Sapienza Universit

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Sapienza Università di Roma

• International Banking
• Lecture Twelve
• Banking in Japan
• Prof. G. Vento

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Agenda

• Introduction to Banking in the United States
• Structure of the Banking and Financial System in
  the US
• Key issues of US Banking Industry
• Banking Regulation in the US

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Introduction to Banking in Japan

• Japan has a bank-based financial system
• Banking system has traditionally played a more
  important role than the stock market
• Wide array of different types of banks
• The largest public bank is the Postal Savings
  Bank
• Major financial crisis in 1997-98
• Wide range of reforms during the 90s.

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Structure of Japanese Banking System

• The Japanese banking system has experienced
  difficult times in recent years as a consequence
  of the downturn in the domestic economy.
• Property prices / bad debts generated the crisis
  in 1997 98.
• Both public and private financial institutions

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Bank Structure in Japan

• Keiretsu system
• A Keiretsu is a group of companies with
  cross-shareholdings and shared directorships
  which normally include a bank, trust company,
  insurance firm and a major industrial concern
  (i.e. cars, steel)
• The bank supplies services to the other keiretsu
  members, including loans
• The Ministry of Finance (MoF) was the key
  regulator through three bureaux Banking,
  Securities and International Finance

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Bank Regulation in Japan

• MoFs responsibilities included all aspects of
  financial institution supervision examination of
  financial firms, control of interest rates and
  products, supervision of the deposit protection
  scheme, setting the rules on activities to be
  undertaken by financial firms
• Bank of Japan was responsible for the
  implementation of monetary policy, but under the
  influence of MoF
• High protected market
• Japanese companies largely dependant on banks
  loans

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Japans Big Bang (1996)

• 1989 crash of Japan stock market
• Big Bang based on
• - end of functional segmentation integration of
  banking, insurance securities liberalisation
  of financial products and prices no restriction
  to short/long-term operations commission
  liberalised disclosure
• - restoring financial stability through
  Financial Supervisory Agency and Financial
  Reconstruction Commission, merged in 2001 in the
  Financial Services Agency
• - more transparent rules

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Private deposit-taking institutions

• City banks. The city banks are the largest banks
  in the Japanese banking system and account for
  over 50 of total banking sector assets.
• They are commercial banks that offer a full range
  of banking services.
• Regional banks. Focused on retail financial
  services and SMEs.
• The majority of regional banks are publicly
  quoted

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Private deposit-taking institutions

• Trust banks and long-term credit banks.
• Trust banks perform commercial banking activity
  but their main function is asset management for
  retail and other customers. Japanese households
  place funds to these banks, which they invest on
  clients behalf.
• Long-term credit banks provide medium- and long-
  term finance to the corporate sector.
• Cooperative banks. They play a major role in the
  Japanese banking system.

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Private non-deposit-taking institutions and
public financial institutions

• Private non-deposit-taking institutions. They
  include a wide variety of securities, insurance
  and other firms.
• public financial institutions. They perform a
  significant role in financial system.
• Post Office has over 24,000 branches. Japans
  postal saving system is the worlds largest
  financial institutions in terms of deposits.
• Development banks. They direct lend to certain
  sectors.

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Balance sheet features and performance

• Between 1996 and 2005 bank lending portfolios
  have declined by around 30 reflecting the lack
  of demand and the increasing number of bad loans
  that had to be written off.
• The decline in lending and the increase in liquid
  assets is an indication of the weak state of the
  domestic economy.
• Also deposit decreased.
• ROE values are very low by international
  standards, mostly because bad loans

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Banking crisis in the 90s in Japan

• Excessive lending (portfolio concentration).
• Negative impact of asset price deflation
• Policy failure to contain problem

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Banking industry in Japan Recent trends

• According to the latest estimates, Japan recorded
  a sharp expansion in GDP in the fourth quarter
  (3.8 per cent on an annual basis, against a
  contraction of 0.6 per cent in the third
  quarter), thanks mainly to the robust increase of
  22 per cent in exports.
• Private consumption performed well again, growing
  by 2.8 per cent thanks partly to a series of
  incentives for purchases of durable goods.
  Non-residential private investment returned to
  growth after a year and a half, expanding by 3.8
  per cent, while residential investment declined
  sharply again, contracting by 12.5 per cent.
• The latest cyclical indicators offer
  contradictory signals regarding the strength of
  the current recovery.

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Banking industry in Japan Recent trends

• The deflationary trend shows no sign of receding.
  The rate of decline in consumer prices moderated
  from 1.7 per cent in December to 1.1 per cent in
  February, but excluding food and energy prices it
  remained basically unchanged at 1.1 per cent.
• According to the forecasts of the private
  analysts surveyed by Consensus Economics,
  deflation will continue in 2010 at an average
  annual rate of 1.1 per cent. The Bank of Japan
  has held its monetary policy reference rate
  unchanged at 0.1 per cent.
• In order to foster a fall in long-term interest
  rates, in mid-March it decided to double to 20
  trillion (about 4 per cent of GDP) the amount of
  liquidity that will be provided to the market by
  means of three-month guaranteed loans under the
  facility introduced in December.

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BANKING IN UK

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