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In prewar Japan, many banks were controlled by industrial companies through capital and personal relationships. Those banks are called "organ banks" (kikan ginko). Organ banks engaged in unsound lending to their related companies, which gave damage to the banks' financial conditions, and consequently made the financial system unstable. This is an accepted view on the financial history in prewar Japan (organ bank hypothesis). However, this view has been based 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 compile a comprehensive database of directors and auditors of banks and non- banking companies in 1926. It is found that interlocking of directors and auditors between banks and non-banking companies were 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 confirm that director interlocking had a negative effect on bank performance, especially for small-sized banks.

Measuring the Extent and Implications of Director Interlocking in the Prewar Japanese Banking Industry