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Banking Crisis Resolution
(Japan's case and the role of central banks)
Hiroshi Nakaso
Financial Markets Department
Bank of Japan
1. Overview of Japan’s Crisis in Late 1990’s
1
Number of Failed Depository Institution
Number of Failed Depository Institutions
(FY 1992 - FY 2004)
Banks
20
Credit unions
27
Credit-cooperatives
134
TOTAL
181
2
Magnitude of Non-Performing Loans
NPLs / Nominal GDP
14%
13.2%
12%
10%
7.8%
8%
6%
4%
2.9%
2.5%
2%
0%
USA (1991)
Sweden(1992)
Japan(1931)
Japan(1999)
3
NPL Ratios
USA
(1991)
Sweden
(1992)
Japan
(1999)
NPL / GDP
ASSET / GDP
NPL / ASSET
2.9%
63.3%
4.5%
13.2%
130.1%
10.1%
7.8%
217.4%
3.6%
Notes:
NPL / GDP= Asset / GDP × NPL / Asset
NPL : For the US, past due loans, loans in non-accrual status, and restructured loans. For Sweden, gross problem
loans. For Japan, risk management loans.
Asset :
For the US, assets held by commercial banks, saving banks, and S&Ls. For Sweden,
assets held by large banks. For Japan, assets held by all deposit taking institutions.
4
Cost of Disposal
All Japanese banks, billion yen
FY92-94
FY95
96
97
98
99
00
01
02
03
Total
Loss
10,744
13,369
7,763
13,258
13,631
6,944
6,108
9,722
6,658
5,374
93,572
Provision
3,493
7,087
3,447
8,403
8,118
2,531
2,732
5,196
3,101
1,616
45,724
Write-offs
5,322
5,980
4,316
3,993
4,709
3,865
3,072
3,975
3,520
3,734
42,484
DIC financial assistance
-
473
117
81
1,936
4,006
4,431
1,041
241
0
12,326
DIC asset purchase
-
-
-
208
2,412
1,097
478
226
154
0
4,576
Capital Injection
-
-
-
1,816
7,459
575
387
184
0
1,960
12,381
Total
10,744
13,842
7,880
15,363
25,438
12,623
11,404
11,173
7,053
7,334
122,855
Notes:
1)
Losses include those arising from debt-forgiveness and loan restructuring.
2)
For FY92-94, figures are for City Banks, Long-term Credit Banks and Trust Banks.
Source: FSA, DIC.
5
Use of Public Funds
( ) ratio to nominal GDP
USA
Expenditure to RTC1
Expenditure to liquidate FSLIC2
Interest payment for bonds issued by
REFCORP3
$
$
$
81.9
42.7
76.2
billion
billion
billion
Total
$
200.8
billion
( 3%)
Sweden
Capital injection and loans4
SEK
65.0
billion
( 4%)
Norway
Capital injection5
NOK
24.9
billion
( 3%)
Finland
Capital injection6
FIM
82.7
billion
(17%)
Japan7
Guarantees
Cashable bonds8
¥
¥
57
13
trillion
trillion
Total
¥
70
trillion
(14%)
Notes: 1. Resolution Trust Corporation
2. Federal Savings and Loan Insurance Corporation
3. Resolution Financing Cooperation
4. Total expenditure until July 1994
5. Total expenditure until Dec. 1993
6. Total expenditure until Dec. 1995
6
7. Japan’s figures are for FY 2000
8. Assigned for loss coverage
Crisis of Autumn 1997
 Oct. 14
Failure of Kyoto Kyoei Bank
 Nov. 3
Sanyo Securities files application
for corporate rehabilitation
 Nov. 17 Failure of Hokkaido Takushoku Bank
 Nov. 24 Yamaichi Securities announces
suspension of operations
 Nov. 26 Failure of Tokuyo City Bank
7
Crisis of Autumn 1998
Profile of Long-Term Credit Bank of Japan
 Failure announced October 1998
 Financial data
(consolidated basis, as of March 1998, in \ billion)
Total assets : 26,565
Capital
:
390
Debentures : 12,268
Deposits
: 5,955
Derivatives : 50,000 (notional principal basis)
 Branches
:
39 (24 domestic, 15 overseas)
 Employees
: 3,346
8
Safety Net Framework (after April 2002)
Purchase and
Assumption
(P&A)
Failed bank
Assuming
institution(s)
Capital injection
Systemic Risk
Exception
Full loss
coverage
Temporary
nationalisation
9
Credit Premiums for Banks
Spread of 5-year Bank Bonds Yield over 5-year JGB yield
(bps)
Mizuho Corp
100
Tokyo-Mitsubishi
90
Mitsui-Sumitomo
80
UFJ
70
60
50
40
30
20
10
0
1998
1999
2000
2001
2002
2003
2004
2005
CY
10
Banknotes in Circulation
18
(y/y, %)
16
14
12
10
8
6
4
2
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
-2
-4
CY
11
2. “Lender of Last Resort” – Japan’s Case
12
Types of Lender of Last Resort Function
Type 1 :
Emergency liquidity assistance to a failed deposit
taking institution
Type 2 :
Provision of liquidity to interbank markets
Type 3 :
Emergency liquidity assistance to a failed
non-bank financial institution
Type 4 :
Provision of risk capital to a financial institution
Type 5 :
Emergency liquidity assistance to a temporarily
illiquid financial institution
13
Outstanding of the LoLR Fund Provision
(billion yen)
4,000
3,500
6.0%
Article 38 Loans
(left scale)
5.0%
3,000
Ratio to total
BOJ asset
(right scale)
2,500
4.0%
2,000
3.0%
1,500
2.0%
1,000
1.0%
500
0
0.0%
1997/1Q
2Q
3Q
4Q
1998/1Q
2Q
3Q
4Q
1999/1Q
2Q
3Q
4Q
2000/1Q
14
Loss Experience from the LoLR Function
Type 1
Type 2
Type 3
Legal basis
Period of experience
Peak outstanding
Loss
Ratio
(A)
(B)
(C)
(D)
(D)/(C)
Article 38
Bank of Japan Law
Article 33
Bank of Japan Law
Article 38
Bank of Japan Law
Aug 1995
Nov 1997 – Dec 1997
Nov 1997
Liquidity support to
Yamaichi Securities
2,858 billion
(0%)
(Feb 1998)
22 trillion
(0%)
(Dec 1997)
1,200 billion
(Nov 1997)
111.1 billion
(9.3%)*
16.4 billion
(82%)
Establishment of Tokyo
Kyodo Bank
20 billion
Jan 1995-Mar 1999
Type 4
Article 38
Bank of Japan Law
Subordinated loans to Midori
Bank
110 billion
(0%)
Jan 1996 – Jan 2006
Capital injection to NCB
July 1997 – Dec 1998
Total
80 billion
80 billion
(100%)
210 billion
96.4 billion
(45.9%)
Note*: Subsequently covered by MOF.
15
3. Questions Out of Japan’s Experience
16
(1) Solvency or Liquidity?
17
Solvency or Liquidity?
 General principle: LoLR assists solvent but
illiquid financial institutions
 Differentiation of solvency from liquidity does
not make much sense in a real crisis
 Many banks went under in what might be
called a vicious cycle to insolvency, triggered
by funding difficulties
18
Vicious Cycle to Insolvency
Sound assets
Deposits
Asset sales
Deposit withdrawal
NPLs
Capital
Sound assets
Deposits
NPLs
Capital
 A troubled bank faces deposit
withdrawal due to deterioration of
credit standing (e.g. down
grading).
 In order to meet the imminent
funding requirement, the bank
sells sound assets.
 The sales of sound assets results
in deterioration of asset quality.
 This leads to further loss of
confidence in the bank, triggering
another round of deposit outflow.
 The bank runs out of sound
assets and NPLs erodes capital
leading to an eventual insolvency.
19
(2) What Should be the Scope of
the LoLR Function?
20
Case of Large and Complex Financial Institution
LoLR support
Bank of Japan
Yamaichi Securities
flow of funds
Bank
in GB
Bank
in DE
Bank
in CH
Bank
in NL
Ring fencing
Creditors
21
Case of Cross-Border Banking (eg. Asian Crisis)
Home country’s Central Bank
Bank A
Branch
Bank B
Bank F
Bank C
Bank E
Bank D
Tokyo Interbank Market
flow of funds
22
Bank of Japan
(3) Is “Constructive Ambiguity” Constructive?
23
Four Principles in the Actual Provision of
LoLR Assistance
(a)
There must be strong likelihood that
systematic risk will materialize.
(b)
There must be no alternative to the provision
of central bank funds.
(c)
All parties involved are required to take clear
responsibility to avoid moral hazard.
(d) The financial soundness of the Bank of Japan
should not be impaired.
24
(4) Will Private Sector Solutions
Always Work?
25
Will Private Sectors Solutions Always Work?
 A scheme orchestrated by private firms based
on commercial interests (without the use of
public funds)
 Supervisory agency or the central bank may be
involved as honest broker (e.g. LTCM in 1998)
 Prisoners’ dilemma for the related private sector
participants
26
Risks to a Private Sector Solution
 Related parties are diverse and the exposure is
unforeseeable but could potentially be large
 Legal risks for the related parties
 Legal or reputation risks for the public sector
 Could only be successful when the case is an
isolated event
27
(5) Any Role for Monetary Policy to
Address Financial Crises?
28
Quantitative Monetary Easing
Current account targeting
(％)
8/14 9/18
12/19
10/30
4/1 4/30 5/20
10/10
(trillion yen)
1/20
0.20
0.15
40
CA target
above 6
5 trillion
trillion yen
yen
6 trillion
yen
10-15 trillion
yen
27-32 trillion
yen
15-20
trillion yen
30-35 trillion
yen
35
30
Current account
target (Right scale)
0.10
22-27
trillion
yen
25
27-30
trillion yen
Uncollateralized O/N
call rate (Left Scale)
0.05
17-22
trillion
yen
20
15
10
0.00
5
-0.05
0
01/3
01/7
01/10
02/1
02/5
02/8
02/12
03/3
03/6
03/10
04/1
04/5
04/8
04/12
05/3
29
Intended Policy Effects
Support economic recovery
--- encourage bank lending and facilitate corporate
financing
Maintain financial system stability
--- ensure banks’ liquidity positions
30
Sign of Economic Recovery
Real GDP growth
(year on year, %)
8
6
4
2
0
-2
-4
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
CY
31
Underbidding
50
0.35
Number of Under-Bidding (left scale, times/month)
Current Account Outstanding(left scale, tril. Yen)
45
0.30
Required Reserve (left scale, tril. Yen)
Quantitative
Easing Policy
40
0.25
35
0.20
30
25
0.15
20
0.10
15
Uncollateralized Overnight Call Rate (right scale, %)
0.05
10
0.00
05/5/6
-0.05
05/3/8
05/1/12
2004/11/12
2004/9/15
2004/7/23
2004/5/31
2004/4/1
2004/2/6
03/12/9
03/10/14
03/8/18
03/6/24
03/4/30
03/3/5
03/1/8
02/11/8
02/9/11
02/7/19
02/5/28
02/4/1
02/2/4
01/12/4
01/10/10
01/8/15
01/6/21
01/3/1
01/1/4
0
01/4/25
5
32
Market Function -1
0.035
TB1Y rate, %
0.030
0.025
0.020
0.015
0.010
0.005
0.000
45
47
49
51
53
55
57
59
Total Outstanding Balances of Short-term Fund-supplying Operations
61
63
65
trillion yen
67
Data: From January 2004 to May 2005.
33
Market Function -2
Outstanding of Uncollateralized Call Market
(trillion yen)
40
35
ZIRP
30
QEP
25
20
15
10
5
0
95
96
97
98
99
00
01
02
03
04
05
ZIRP : Zero Interest Rate Policy
QEP: Quantitative Easing Policy
34
Outright Purchase Scheme
for Asset-Backed Securities
sale of receivable
Senior
Seniorsecurity
security
(low
risk
portion)
(low risk portion)
sale proceeds
SMEs
SPC
loan sales
(Pools of SME risk)
Mezzanine
Mezzaninesecurity
security
(middle
risk
portion)
(middle risk portion)
Investors
(markets)
loans
Banks, etc.
(originators)
sale proceeds
Equity
Equity
(first-loss
(first-lossportion)
portion)
< Outline of the Scheme >
Bank of Japan
(1) Types of eligible assets
・Asset-backed securities (publicly-offered)
・Synthetic-type securities (publicly-offered credit-link notes)
・Asset-backed commercial paper (including dematerialized commercial
paper)
(2) Underlying assets
・50 % or more of the total value or the total number of individual assets in
underlying assets shall be composed of assets related to small and
35
medium-sized enterprises.
ABS Purchased by BOJ
3
2.5
(tril. Yen, as of end of month, accumulated amount)
Revision of the eligibility standard
2
1.5
1
0.5
0
8 9 10 11 12 1 2
2003
2004
3
4
5
6
7
8
9
10 11 12 1 2
2005
3
4
5
36