This paper investigates the impact of bank consolidations promoted by government policy, using data from pre-war Japan when the Ministry of Finance promoted bank consolidations by dint of the Bank Law of 1927. It is found that policy-promoted consolidation had a positive effect on deposit growth, especially in the period when the financial system was unstable. On the other hand, it had a negative effect on profitability, particularly when there was no dominant bank among the participants or

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... more than two banks participated in the consolidation. Policy-promoted consolidation in such cases was likely to be accompanied by large organizational cost. Recent research stresses another channel through which bank consolidation and branch banking could contribute to stabilization of the financial system. Carlson and Michener (2005b) confirmed that the expansion of statewide branch banking induced competition among banks and thereby removed weak and inefficient banks through failures, liquidations and consolidations in the U.S. in the 1920s, which consequently improved the stability of the banking system. In addition, Carlson and Michener (2005c) show an external effect of branch banking, using the data on California in the 1920s and 1930s. That is, many small unit banks were exposed to competition induced by the emergence of large branch banking institutions, in particular, the Bank of America, and those small unit banks were forced to make efforts to improve efficiency. Consequently, the aim of future research.