2) The Japanese asset purchase and equity infusion experience

Transcription

1 Will The U.S. Bank ReCapitalization Work? Lessons from Japan Outline Anil Kashyap November 11, 28 Myron Scholes Global Market Forum 1) Some similarities between the U.S. and Japan 2) The Japanese asset purchase and equity infusion experience 3) Lessons from Japan 1

2 Jūsen: The first leg of Japan s Crisis Jūsen: created in the 197s to provide mortgages High population growth in urban area during the rapid growth era increased housing demand City banks were reluctant to jump into home mortgage business, which was new to them Jūsen were founded by banks but encouraged and guided by the MOF Jūsen also provided attractive places for the MOF amakudari officials

3 The transformation of the Jūsen Initially focused on home mortgages In the 198s, banks (founders of jūsen) ) enter home mortgage business as they lose their traditional customers to the capital market Jūsen started to lend more to real estate developers Jūsen were non-depository institutions and borrowed from (founder) banks and agricultural coops Founder banks collected finder s fees for high-risk loans

4 Housing prices Land Prices in the U.S. and Japan Case-Shiller National Index Commercial Prices 6 Major Cities US (left, bottom axes) Japan (right, top axes) 4

5 November 1997 to February 1999 in Japan (Chapter 8 of Hoshi and Kashyap 21) Unexpected failure of multiple large institutions (Nov 1997) Spike in the interbank borrowing rate New accounting rules to cover up problems (Jan 1998) Half-hearted recapitalization (Mar 1998) All banks get the same injection = amount desired by the strongest bank Deposit guarantees LDP loses election, government resigns (June 1998) Compromise second round crisis legislation (Oct 1998) Several major financial firms nationalized (Nov 1998) Second round recapitalization (preferred shares) (Mar 1999) MOF declares crisis will be over in 2 weeks 5

6 P ercentage Points 1 Figure 8.1 One-Year Yen Interbank Loan Rate Difference Between Bank and US, UK Average P ercentage Points 1.9 BOTM Fuji (.1) 2/1/95 5/24/95 9/13/95 1/3/96 4/24/96 8/14/96 12/4/96 3/26/97 7/16/97 11/5/97 2/25/98 6/17/98 1/7/98 1/26/99 3/29/95 7/19/95 11/8/95 2/28/96 6/19/96 1/9/96 1/29/97 5/21/97 9/1/97 12/31/97 4/22/98 8/12/98 12/2/98 3/23/99 Source: Bloomberg (.1) 6

7 How Big was the Problem in Japan? (All banks, trillion) End of Loan Losses (addition to loan loss reserves) Cumulative Loan Losses since 4/1992 Number of Major Banks 3/ / / / / / / / / / / / / / / % of GDP

8 Asset Management Companies in Japan Name Dates (purchases) Target Purchases Amount Spent ( Trillion) Amount Collected ( Trillion) Comments Cooperative Credit Purchasing Co. 12/1992-3/21 Non-performing loans with land collateral of 5.8 (market ) [=15.4 book] Bank financed, created tax benefits by (CCPC) contributing banks buying loans Liquidated in 3/24 Tokyo Kyodo Bank 1/1995-4/1999 Initially assets of failed credit unions, later Reorganized as Resolution and assets of any failed banks Collection Bank (RCB) in 9/1996 Housing Loan and Administration Corp. (HLAC) 7/1996-4/1999 Loans of failed jusen (specialty housing loan companies) (market) Financed with mix of public and private money Resolution and Collection Corp. 4/1999-6/25 Industrial Revitalization Corp. of Japan 5/23-3/25 Combined RCB and.356 (market).649 Starting in 21 also HLAC, mandate extended to allow purchases of assets from solvent banks [=4.46 book] (beyond earlier HLAC and RCB spending) reorganized loans, ultimately involved in restructuring 577 borrowers Buy non-performing loans through 25, restructure them within 3 years.53(market) [=.97(book)] NA [.94 surplus as of 5/27] Restructured 41 borrowers with 4 trillion total debt Closed in 5/27 8

9 Recapitalizations in Japan Legislation Date Securities Used Number of financial institutions (# with nonzero outstanding balance) Amount Injected (Trillion ) Amount Sold or Collected to date (as of September 28) (Trillion ) Financial Function Stabilization Act 3/1998 Preferred shares, subordinated debt 21 (2) [1.626 (book)] Prompt 3/1999 Preferred shares, 32 (1) Recapitalization Act 3/22 subordinated debt [7.556 (book)] Financial Reorganization Promotion Act 9/23 Subordinated debt 1 ().6.6 [.6 (book)] Deposit Insurance Act (Article 12-1) Act for Strengthening Financial Functions 6/23 Common shares, preferred shares 11/26-12/26 1 (1) [.17 (book)] Preferred shares 2 (2).41. 9

10 Official Core capital Deferred Tax Assets Estimated Underreserving Modified Capital Capital held by the gov t Bank Assets Capital Gap A B C D=A-B-C E F G=.3*F-D Mar NA Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Source of data: Assets and core capital are from the Bank of Japan for all domestically licensed banks. Deferred tax and under-reserving estimates are from Fukao (23a) and JCER (24), based on Federation of Bankers Associ "Analysis of Bank Financial Statements," various issues and securities reports for individual banks. Note: Core capital, sometimes referred to as Tier I capital, includes equity capital and capital reserves. Fukao also estimates that prior to 21 there were substantial unrealized ed portfolio gains that could have been availab ailab The after tax amounts he reports from 1996 to 2 are 12.8, 6.7, 3.1, 2.6 and 6.1 trillion yen respectively. 1

11 Lessons from Japanese Recapitalizations 1. Banks may refuse public funds (fear of signaling troubled situation; creation of claims senior to the existing shares) 2. Small (and repeated) recapitalizations ease the capital shortage only temporarily 3. Recapitalization of failing banks is counter- productive 4. Recapitalization with requirement to increase lending to small and medium firms may have been counter-productive 11

12 Principles for Capital Injection 1. Do not waste money helping non-viable banks (use audits, and/or market signals to decide who to save) 2. Prevent new money from being diverted to existing creditors (Dilute current shareholders, try to restructure long-term debt or concentrate spending on healthy banks; suspend dividend payments.) 3. Make the capital injection large enough to recapitalize the system 4. Insist that the most healthy banks get more capital (private funding is even better) 12

13 YTD through Assets ($ millions) Loans (not counting allowance for loss) % real estate % credit card Mortgage Investment Securities (Fair Value) Equity/ Assets Bank of America 3-Jun 1,327, , % 1.89% 199, Merrill Lynch 27-Jun 966,21 79,17 22.% 4.% 2, Combined 2,293, , % 2.78% 22,44.63 JP Morgan 3-Jun 1,685,49 613, % 7.91% 14,87.16 CitiGroup 3-Jun 1,228, , % 3.63% 54, Wells Fargo 3-Jun 1,173,966 75, % 1.1% 146,74.97 Goldman Sachs 31-Aug 1,81,773 29, %.% 29,54.42 Mogan Stanley 31-Aug 987,43 93, % 24.89% 214, NY Mellon 3-Jun 21,225 5,568.%.% 4, State Street 3-Jun 138,859 11,317.%.% 25,76.91 Total (including recent acquisitions) 8,79,799 2,521, % 5.69% 133,745.74

14 Real GDP Real GDP in US and Japan (Normalized to be when land prices peak).3 Peak Land Price Normalized Log US GDP (bottom dates) Normalized Log Japanese GDP (top dates) 14

15 Percent of Japanese Bank Loans Less than 1.5% 5.% 45.% 4.% % 35.% 3.% % 25.% 2.% % 15.% 1.% % 5.%.% %

16 Zombies Firms getting subsidized credit The sample is listed firms in manufacturing, construction, real estate, retail and wholesale (other than the nine largest general trading companies), and services Raw Percentage Asset-weighted Percentage (%) (%)

17 Cross-industry incidence of zombies Construction All Firms Manufacturing 6 % 6 % 6 % Services Real Estate Trade 6 % 6 % 6 % % 5 Crisp All Firms 3 1 Fuzzy with (d1, d2) = (, 5bp) Fuzzy with (d1, d2) = (-25bp, 75bp)

18 Total Factor Productivity by Industry: (1995=1) MANUFACTURING NONMANUFACTURING 18

19 Today s News headlines WSJ: The U.S. government's financial-system rescue plans are coming under pressure as a growing array of distressed companies signal the need for assistance. Bloomberg: Revised AIG Terms Begin Treasury Transfusions to 'Zombie' Firms At risk employment Airlines Autos Housing finance Insurance Your favorite special interest! 19

20 Conclusions Government focus on capital shortages is welcome, but details of the bail out matter Willingness to lend comes with sufficient capital Too early to declare victory some increasingly scary analogies to Japan Bil Bailouts to distressed dit did industries ti could ldturn the recession into an extended period of slow growth 2