This paper measures and analyzes two types of hidden capital at Japanese
banks: (1) the net undervaluation preaent in accounting measures of on-balance-
sheet assets and liabilities and (2) the net economic value of off-balance-
sheet items. A model is constructed that explains changes in both
types of capital as functions of holding that explains changes in both types of
capital as functions of holding-period returns earned in Japan on stocks,
bonds, yen, and real estate. The model is applied to annual data covering
1975-1989 and a four-class size/charter partition of the Japanese banking
system. For each type of hidden capital and each class of bank, the model
develops estimates of the stock-market, interest-rate, foreign-exchange, snd
real estate sensitivities of returns to bank stockholders.
Only the stock-market sensitivities prove significant at five percent.
This finding leads us to investigate what happens when we analyze Japanese bsnk
stock returns by means of stationary and split-sample market models. Timeseries
regressions show that very large Japanese banks have developed stockmarket
betas in excess of two and that the value of a bank's beta has come to
increase with measures of its size and accounting leverage.
Future research will investigate the sensibility of our results to
different ways of pooling data from individual banka and to more-sophisticated
methods for estimating various parameters. We also plan to extend the analysis
by imbedding it in a model of how variations in bank-customer contracting
arrangements in Japan affect the returns that can be earned by bank
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