Download The Role of Savings Banks in Economic Development

The Role of Savings Banks in Economic Development
and Its Contribution to Financial Stability
Naoyuki Yoshino
Professor of Economics, Keio University
Director of Financial Research at FSA
(Financial Services Agency, Government of Japan)
[email protected]
1, Savings and Investment Relations
For small countries and developing countries, it seems very important to
collect domestic savings and utilize collected savings into domestic investment.
Some Latin American countries borrowed from abroad in order to finance their
budget deficits. They had accumulated foreign debt due to lack of tax revenues
and turned into economic crises.
Many Asian countries show remarkably high savings ratio to GDP as is shown
in Table 1. Note that Table 1 denotes not only individual savings but also
corporate savings. Table 1 also shows investment to GDP ratio.
Even though many Asian countries show remarkably high investment to GDP
ratio, most Asian countries can be supported by their domestic savings.
Figures 1, 2 and 3 show international capital flows among various regions.
Savings in Asia are mostly invested in America and Europe. On the other hand,
Asia depends on capital inflows from America and Europe. Europeans invest
their money into Europe. How to promote capital flows among Asian countries is
one of the key issues.
Asian Financial Crisis in 1997 is one of the typical phenomena where
speculative foreign capital suddenly hit such countries as Thailand, Indonesia,
Malaysia, Korea etc. These speculative attack from abroad created turmoil in
their domestic economy.
Therefore, the role of savings banks for the stability of the financial system will be discussed.
2, Government Savings Banks
Small savings by individuals are often collected by informal sector in
developing countries. As their economy develops, government sets up its
governmental savings institutions to collect small domestic savings from
individuals.
In Japan, postal savings was started in 1887 when Japan introduced mail
service from United Kingdom. Post Office started not only mail service but also
postal savings and post life insurance.
In 1950s when Japan was just initiated its economic development, private
insurance companies excluded risky individuals and are reluctant to offer
insurance contract to small business etc. Therefore governmental postal
insurance was created to provide to any kind of individual in Japan.
Japan’s post office provided mail service, postal savings and post life
insurance at one post office. No other private financial institutions could offer
all these three services in Japan. Mail service used to be dominated by the
government owned post office. Private banks in Japan could not offer insurance.
Private insurance companies could not collect money by deposits. Post office
in Japan shows economies of scale of its nationwide network and economies of
scope by providing three businesses at one post office.
Personal and Equipment costs to Total Deposits of various financial
institutions are compared in Figure 4. Large city banks used to show the best
cost performance and the regional banks show less efficient cost structure.
However, the cost efficiency of postal savings (added to the costs of the
government banks) show better performance than large city banks in the 1990s
due to scale economy and the scope economy of postal savings.
3, Closeness, Convenience and Trust of the Government
The Central Bank of Japan (Households' savings survey) conducts survey
every year. During 1990s, closeness and convenience were the top reasons why
people choose their financial institutions. The second reason for the
attractiveness of postal savings in Japan is the nationwide branch networks.
The third reason is safety (or trust). The rate of return was not an important
reason to choose financial institutions during 1990 since the stock prices kept
on falling and 180 banks (mainly small regional banks) went into bankrupt.
There are 24700 post offices nationwide in Japan. On the other hand, there
are only about 3500 bank branches in Japan. Table 2 shows regional distribution
of branches of private banks and post offices in various prefectures (various
states) in Japan. The number of post offices is larger than private banks’
branches in most of the cities except for Tokyo and Osaka (where two of the
largest cities in Japan).
Due to closeness, post office attracts many customers in Japan.
4, Unique Product of Postal Savings in Japan
(Ten year time deposits , i.e. “Teigaku Chokin”)
Another important point of attractiveness of Japan's Postal savings relies on
its unique time deposit (which is call "Teigaku Deposit").
Japanese private banks were under strict government control (by the Ministry
of Finance). During 1950s, 1960s until 1970s, interest rates were regulated.
Deposit rate of interest is controlled by the Ministry of Finance. Private banks
could not freely determine their deposit interest rate. They could not set up
their branch offices without consultation with the Ministry of Finance (MOF).
There were many different kinds of private banks in Japan. City banks
operate nationwide and provide financial service to large corporations and
overseas. Long term credit banks were providing financial services to large
corporations by longer term loan. Regional banks (Regional Banks I) were
providing financial services to relatively large companies in their region. Second
Regional banks (Regional Banks II) were providing financial services to medium
and small business in their region. Shinkin banks and Credit cooperatives were
providing financial services to relatively smaller companies in the region. There
are agricultural banks which provide financial services to agricultural farmers.
Thus. Japanese banking system was segregated and each banking group was
providing loans to specific groups in various region. It was important for the
MOF to keep stable banking system by avoiding too much competition among
themselves. There were almost no bank failures until early 1990s when the
asset price bubble burst. Some small bank failures occur before 1990, however
another healthy bank merged the problem bank in the past without creating any
turmoil in the banking system (Table 2).
Not only setting up of the branch offices were restricted, but also kinds of
deposits to be able to offer were restricted. Ordinary banks were only allowed
to provide demand deposits and one year time deposits. Long term credit banks
were offering five year bank debentures. Since long term credit banks were
providing long term loans to large corporations, they were only allowed to
provide long term bank debentures. In order to keep stable banking structure,
strict control of kinds of deposits to be offered were important.
Postal savings offered 10 year time deposits (i.e. 10 year "Teigaku Deposits").
No other private banks could offer such long term deposits. Since postal
savings deposited their collected postal deposits into the MOF for seven years
with fixed interest rate, it was possible for the post office to offer 10 year fixed
rate deposits. When the interest rate was expected to decline, lots of deposits
shifted from private banks to the post office (See Table 5, Econometric
Analysis of Postal Savings versus Private Bank Deposits). Postal savings are
popular in large cities compared with rural regions as is shown in the dummy
variables in Table 5. Since much more competition can be observed among
financial institutions in large cities, people had much more access to various
financial institutions and various financial products.
Thus attractiveness of postal savings in Japan was characterized its unique 10
year time deposits and large number of post offices in various region,
5, Use of Collected Fund
How to allocate collected deposits by savings banks is an important issue.
There will be three ways for savings banks to manage its deposits. Firstly, the
savings bank provide collected deposits to the government such as the Ministry
of Finance in order to utilize its fund into fiscal expenditures or providing loans
by government banks. Secondly, the savings bank could purchase government
bond through the market which is currently undertaken by postal savings in
Japan. Japan Post invest about 80% into government bonds, 5% to domestic
stocks, 5% to foreign stocks, 5% to foreign bonds and last 5% to short term
investment.
Thirdly the savings banks will make loans and invest into stock and bond
market just like ordinary banks.
In any case, the savings bank has to keep its transparency in their non
performing loans and credibility of the management when they are under the
government ownership.
6, Privatization or Government-Ownership
Privatization of the postal savings is under going in Japan. I recommended the
following points to Minister Takenaka.
(6-1) Reduce rural post offices by substituting to local shops or truck post
offices,
----> Maintain mail services a few times per week
----> Set up Postal ATM in rural government office and/or in rural shops.
----> Reduce costs as much as they can by outsourcing their rural services.
(6-2) Post offices should be allowed to sell various private financial products
such as mutual funds, private banks' deposits, stocks, bonds and government
bonds.
(6-3) Post Office can only accept ordinary deposits. They should stop
accepting time deposits and life insurance. Should earn commissions and fees
by selling financial products managed by private financial institutions..
----> Japan Post prefers to keep on accepting time deposits and life
insurance as it is now today.
(6-4) New Post Office Services would encourage competition among financial
services.
7, References
Cargill Thomas and Naoyuki Yoshino, Postal Savings and Fiscal
Investment in Japan, Oxford University Press, 2003
Scher Mark and Naoyuki Yoshino, Small Savings Mobilization and Asian
Economic Development, M.E.Sharpe. 2005
Table 1,
Saving and Investment Ratio in Asian Countries
Gross Saving Ratio (%)
Gross Investment Ratio
1990 1995 2000 2003 2004 1990 1995 2000 2003
China
38.7 42.5 39.0 42.7 44.7 34.7 40.8 36.3 44.4
Hong Kong 35.2 29.1 31.7 31.6 31.6 27.5 34.7 28.1 22.8
Indonesia
32.3 30.6 25.6 21.5 25.3 30.7 31.9 16.1 16.0
Korea
37.2 36.5 33.9 32.8 35.0 37.7 37.7 31.0 29.4
Malaysia
34.4 39.7 47.2 42.9 43.8 32.4 43.6 27.2 21.8
Philippines 18.7 14.5 17.3 20.1 20.9 24.2 22.5 21.2 18.7
Singapore 43.3 50.2 47.9 46.7 48.0 36.4 34.2 32.0 13.4
Taiwan
27.6 25.9 24.4 23.5 23.4 23.1 25.3 22.9 17.2
Thailand
34.3 37.3 33.2 33.1 33.4 41.4 42.1 22.8 25.2
Figure 1 Regions to invest from Asian Countries
Others
11.80%
Asia 8.20%
USA 42.80%
Europe
37.20%
(%)
2004
45.3
23.0
22.8
30.2
22.5
17.0
18.3
20.7
27.1
Figure 2 Regions to invest to Asian Countries
Others
13.26%
USA 37.12%
Asia 18.94%
Europe
30.68%
Figure 3 Regions to invest to European Countries
Others
11.10%
USA 15.67%
Asia 7.67%
Europe
65.56%
Figure 4 Cost Comparison of banks and Postal Savings in Japan
Cost Comparison
3.5
3
2.5
2
1.5
1
0.5
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
0
Large City Banks
Regional Banks
PostalSavings
Table 2 Bank Failures and the Asset Purchase of Japan
Year(FY) No.
of
Bank
Failures
1992
2
1993
2
1994
2
1995
3
1996
6
1997
7
1998
30
1999
20
2000
20
2001
37
2002
51
2003
0
2004
0
Sum
180
(Units: Cases, 100 billion Yen)
Grant
Asset
Loans
Purchase
200
459
425
6,008
13,160
1,524
26,843
46,371
51,564
16,422
23,180
0
0
186,156
0
0
0
0
900
2,391
26,815
13,044
8,501
4,064
7,949
0
0
63,663
80
0
0
0
0
0
0
0
0
0
0
0
0
80
Bond
Purchase
0
0
0
0
0
40
0
0
0
0
0
0
0
40
Table 9:Reasons why people choose specific financial institutions
金融機関の選択理由,2002年、日本銀行金融広報中央委員会
(1)
Closenee
and
Convenience
(2)
Nationwide
Branch
Network
80.4%
25.8%
(3)
Various
financial
produces
are
prepared
2.4%
(6)
Healthy
Financial
Institution
(7)
Very
friendly
and kind
atmosphere
(8)
TV commercial
and
other
Advertisement
(9)
Not
specific
reasons
8.3%
1.4%
10.10%
全国的な店舗展開
利便性
安全な金融機関
40.0%
(4)
Rate of
return
is
higher
2.9%
(5)
Kindly
consult
with
the
customers
4.0%
Figure 5 Share of Postal Deposits to Total Deposits
Potal Deposits / Total Deposits
40.00
30.00
25.00
20.00
郵貯比率
Postal Deposits
15.00
10.00
5.00
0.00
18
88
18
92
18
96
19
00
19
04
19
08
19
12
19
16
19
20
19
24
19
28
19
32
19
36
19
40
19
44
19
48
19
52
19
56
19
60
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
00
Postal Deposits/Total Deposits
35.00
Year
Table 3, Share of Postal Savings
Share of Share of Year
Postal
Postal
Savings/ Savings/
Fin Asset Deposits
16.6
34.0
1994
16.8
35.1
1995
17.4
35.4
1996
18.0
35.9
1997
18.8
36.3
1998
18.1
36.4
1999
17.5
34.7
2000
17.0
32.7
2001
16.9
31.5
2002
16.0
30.6
2003
15.0
29.0
2004
13.2
27.3
2005
%
Table 4
%
Year
Branch Offces of Banks and Post Office
Table 5 Demand for Bank Deposits and Postal Savings
Figure 6, Regional Cost Disparities of Postal Savings in Japan
1.4
1.2
1
0.8
Regional Costs
0.6
0.4
0.2
Region
Okinawa
Kyushu
Shikoku
Chugoku
Osaka
Tokai
Hokuriku
shinetsu
TOKYO
Kanto
Tohoku
0
Hkkaido
Cost (Personel and Equipment
Costs/Deposits+Loans)
Regional Cost Differentials