Suzuki japan’s financial slump; collapse of the monitoring system under institutional and transition failures (2011)

Amazon.com: Japan's Financial Slump: Collapse of the Monitoring System in Banking and Financial Institutions) (9780230290341): Yasushi SUZUKI Japan's Financial Slump: Collapse of the Monitoring System under Institutional and Transition Failures (Palgrave Macmillan Studies in Banking and Financial Institutions) Close Window http://www.amazon.com/gp/product/images/0230290345/ref=dp_image_0?ie=UTF8&n=283155&s=books5/2/2011 7:46:08 AM Palgrave Macmillan Studies in Banking and Financial Institutions The Palgrave Macmillan Studies in Banking and Financial Institutions are international in orientation and include studies of banking within particular countries or regions, and studies of particular themes such as Corporate Banking, Risk Management, Mergers and Acquisitions, etc The books’ focus is on research and practice, and they include up-to-date and innovative studies on contemporary topics in banking that will have global impact and influence Titles include: Yener Altunbas‚, Blaise Gadanecz and Alper Kara SYNDICATED LOANS A Hybrid of Relationship Lending and Publicly Traded Debt Yener Altunbas‚, Alper Kara and Öslem Olgu TURKISH BANKING Banking under Political Instability and Chronic High Inflation Steffen E Andersen THE EVOLUTION OF NORDIC FINANCE Seth Apati THE NIGERIAN BANKING SECTOR REFORMS Power and Politics Elena Beccalli IT AND EUROPEAN BANK PERFORMANCE Paola Bongini, Stefano Chiarlone and Giovanni Ferri (editors) EMERGING BANKING SYSTEMS Vittorio Boscia, Alessandro Carretta and Paola Schwizer COOPERATIVE BANKING: INNOVATIONS AND DEVELOPMENTS COOPERATIVE BANKING IN EUROPE: CASE STUDIES Roberto Bottiglia, Elisabetta Gualandri and Gian Nereo Mazzocco (editors) CONSOLIDATION IN THE EUROPEAN FINANCIAL INDUSTRY Alessandro Carretta, Franco Fiordelisi and Gianluca Mattarocci (editors) NEW DRIVERS OF PERFORMANCE IN A CHANGING FINANCIAL WORLD Dimitris N Chorafas CAPITALISM WITHOUT CAPITAL Dimitris N Chorafas FINANCIAL BOOM AND GLOOM The Credit and Banking Crisis of 2007–2009 and Beyond 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Series Editor: Professor Philip Molyneux Violaine Cousin BANKING IN CHINA Peter Falush and Robert L Carter OBE THE BRITISH INSURANCE INDUSTRY SINCE 1900 The Era of Transformation Franco Fiordelisi MERGERS AND ACQUISITIONS IN EUROPEAN BANKING Franco Fiordelisi, Philip Molyneux and Daniele Previati (editors) NEW ISSUES IN FINANCIAL AND CREDIT MARKETS Franco Fiordelisi, Philip Molyneux and Daniele Previati (editors) NEW ISSUES IN FINANCIAL INSTITUTIONS MANAGEMENT Franco Fiordelisi and Philip Molyneux SHAREHOLDER VALUE IN BANKING Hans Genberg and Cho-Hoi Hui THE BANKING SECTOR IN HONG KONG Competition, Efficiency, Performance and Risk Carlo Gola and Alessandro Roselli THE UK BANKING SYSTEM AND ITS REGULATORY AND SUPERVISORY FRAMEWORK Elisabetta Gualandri and Valeria Venturelli (editors) BRIDGING THE EQUITY GAP FOR INNOVATIVE SMEs Kim Hawtrey AFFORDABLE HOUSING FINANCE Jill M Hendrickson REGULATION AND INSTABILITY IN US COMMERCIAL BANKING A History of Crises Otto Hieronymi (editor) GLOBALIZATION AND THE REFORM OF THE INTERNATIONAL BANKING AND MONETARY SYSTEM Munawar Iqbal and Philip Molyneux THIRTY YEARS OF ISLAMIC BANKING History, Performance and Prospects 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Vincenzo D’Apice and Giovanni Ferri FINANCIAL INSTABILITY Toolkit for Interpreting Boom and Bust Cycles Sven Janssen BRITISH AND GERMAN BANKING STRATEGIES Alexandros-Andreas Kyrtsis (editor) FINANCIAL MARKETS AND ORGANIZATIONAL TECHNOLOGIES System Architectures, Practices and Risks in the Era of Deregulation M Mansoor Khan and M Ishaq Bhatti DEVELOPMENTS IN ISLAMIC BANKING The Case of Pakistan Caterina Lucarelli and Gianni Brighetti (editors) RISK TOLERANCE IN FINANCIAL DECISION MAKING Roman Matousek (editor) MONEY, BANKING AND FINANCIAL MARKETS IN CENTRAL AND EASTERN EUROPE 20 Years of Transition Philip Molyneux and Eleuterio Vallelado (editors) FRONTIERS OF BANKS IN A GLOBAL WORLD Imad Moosa THE MYTH OF TOO BIG TO FAIL Simon Mouatt and Carl Adams (editors) CORPORATE AND SOCIAL TRANSFORMATION OF MONEY AND BANKING Breaking the Serfdom Anastasia Nesvetailova FRAGILE FINANCE Debt, Speculation and Crisis in the Age of Global Credit Anders Ögren (editor) THE SWEDISH FINANCIAL REVOLUTION Dominique Rambure and Alec Nacamuli PAYMENT SYSTEMS From the Salt Mines to the Board Room Catherine Schenk (editor) HONG KONG SAR’s MONETARY AND EXCHANGE RATE CHALLENGES Historical Perspectives 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Kimio Kase and Tanguy Jacopin CEOs AS LEADERS AND STRATEGY DESIGNERS Explaining the Success of Spanish Banks Yasushi Suzuki JAPAN’S FINANCIAL SLUMP Collapse of the Monitoring System under Institutional and Transition Failures Ruth Wandhöfer EU PAYMENTS INTEGRATION The Tale of SEPA, PSD and Other Milestones Along the Road The full list of titles available is on the website: www.palgrave.com/finance/sbfi.asp Palgrave Macmillan Studies in Banking and Financial Institutions Series Standing Order ISBN 978–1–4039–4872–4 You can receive future titles in this series as they are published by placing a standing order Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Noël K Tshiani BUILDING CREDIBLE CENTRAL BANKS Policy Lessons for Emerging Economies Japan’s Financial Slump Yasushi Suzuki Professor of Finance, Ritsumeikan Asia Pacific University, Japan 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Collapse of the Monitoring System under Institutional and Transition Failures © Yasushi Suzuki 2011 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978–0–230–29034–1 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Suzuki, Yasushi, 1963– Japan’s financial slump : collapse of the monitoring system under institutional and transition failures / Yasushi Suzuki p cm — (Palgrave Macmillan studies in banking and financial institutions) Includes index ISBN 978–0–230–29034–1 (hardback) Bank failures—Japan Banks and banking—Japan Financial institutions—Japan Financial crises—Japan Nihon Choki Shin’yo Ginko I Title HG3767.J34S99 2011 332.10952—dc22 2011002016 10 20 19 18 17 16 15 14 13 12 11 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS List of Tables ix List of Figures xi Preface xii Acknowledgements xiv Introduction and Summary 1.1 Fundamental questions about Japan’s financial monitoring system 1.2 Economic realities 1.3 Analytical framework 1.4 Summary of conclusions and contributions 1.5 Chapter outline Theoretical Framework and Basic Analysis of Monitoring Activities 2.1 Introduction 2.2 Theories related to monitoring activities: Screening and monitoring activities by lenders and investors 2.3 Theories related to monitoring activities: Supervising and monitoring activities of regulatory authorities 2.4 Theories of institutional changes 2.5 Conclusions Characteristics of the ‘Traditional’ Japanese and Anglo-American Financial Systems 3.1 Introduction 3.2 The Anglo-American financial system 3.3 Japanese ‘main banks’ as intermediaries and monitors 3.4 Intangible and informal institutional features of the ‘convoy’ monitoring system Economic Environmental Changes and Institutional Changes 4.1 Introduction 4.2 Changes in economic environment affecting the Japanese traditional monitoring system vii 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki 1 14 16 16 18 31 43 47 49 49 50 56 60 77 77 79 Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Contents viii Contents 4.3 106 115 The 5.1 5.2 5.3 5.4 5.5 118 118 119 128 134 140 LTCB Collapse: A Case Study Introduction Changes in the LTCB’s profitability Responses to the collapse of the financial bubble Changes in the LTCB’s financial position Conclusion Intensified Uncertainty: The Political and Economic Reality of the 1997–98 Financial Crisis and Prolonged Financial Stagnation in Japan 6.1 Introduction 6.2 A survey of the process from the collapse of the financial bubble to the LTCB’s bankruptcy 6.3 Characteristics of Japan’s prolonged financial slump 6.4 Credit crunch seen as a result of herd behaviour in lending 6.5 ShinGinko Tokyo: Another case study 6.6 Concluding comments 96 142 142 143 155 161 165 170 Transition Failure 7.1 Introduction 7.2 Costs for abandoning the traditional mode – the transition cost 7.3 Intensified ‘audience’ effects 7.4 Actions by the Japanese banks after the crisis 7.5 Conclusions 174 174 Conclusions 8.1 Summarized conclusions 8.2 Lessons from Japan’s financial stagnation 195 195 199 177 185 190 193 Notes 203 Bibliography 208 Index 215 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Limitation of the Anglo-American methods of screening and monitoring 4.4 Changes in the financial structures through the 1990s: Comparative financial structures of Japan and the US 4.5 Concluding comments 1.1 Japan’s average real GDP growth rates (at constant prices) 1.2 The changes of the share of each industry in Japan’s GDP (at current prices) 2.1 Comparison of the institutional setting of regulation in the US and Japan 38 4.1 Changes in the outstanding loans by the Japanese banks to industries 81 4.2 Changes in the composition of fund raising by the Japanese major manufacturing/non-manufacturing firms 82 Changes in the average real growth rate by each type of manufacturing 84 4.3 4.4 Sample credit rating transition matrix 100 4.5 Risk weights used in standardized approach for credit risk in Basel II 104 Financial assets held by households (comparison between Japan and the US) 107 Liability composition of financial intermediaries (comparison between Japan and the US) 110 Asset composition of financial intermediaries (comparison between Japan and the US) 111 5.1 Changes in the LTCB’s net revenue 122 5.2 Changes in the share of loan exposures to major sectors 124 5.3 Changes in interest revenue and funding costs 125 5.4 LTCB: Interest swap and revised net interest revenue 126 5.5 Share of LTCB loans whose security is ‘guaranteed’ 130 5.6 LTCB’s net profit from dealing and changes in the bond yield on the barometer 10 year government bond 133 5.7 LTCB assets by major categories 135 5.8 Liabilities of LTCB by major categories 137 4.6 4.7 4.8 ix 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 List of Tables 205 10 It is apparent that higher-rated credible firms could raise funds with lower costs in international financial markets According to the data provided by a London-based investment bank (through an interview with the staff), the average swap spread for the Japanese AAA-rated firms, which is considered as a justifiable borrowing margin against the London Inter-Bank Offered Rate or ‘LIBOR’, was Ϫ0.348 per cent (sub-LIBOR) in 1996 and Ϫ0.219 per cent in 1997 The average swap spread for the Japanese BBB-rated firms was 0.477 per cent in 1996 and 0.845 per cent in 1997, respectively Meanwhile, we have to admit that there is no credible estimate of the magnitude of the costs borne by firms that were forced to rely on bank financing in the heyday of keiretsu financing in the 1970s As Hoshi and Kashyap (2001, pp 201–2) point out, the cost of market financing is likely to depend on the size and maturity of capital markets, which makes it hard to measure how much market financing would have cost from the 1950s to the 1970s if capital markets had been allowed to develop without so many restrictions But it is clear that some firms must have experienced higher costs by reason of being forced to borrow from banks Certainly, when capital market or offshore loan market financing options were being expanded in the 1980s, as discussed in section 4.2.1, many large and profitable firms started to move away quite aggressively from bank financing 11 Unproductive rent seeking refers to activities that are profitable for the parties involved without being productive for the economy because these activities lead to the contraction of the available set of goods and services entering the utility function of society Esteban and Ray (2006) point out that the US is a hotbed of licensing activities, presumably influenced by a host of business interests Similarly, business interests deploy much lobbying expertise to influence regulatory design and implementation According to them, every state in the US has a ‘division of occupational licensing’ charged with the role of setting the conditions to qualify for a license In New Jersey, for instance, there are 41 different commissions regulating different professional activities Also in the financial sector, as a factor causing the S&L debacles within in the US, Stiglitz (1994) points out that in an attempt to help the failing S&Ls, the Reagan administration had, in the early 1980s, actually loosened regulations, allowing those who wished to gamble on their resurrection to so Economic Environmental Changes and Institutional Changes Schaberg (1998) uses this term to describe the declining importance of domestic bank lending as a source of funds The ratio of sales of overseas manufacturing subsidiaries to sales of Japanese manufacturing firms (including those firms without any overseas subsidiary) This terminology is based on Freixas and Rochet (1997, pp 1–2) Standard & Poor’s Financial Services LLC (S&P) does not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and is not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of ratings S&P GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE S&P SHALL NOT BE LIABLE 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Notes Notes FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, or LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS) IN CONNECTION WITH ANY USE OF RATINGS S&P’s ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities They not address the market value of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice The FFA is a set of comprehensive financial statistics that shows the movements of funds among economic entities such as enterprises, households, and the government, and the claim/debt relationships between them In July 1999, the BOJ conducted a fundamental revision of the FFA for the first time in nearly 40 years and started releasing the new data Retroactively revised data for the past 10 fiscal years were also released in March 2000 (BOJ 2000, Introduction) The outstanding financial liabilities was ¥393 trillion Thus, the households sector was a net creditor with outstanding net assets of ¥997 trillion (BOJ 2000, p 4) Non-banks in the FFA are defined as private financial institutions that raise funds through methods other than deposits and deposit-like instruments and invest such funds as loans including the purchase of structured-financing instruments The high value of outstanding shares and other equities reflects the rise in stock prices In fiscal year 1999, the growth rate of outstanding shares and other equities was high, the year-to-year increase being 41.6 per cent (BOJ 2000) In the baseline estimate, conservatively assuming a true loss rate of 90 per cent, based on historical trends in loss rates and an estimated current loss rate of about 85 per cent, leads to an estimate of potential loan losses of about ¥58.5 trillion The uncovered losses are calculated as the gap with the major banks’ cumulative provisions and write-offs of about ¥52.3 trillion (IMF 2000, p 196) The LTCB Collapse: A Case Study Some parts of the chronology owe to Tett (2003) The LTCB went bust and was temporarily nationalized in October 1998 Detailed breakdown of income from and the associated costs of interest swap transactions were not available until 1989 The LTCB started earning significant amounts from interest swap transactions only after 1993, in other words, the contribution of the revenue from interest swap transactions was very marginal until 1992 Intensified Uncertainty: The Political and Economic Reality of the 1997–98 Financial Crisis and Prolonged Financial Stagnation in Japan See section 4.3 for the details In part, the fall of Lehman Brothers, a major US investment bank, in the summer of 2008 triggered a global financial crisis which caused the global economic slowdown and, accordingly, a rapid deterioration of the Japanese economy 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 206 207 While the ratio of ordinary profit to sales for enterprises with capital between ¥10 and ¥100 million and enterprises with capital of less than ¥10 million has improved slowly during the economic recovery since 2002, the gap in the profit ratio between these enterprises and large enterprises with capital of ¥100 million or more has expanded (SMEA 2008) The profit ratio of small enterprises with capital of less than ¥10 million is particularly sluggish; the gap in the ratio of ordinary profit to sales between these enterprises and large enterprises with capital of ¥100 million or more was 2.1 per cent on average for the 10 years between FY1992 and FY2001, but widened to an average of 3.6 per cent for the five years from FY2002 to FY2006 In FY2006, the gap expanded to 4.3 per cent, the highest level in the past 30 years The meaning of Shinginko is ‘New Bank’ From an interview with an Executive Officer of SGT on 23 August 2006 According to SGT, their NPL were finally sold in bulk to loan servicers Transition Failure An interview with Tsuneo Suzuki, the last president of the bank at the ‘bridge bank’ stage towards the nationalization, by NHK, in May 2005 A former Executive Vice President of the LTCB, Mr Takashi Uehara, committed suicide in February 1999 According to a newspaper, Mainichi Shimbun, Mr Uehara was called in for questioning by prosecutors in relation to the bank’s alleged window-dressing of its settlements in 1998 The newspaper stated that Mr Uehara, who had assumed the position in charge of account settlements for the bank in March 1998, reportedly approved payment of illegal dividends totalling some 7.1 billion yen to shareholders, despite the fact that the LTCB was making a huge loss He, however, was less responsible for the accumulation per se of non-performing loans in domestic real estate and construction sectors, which seriously damaged the bank’s loan portfolio, because he had long been engaged in international business including as General Manager of the New York Branch since the late 1980s Mr Uehara assumed the top management job in charge of negotiating with potential ‘white knights’ as well as regulators for the LTCB’s survival Many former LTCB staff knew that he fought it out to the very end It is difficult to understand what drove him to kill himself However, something must have led to his fatal loss of trust in the regulators Further, Mitsubishi UFJ Financial Group or MUFG combined Mitsubishi Tokyo Financial Group and UFJ Holdings on October 2005 They were found guilty by the Tokyo District Court in 2002, and the Tokyo High Court supported the district court’s ruling, turning down an appeal in 2005 But on 18 July 2008, the Supreme Court reversed the lower courts’ decision and acquitted each of the defendants According to the Nikkei Weekly on 28 July 2008, the top court ruled that failing to comply with the ministry’s guideline did not constitute a violation of the Securities and Exchange Law, as the guideline itself lacked established authority at that time 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Notes Alchian, A and Demsetz, H (1972) ‘Production, Information Costs, and Economic Organization’, reprinted in L Putterman (ed.), The Economic Nature of the Firm: A Reader, Cambridge: Cambridge University Press, pp 193–216 Antoniewicz, R.L (2000) ‘A Comparison of the Household Sector from the Flow of Funds Accounts and the Survey of Consumer Finances’, http://www federalreserve.gov/pubs/ Aoki, M (1994) ‘Monitoring Characteristics of the Main Bank System: An Analytical and Developmental View’, in M Aoki and H Patrick (eds), The Japanese Main Bank System, New York: Oxford University Press Aoki, M (2001) Toward a Comparative Institutional Analysis, Cambridge, MA: MIT Press Aoki, M., Patrick, H and Sheard, P (1994) ‘Introduction’, ‘The Japanese Main Bank System: An Introductory Overview’, in M Aoki and H Patrick, The Japanese Main Bank System, Oxford: Oxford University Press Arrow, K.J (1974) The Limits of Organization, New York: W.W Norton BCBS (Basle Committee on Banking Supervision) (1999a) ‘Credit Risk Modelling: Current Practices and Applications’, Basel Committee’s Models Task Force, http://www.bis.org/ BCBS (1999b) ‘A New Capital Adequacy Framework’, Basel Committee’s Models Task Force BCBS (2006) International Convergence of Capital Measurement and Capital Standards: A Revised Framework Comprehensive Version, Basel Committee on Banking Supervision, June 2006, Basel: Bank for International Settlements Bergson, H (1992) The Creative Mind, An Introduction to Metaphysics, translated by M.L Andison, New York: Citadel Press Bikhchandani, S and Sharma, S (2000) ‘Herd Behavior in Financial Markets: A Review’, IMF Working Paper, WP/00/48, IMF Institute BOJ (Bank of Japan) (1960) Hompo Keizai Tokei (National Economic Statistics), Tokyo: BOJ BOJ (1970) Keizai Tokei Nempo (Annual Economic Statistics), Tokyo: Bank of Japan BOJ (1975) Keizai Tokei Nempo (Annual Economic Statistics), Tokyo: Bank of Japan BOJ (1980) Keizai Tokei Nempo (Annual Economic Statistics), Tokyo: Bank of Japan BOJ (2000) ‘Japan’s Financial Structure in View of the Flow of Funds Accounts, Research and Statistic Department’, Working paper, Bank of Japan BOJ (2001a) ‘Zenkoku Ginko no Heisei 12 nendo Kessan to Keiei Jyo no Kadai’, Working paper, Bank of Japan BOJ (2001b) ‘Insights into the Low Profitability of Japanese Banks: Some Lessons from the Analysis of Trends in Banks’ Margin’, Discussion Paper No.01-E-1, Tokyo: Bank of Japan BOJ (2004) Zenkoku Ginko no Kessan Jyokyo, Tokyo: Bank of Japan 208 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Bibliography 209 BOJ Time Series data Boot, A.W.A and Greenbaum, S (1993) ‘Bank Regulation, Reputation and Rents: Theory and Policy Implications’, in C Mayer and V Xavier (eds), Capital Markets and Financial Intermediation, Cambridge: Cambridge University Press Cabinet Office (2001) Heisei 13 nendo-ban, Keizai Zaisei Hakusho (Annual Report on Japan’s Economy and Public Finance 2000–2001), Tokyo: Government of Japan Cabinet Office (2002) Heisei 14 nendo-ban, Keizai Zaisei Hakusho (Annual Report on Japan’s Economy and Public Finance 2001–2002), Tokyo: Government of Japan Cabinet Office (2003) Heisei 15 nendo-ban, Keizai Zaisei Hakusho (Annual Report on Japan’s Economy and Public Finance 2002–2003), Government of Japan Cabinet Office (2004) Heisei 16 nendo-ban, Keizai Zaisei Hakusho (Annual Report on Japan’s Economy and Public Finance 2003–2004), Tokyo: Government of Japan Cabinet Office (2008) Heisei 20 nendo-ban, Keizai Zaisei Hakusho (Annual Report on Japan’s Economy and Public Finance 2007–2008), Tokyo: Government of Japan Cabinet Office (2009) Heisei 21 nendo-ban, Keizai Zaisei Hakusho (Annual Report on Japan’s Economy and Public Finance 2008–2009), Tokyo: Government of Japan Cabinet Office Statistics Accessed online at http://www5.cao.go.jp/keizai/indexe.html Campbell, T., Chan, Y.-K and Marino, A (1992) ‘An Incentive-Based Theory of Bank Regulation’, Journal of Financial Intermediation, vol 2, pp 255–76 Chan-Lau, J.A (2001) “Corporate Restructuring in Japan: An Event-Study Analysis”, IMF Working Paper, WP/01/202 Chang, H-J (2000) ‘The Hazard of Moral Hazard: Untangling the Asian Crisis’, World Development, Vol 28, No.4, pp 775–88 Cohen, D and Knetsch, J.L (1992) ‘Judicial Choice and Disparities between Measures of Economic Values’, in D Kahneman and A Tversky (eds), Choices, Values, and Frames, Cambridge: Cambridge University Press Cornford, A (2001) ‘The Basel Committee’s Proposals for Revised Capital Standards: Mark and the State of Play’, Discussion Papers, no 156, UNCTAD Davis, E.P (1995) Debt Financial Fragility and Systemic Risk, Oxford: Clarendon Press Diamond, D.W (1984) ‘Financial Intermediation and Delegated Monitoring’, Review of Economic Studies, vol 51, pp 393–414 Dore, R (1998) ‘Asian Crisis and the Future of the Japanese Model’, Cambridge Journal of Economics, vol 22, pp 773–87 Dore, R (2000) Stock Market Capitalism: Welfare Capitalism, Japan and Germany versus the Anglo-Saxons, Oxford: Oxford University Press Dymski, G (1993) ‘Keynesian Uncertainty and Asymmetric Information: Complementary or Contradictory’, Journal of Post Keynesian Economics, Fall 1993, Vol 16, No 1, pp 49–54 Dymski, G (1999) The Bank Merger Wave: The Economic Causes and Social Consequence of Financial Consolidation, Armonk, NY: M.E Sharpe, Inc Eichengreen, B (1999) Toward a New International Financial Architecture, A Practical Post-Asia Agenda, Washington, DC: Institute for International Economics Ellsberg, D (1961) ‘Risk, Ambiguity, and the Savage Axioms’, reprinted in P.K Moser, Rationality in Action: Contemporary Approaches, Cambridge: Cambridge University Press Elster, J (2000) Ulysses Unbound: Studies in Rationality, Precommitment, and Constraints, Cambridge: Cambridge University Press 10.1057/9780230307704 - 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Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index Index convoy system 2, 6–7, 8, 13, 50, 59–61, 67–9, 73–4, 76, 79, 89, 94, 97, 116, 147, 152, 162, 175, 177, 178, 185–8, 194, 196, 204 coordination problem 22 corporate finance 33, 37–8, 52, 55, 58, 61, 76, 87, 97, 152 Cosmo Credit Cooperative 148, 188 de facto consortium 58, 120 delegated monitoring theory 57 demand-deficient economy 88, 143 Democratic Party of Japan (DPJ) 154 demographic problem 176 deposit insurance 32, 42, 90, 146, 148–50 depository corporations 108–12, 113 DI (diffusion index) direct finance 19–20, 38, 159, 185, 197, 200 disintermediation 79, 91, 93, 94, 113, 120, 122 docility 27 Dun and Bradstreet 25 easy-money policy 175 EIE International 183 ex ante monitoring 2, 16, 18, 51, 58, 119–20 Expected Default Frequencies (EDF) 65–6, 98–9, 101–2, 129–30, 163, 166–7 Federal Deposit Insurance Corporation (FDIC) 51–2 finance 10, 11, 19, 33, 80, 86, 102, 128, 154, 157, 159, 164, 184, 185, 193, 200 corporate 33, 37–8, 52, 55, 58, 61, 76, 87, 97, 152 direct 19–20, 38, 159, 185, 197, 200 indirect 19–20, 37, 197, 198, 199, 200–1 Ponzi 30–1 relationship 50, 64, 67 financial ‘Big Bang’ 6, 10, 150–2, 190, 196 financial differentiation 65, 88, 142 Financial Early Strengthening Law 149, 154 financial establishment 73 financial fragility 30, 162 Financial Reconstruction Commission (FRC) 165 Financial Rehabilitation Law 149 Financial Revitalization Law 137, 154 financial restraint model 34, 57 Financial Services Agency (FSA) 165, 172, 190, 191 Flow of Funds Accounts (FFA) 106 franchise value 24, 36–7, 56, 57, 58, 64, 68, 90, 91, 92, 178 frontier economy 3–4, 9, 11, 13, 77, 80, 87, 94, 101, 116, 159–60, 179–80, 182, 187, 193–4, 195, 198, 200–1 frontier economy period 9, 80 Fukuyama, Francis 46, 201 Trust: The Social Virtues and the Creation of Prosperity 176–7 functional theories 44 GATT Uruguay Round 187 general equilibrium model 18, 19–20, 21, 203 Glass–Steagall Act 38, 51–2, 203–4 Glass–Steagall portfolio restrictions 53 goods market 21 group-oriented system 176–7, 193 Hashimoto cabinet 119, 148, 189 hedge financing 31 Heiwa Sogo Bank 59, 68 herd behaviour 17, 30, 143, 161–3, 172 Hokkaido Takushoku Bank 119, 149, 154 homo economicus 26 homo sociologicus 26 Hosokawa government 187 Hyogo Bank 145, 148 IMF’s Special Data Dissemination Standards 103 incentive approach 22–5, 41, 42 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 216 indirect finance 19–20, 22 Industrial Bank of Japan (IBJ) 65, 69, 85–6, 96, 99, 119–20, 137, 146, 186, 190, 192 information asymmetry 22 Information Economics 23, 25 instrumental rationality 27 institutions 4, 7–8, 14, 16, 17, 19, 21, 25, 27, 32, 44–5, 47, 48, 49, 53, 56–7, 58, 60–5, 71, 73, 91, 103, 106, 109–12, 114, 117, 119–20, 123, 139, 145, 152–4, 159, 165–6, 169, 172, 177, 180–3, 187, 188–9, 193, 198, 199, 203, 204, 206 integrated mode 89 integrated monitoring system 34, 57, 59, 86 internationalization 4, 8, 26, 77, 79, 83, 85, 88, 89, 91–2, 93, 101, 115, 120, 122, 137, 142, 196 interest swap deals 123, 125–6, 206 intuition 62, 64 intuitive rationality 62 Japan–US Yen–Dollar Ad Hoc Committee 50, 88 Japan Development Bank (JDB) 119–20 Japan Incorporated 67, 177 Japan Premium 148, 153 jusen 145, 188 jusen companies 145 jusen housing 148 69, Kawachi Bank 59, 68 keiretsu 64, 67, 69, 191, 192, 202, 205 Keynes’ theory of expectations 55 Kizu Credit Cooperative 188 KMV model 99 Law to Ensure the Soundness of Financial Institutions 153 lending 1, 5, 9–12, 30, 34–5, 51–2, 54, 57, 60, 62, 63, 65, 69, 73, 78, 79, 80, 86–7, 89–90, 92, 93, 95, 97, 101, 102, 114, 116, 119–20, 123, 125, 127, 131, 133–4, 135, 141, 143, 145, 151, 157, 158–60, 217 161–4, 166, 172–3, 183–4, 188, 197, 199, 202, 203, 204, 205 and crowd psychology 164 level playing field regulation 55 Liberal Democratic Party (LDP) 154, 187, 189 LIBOR 205 limited recourse loan 61 liquidity risk 32 loan syndication 58, 129–30 Long-Term Credit Bank Laws 65 Long-Term Credit Bank of Japan Limited (LTCB) 1, 5, 6, 10, 11–12, 13, 14, 61, 65, 69, 73, 95, 98, 99, 112, 118–41, 142, 143, 145, 149, 154–5, 174–5, 183, 184, 189, 190, 196, 197, 202, 206 long-term credit banks 47, 65, 69, 73, 85, 119–20, 127, 137 Long-Term Prime Lending Rate (LTPR) 65, 66 main bank system 2, 17, 49, 50, 137, 151, 171, 177, 183, 191 margins of safety 31 market discipline 41, 71 market failure 23, 25, 29 McFadden–Pepper Act 52 Ministry of Finance (MOF) 5, 39, 57, 59–60, 67–9, 72–4, 94, 131, 143, 144, 145, 148–50, 152, 154, 165, 174, 176, 186, 187–9, 196 Minsky’s financial fragility hypothesis 30–1 Mitsubishi Tokyo Financial Group 190, 203, 207 Mitsubishi-UFJ Financial Group (MUFG) 1, 203, 207 ‘Mizu-Ho’ Financial Group 190 moderate economic growth period 3, 83 MOF Banking Bureau 59 MOF-tan 74, 188 money supply 5, 132, 144, 157 monitor 16, 23–4, 26, 34, 40, 43, 55, 56, 58, 59, 63, 67, 68, 71, 86, 87, 89, 91, 95, 114, 115, 122, 128, 137, 161, 162, 163, 191, 192, 202 definition 16 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index Index monitoring activities 1–4, 7–14, 16, 18, 20, 21–6, 29, 31–3, 34, 36–40, 41–3, 45, 46–7, 50–3, 55, 56–65, 67–8, 69, 71, 76, 77–9, 80, 85–7, 89–93, 94, 96–9, 101–2, 112, 113, 114, 115–16, 118, 119–22, 128, 137, 139, 142, 150, 151–3, 158, 160, 161, 162–4, 166, 170, 172, 175, 177–80, 183, 185, 187, 189, 191–2, 193–4, 195–202, 204 ex ante 2, 16, 17, 18, 51, 58, 89, 119, 120 ongoing 2, 18, 51 Moody’s 25, 98, 99, 130 moral hazard effect 40, 66, 93, 184 moral hazard problem 2, 21–4, 32, 67, 68, 73, 164 narrow banking 42, 203 New Institutional Economics (NIE) 8, 14, 15, 18, 44 Nippon Credit Bank (NCB) 65, 142, 149, 154–5, 190 Nippon Kangyo Bank (NKB) 118 non-algorithmic monitoring 63–5, 76, 121 non-banks 109, 114, 124, 167, 206 non-performing loans (NPL) 1, 2, 10, 40, 50, 72, 94, 95, 113, 125, 128–9, 132, 133–4, 135, 141, 144, 146, 147, 150, 151–3, 157–8, 168, 170, 171, 172, 176, 184–8, 191, 193, 207 write-offs 157, 206 norms 8, 13, 26–7, 29, 45–6, 78, 115, 176, 181–2 Oil Shock 4, 118, 195 opportunism 15, 18, 27, 45–7 overseas production ratio 83, 85 Plaza Accord 83, 93, 119 Ponzi financing 30–1 portfolio approach 24, 41 Post-Keynesian economics 7, 9, 28, 47, 199 postal savings 108, 109, 112 primary securities 19 principal–agent problem 22–3, 42 Prisoner’s Dilemma 182 private equity funds 114 procedural rationality 29, 182 process-oriented theories 44 Probability Density Function (PDF) 54 Program for Financial Revival 158 project finance 61 Prompt Corrective Action Law 147, 149 Prompt Corrective Action (PCA) framework 153–4, 198 quasi-rent-seeking activity 92 regional banks 120, 166, 167, 171–2 relation-based financial system 8, 11, 39, 57, 60, 63, 67, 68–71, 73, 74, 151, 179, 186 relationship banking 10, 61, 64, 67, 165, 166–7, 170 relationship finance 50, 64, 67 relative price 45 rents 7, 11, 24, 37, 39, 67, 89, 90, 91–2, 115, 121, 127, 128 bank 7, 8, 33–6, 40, 56, 57, 61, 64, 65–7, 76, 77, 79, 87, 89–90, 92, 97, 142, 151, 178 rent effect 35, 92 rent opportunities 13, 47, 57, 58, 89, 90, 95, 127, 152 rent-seeking activities 40, 76, 92, 93, 95, 127, 186, 205 reputation 13, 30, 36, 58, 64, 90, 92, 141, 145, 152, 178, 193 reputation rents 37, 90–1 residual claimant 23 Resona Bank 113 returns on assets (ROA) 54, 79, 87, 93, 120, 121, 131 returns on equity (ROE) 54 Riegle–Neal Interstate Banking and Branching Efficiency Act 53 Ripplewood Holdings 190 Risk Adjusted Return on Capital (RAROC) 121 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 218 219 risk assets 55, 103, 108, 172 rules of thumb 26–7, 29, 162, 200, 201 Swiss Banking Corporation (SBC) 128 systemic fragility 29, 30 safety assets 108, 172 Sanyo Securities 119, 149, 154 savings 10, 11, 19–21, 35–6, 49, 51, 92, 108, 112, 114, 115, 200 Savings and Loans (S&L) crisis 50, 53, 88 debacle 53, 91, 205 screening 1, 3, 7, 9, 14, 16, 18, 21, 26, 31, 36, 38–9, 40, 42, 47, 51, 52, 57, 67, 69, 78, 92, 96, 97, 102, 114, 116, 139, 142, 151, 159, 166, 168, 169, 198 credit risk 2, 55, 61 securities-based financial structure 109 ShinGinko Tokyo, Limited (SGT) 143, 165–70, 207 Shinkin banks 166 Shinsei Bank 137, 190 shirking problem 9, 23, 36, 37, 92, 178, 179 small and medium-sized enterprises (SME) 5, 6, 23, 83, 86–7, 95, 114, 129, 142–3, 158–61, 162, 164, 165–6, 167, 168–9, 171, 173, 185, 203 hit products’ lifecycle 160–1 social capital 46, 181, 200, 201 speculative financing 31 spiral of deflation 156, 157 spot market model 50 spread margins 61, 65, 79–80, 125, 127, 129, 133–4, 167, 170, 183–4 Standard & Poor’s 25, 98, 99, 100, 130, 163 stock market capitalism 55, 94, 112, 143, 144, 154, 155 structural failures 4, 115, 193 subjective probability 27–8, 29, 32, 163 Sumitomo Mitsui Banking Corporation 190 supervisory review 41 technological change 4, 8, 26, 77, 85, 88–9, 91, 92, 101 Tokyo Kyowa Credit Cooperative 119, 147, 188 Tokyo Metropolitan Government (TMG) 147, 165, 169–70 toshi ginko 204 see also city banks transaction bank 165, 170 transaction cost(s) 8, 18, 20, 22, 36, 44–6, 74, 77–8, 79, 96, 117, 142–3, 158, 168, 177, 179, 180, 182, 197, 200 Transaction Cost Economics (TCE) 8, 14, 18 transition failures 4, 12, 174–94 trust 8, 12–13, 15, 18, 44, 45–7, 58, 70–1, 92, 176–7, 178–82, 185–7, 189–90, 191, 193–4, 207 uncertainty 2, 7–12, 14–15, 25, 26, 27–30, 31–3, 36–7, 45, 47–8, 55–6, 60, 67, 69, 70–1, 77, 78, 83, 87, 93, 94–5, 97, 101, 102, 115, 116, 142–73, 177, 179–80, 182, 191, 193, 196–9, 200–1 Knightian definition 27–8 measurable 27–8, 46, 63 unmeasurable 27 United Financial Group of Japan (UFJ) 190 value at risk (VaR) methods 54 volatility 29, 54, 162, 164 volatility risks 54 price 132, 141 welfare capitalism 50 Yamaichi Securities 69, 119, 149, 154 zaibatsu 64 10.1057/9780230307704 - Japan's Financial Slump, Yasushi Suzuki Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index ... Explaining the Success of Spanish Banks Yasushi Suzuki JAPAN’S FINANCIAL SLUMP Collapse of the Monitoring System under Institutional and Transition Failures Ruth Wandhöfer EU PAYMENTS INTEGRATION The. .. regulators and monitoring agents of banks This book suggests that the institutional failure in the transition of the mode of monitoring was the root cause of the prolonged financial stagnation after the. .. Yasushi, 1963– Japan’s financial slump : collapse of the monitoring system under institutional and transition failures / Yasushi Suzuki p cm — (Palgrave Macmillan studies in banking and financial