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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