Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Japan Financial Crisis By: Sander Chau Winslow Han Postwar Financial System • Bank-based system with underdeveloped stock and bond market. • Stable system – no threat of new entry • Safe but inefficient system • Postwar system could not last forever • Banks grew too large but restricted by many restrictions 4 Basic Causes of Bank Difficulties • Failure to create prudential regulatory system • Macroeconomic mismanagement • Effects of Globalization • High rate of financial innovation Prudential Regulatory System • Deregulation of the system took place without creating a effective system • Generates competition • Profit no longer guaranteed 5 Macroeconomic Policy Mistakes • Interest Rates were at postwar lows • Not easing monetary and fiscal policies in the early 90’s • Relying excessively on easy monetary policies in the mid 90’s • Fiscal Stimulus through supplementary budgets in the mid 90’s, too little too late. • Wrong optimistic forecast for ‘97 Effects of Globalization • Economic and financial policies subject to foreign pressures • World’s largest creditor nation: Japanese financial institutions engaged in foreign lending and portfolio investment • Flourishing of a free global capital market • Big Bang deregulation creates competition in Japan home market from foreign financial institutions Financial Technology Innovation • Wide range of new financial derivatives • Mostly American and some European players • Japanese banks unable to learn • The most capable Japanese are hired away by foreign firms Banking Sector Problems • Mergers and failures have left Japan with 7 major banks • Low profitability for more than 10 yrs • Banks depend too heavily on revenue from lending • Government sponsored financial institutions • Evergreening Comparison to US Banks • Interest Margin of Japanese banks 1.2% compared to 3.3 to 3.5% of assets • “Other Revenue” 38% revenue from lending operations compared to US 73% of lending revenue Government Sponsored Institutions • Japan Post: post office and largest deposittaking institution in the world • Heavily subsidized • 9 times the branches of all city banks • Same rate on deposits, explicit government guarantee, no maintenance fee, lower rate on lending, no prepayment penalties • Strong government resistance to address this problem and no public recognition of the losses that these government institutions have made with explicit subsidies Table 1: An Overview of the Japanese Financial System Total Assets Number Of Institutions Branches Employess Trillion % of GDP Deposits Outstandin g Loans and Discount Outstandin g Trillion Trillion Banks City Banks (Consolidated) 7 2853 104847 410 81.9 260 238 227 12221 238760 436.4 87.2 289.2 259 2444 11197 173709 394 78.8 317 154 Life Insurance 43 15807 380864 184 36.7 0 47 Other Insurance 59 4869 87501 33 6.6 0 4 293 2256 94898 95 19 0 0 Postal Savings 1 24773 62422 242 48.3 239 0.7 Government Financial Institution 8 311 11250 166 33.2 0 159 3082 74287 1154251 1960.4 391.7 1105.2 861.7 Others Cooperative Financial Institutions Non-depository financial institutions Remaining Public Financial Institutions Total Financial System Bank Problem Example • 1.1 trillion yen of public funds injected into Asahi and Daiwa Banks • March 2003: Asahi and Daiwa Banks merge into Resona Bank (5th largest) • Resona granted another 1.96 trillion yen • September 2003: Resona records loss of 1.76 trillion yen for period between Mar-Sept 03 (90% capital provided, disappears) • Regulators principal aim to avoid large bank failures • Little attention to future viability of recapitalized banks • Regulators did not systematically force other banks to reassess their risk ratings • Gives little incentive for Banks to restructure Book Value and Adjusted Capital in the Japanese Banking Sector Mar-89 Mar-91 Mar-93 Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Market Value of Shares A 97.1 77.7 56.4 52 54.1 47.1 44.5 23.2 Book Value of Shares B 23.2 33.1 34.5 39.8 42.9 42.7 44.3 23.2 Reported Book Value of Bank Capital C 22.5 30.2 31.8 32.3 28.5 33.7 36.7 24.8 Defered Tax Assets D 0.0 0.0 0.0 0.0 0.0 8.4 7.3 10.6 Estminated Underreserv ing E N/A N/A N/A N/A 15 4.6 7.6 5.4 Adjusted Capital C+ ((AB)*.05)-D-E 66.8 57 44.9 39.6 20.2 23.4 21.9 8.8 Equity Capital Held by the Govt 0.0 0.0 0.0 0.0 0.0 6.3 7.1 7.3 32839 26292 18591 15140 18008 15887 13000 7873 Nikkei225 Stock Price Average Conclusion • Cumulative loan losses by banks since 1990 is 91.5 trillion yen (18% of current Japanese GDP) • Tax payer burden very likely at least 100 trillion yen (20% of GDP) • Solutions: – – – – Banks must shrink in size Find alternative means of income other than lending Recapitalization and restructuring Reining in of Government sponsored financial institutions