Atkinson, David, Tomishi Ishida, and Hideyuki Ishii, “City Bank Profitability in the 1990s,” Goldman Sachs Investment Research, February 2000.
Kuwayama, Patricia Hagan, Postal Banking in the United States and Japan: A Comparative Analysis, Bank of Japan, Institute for Monetary and Economic Studies, Discussion Paper No. 99-E-18, June 1999.
Morsink, James, and Tamim Bayoumi, “Monetary Policy Transmission in Japan,” in Tamim Bayoumi and Charles Collyns (eds.), Post Bubble Blues: How Japan Responded to Asset Price Collapse, Washington: IMF, 2000.
Prepared by James Morsink (ext. 37875).
Banks with exclusively domestic operations are required to hold 4 percent capital, does not include 45 percent of unrealized gains on securities.
Another firm is a subsidiary if the bank’s equity stake is above 20 percent but below 50 percent, or if the stake is below 20 percent but the bank wields effective control. If the bank’s stake is above 50 percent, the other firm (except insurance companies) must be consolidated.
In October 1998, the total amount of public funds available to deal with banking problems had been set at ¥60 trillion, of which ¥25 trillion was targeted at the recapitalization of weak but solvent banks, ¥18 trillion at nationalization and bridge banks, and ¥17 trillion at protecting depositors (see Chapter IV in IMF, 1999).
No new banking license has been issued for fifty years.
Liquid deposits are defined as those used for transactions purposes. They include checking and savings deposits, but not time deposits or certificates of deposit.
Major banks’ total Class 2 loans amounted to ¥37.7 trillion as of September 1999, according to the summary information released by the FSA on banks’ self-assessments of asset quality, which is another source of information on the extent of bad loans.
At present, most banks report the value of their equity holdings at the cost of acquisition, which limits the downside exposure of their balance sheets, though banks using this valuation method may not include any unrealized gains as part of capital.
A 100 bps rise in JGB yields—as occurred between October 1998 and January 1999— would lead to a valuation loss at major banks of about ¥1.1 trillion (about one-third of operating profits or less than 5 percent of Tier-1 capital). By comparison, a 1,000 point fall in the Nikkei stock price index would reduce the market value of equity holdings by about ¥2.2 trillion.
The average ratio of operating costs to revenues (excluding realized gains on investment bonds) was 61 percent for Japanese city banks in 1999, compared to 68 percent for U.S. money center banks (see Atkinson, Ishida, and Ishii 2000).
Long-term savings deposits are in fact very liquid, as they can be redeemed without penalty after six months, which provides an attractive hedge against an increase in interest rates. Although the interest rate on postal savings deposits is set as a fraction (usually about 90 percent) of the average 3-year deposit rate at private banks, the differential is not sufficient—especially when interest rates are low—to compensate for the nonpecuniary benefits of postal savings deposits.
The previously-announced merger between Chuo Trust and Mitsui Trust took place as planned in April 2000, creating Chuo Mitsui Trust Bank.
For example, DKB, the product of a 1971 merger between Dai-Ichi Bank and Nippon Kangyo Bank, reportedly remains divided between its two constituent camps. More recent mergers, including Sakura Bank (Mitsui Bank and Taiyo Kobe Bank in 1990), Asahi Bank (Kyowa Bank and Saitama Bank in 1991), and Bank of Tokyo-Mitsubishi (Bank of Tokyo and Mitsubishi Bank in 1996), also are also said to have had trouble paring staff and operations, and melding different business cultures.
Both banks were nationalized in part because their franchises as providers of long-term credit to the industrial sector had largely disappeared.
The other main members of the group are Tokio Marine and Fire Insurance Company and Orix Corporation, a large leasing firm.
The equities portfolios were sold to the DIC, which placed them back with the banks. This arrangement (i) allowed the realization of capital gains, which improved capitalization, (ii) removed the new banks’ exposures to the stock market, and (iii) allowed the new banks to retain control of the assets, which protected the franchises that the banks possessed through mutual cross-shareholdings with corporate borrowers.
Consider the following example: gross profits are ¥500 and expenses are ¥300. Absent the Tokyo tax, net profits are ¥200, the tax on net profits is ¥84 (42 percent), so net income is ¥116. With the Tokyo tax (3 percent of gross profits generated in Tokyo, say 50 percent), net profits are ¥193, the tax on net profits is ¥75 (39 percent), so net income is ¥117.
Second-tier regional banks and cooperative-type financial institutions together account for 40 percent of deposits.
Regional banks generally have higher expense ratios than major banks, mostly because of more extensive branch networks (relative to asset size), so there could be scope to cut costs.
For example, banks will be allowed to sell life insurance products linked to mortgages and fire insurance for home owners.