No Guarantee, Still Gains? Rethinking the Relation Between Loans Without Personal Guarantees and Bank Profitability

Japanese financial authorities have been promoting lending without personal guarantees, with the aim of enhancing the stability of the banking sector. However, banks’ willingness to provide loans without personal guarantees varies. Furthermore, no prior study has directly examined the impact of such loans on bank profitability. Since Japanese regional banks recently began disclosing the proportion of the concerned loans, this study aims to clarify their impacts on bank profitability, utilizing 352 bank/year observations from fiscal years 2019 to 2023. The results indicate that the statistical significance of the impacts of the proportion of loans without personal guarantees on bank profitability is not robust, and that the impacts are economically insignificant. This study contributes to the literature by providing the first empirical evidence on the impact of personal guarantees on bank profitability. It also offers practical insights to financial authorities, demonstrating that loans without personal guarantees do not significantly affect the profitability of regional banks, at least during the examined sample period.