description
In the present paper, we apply the generalized user-revenue model (GURM)presented by Homma (2009) to Japan’s banking industry and perform ananalysis fusing producer theory and industrial organization theory (appliedmicroeconomics) and finance (asset pricing theory). Basically, while basingthe approach on the GURM, we derived the generalized user-revenue prices(GURPs) and the extended generalized Lerner indices (EGLIs), organized theirtheoretical characteristics from an interdisciplinary analyticalperspective, applied the GURM to Japanese city banks, and estimated theGURPs and the EGLIs. These efforts provided material for thinking about thenecessity of risk-adjustment policies as part of the industrial organizationpolicy in the banking industry. Based on the EGLI estimation results,regarding the components of the EGLIs (in terms of absolute value), therisk-adjustment effects are the largest, followed by the equity capitaleffects, and the market structure and conduct effects are the smallest. Thisis the same as the results for the GURPs, so there is pressure to reviewconventional competition policy, which considers primarily the marketstructure and conduct effects. It has been pointed out that switching from acompetition policy to a risk-adjustment policy is necessary, so specificmeasures in risk-adjustment policy that have not yet been considered must betaken into account. Furthermore, the injection of public funds dramaticallyimproved (decreased) the risk-adjustment effects of the EGLI for long-termloans and dramatically increased the degree of competition in the long-termloan market.
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