Deposit Insurance and Banking Behavior

Transcription

1 Deposit Insurance and Banking Behavior Naoyuki Yoshino Professor of Economics Keio University Various Banks in Japan 0. Large Banks 1, Regional Banks 2, Regional Banks II 3, Credit Association 4, Credit Cooperatives 5, Agricultural banks 6, Finance companies 7, Government bank 2 ١

2 Stocks; 1170 America Others; 147 Securities; 782 Cash ans Deposits; 567 Insurance and Pension Funds; 1049 Others; 58 Stocks; 87 Securities; 92 Insurance and Pension Funds; 399 Japan Cash ans Deposits; 792 Stocks; 44 Securities ; 103 Insurance and Pension Funds; Germany Others; 5 Cash ans Deposits; 221 Total, 562 Total, 3715 Total, 1428 Creation of Bridge Bank (DICJ) 1, Bank failure Close the bank 2, Create the Bridge Bank (BB) 3, Keep banking business going on 4, Separate good assets and bad assets 5, Purchase of BB by a succeeding bank ٢

3 Figure 1 Bank s Balance Sheet Bank Loans Good Assets Non Performing Loans (NPL) Bad Assets Capital=A(q2) 6 ٣

4 Japan s Shin-kou Bank Failure 1, Bank Inspection by FSA 2, NPL is growing > Capital 3, Stop Operation on Friday Prime Minister Minister of Finance FSA Minister Governor, Central Bank of Japan ۴

5 4, DIC examines bad assets 5, Depositors names and addresses 6, Bridge bank is established (DIC) 7, Friday, Saturday and Sunday 8, Opening of operation on Monday 9, Pay up to 100,000 US dollar (full) Beyond 100,000$ (partial) 10, Criminal charges to management Fraud, Illegal activities 11, Depositors receive up to 100,000 US dollar 12, After bad loan ratio is determined deposits exceeding 100,000 ($) will be returned. 13, Tentative repayment of depositors 14, Individual number (Identification) Corporate number (identification) 15, Total aggregated amount of Dep. ۵

6 Figure 1 Bank s Balance Sheet Bank Loans Good Assets Non Performing Loans (NPL) Bad Assets Capital=A(q2) 12 ۶

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9 30 Non-performing Loans in Japan (trillion yen) 8.4%, 26.8 trillion yen Disclosed Claims under the FRL (Financial Restruction Law) Rate of Disclosed Claims under the FRL (%) trillion yen 1.7%, Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar ٩

10 Balance of Liability Reserves/Retained Loss Deposit Insurance 19 ١٠

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12 Government Bond Infrastructure Large Companies Bond Market Government Bank Ordinary Banks Pensions and Insurance SMEs Venture business FIs for SMEs Micro credit Venture Capital Hometown Investment Trust Funds S Savings 24 ١٢

13 Creation of Bridge Bank 1, Bank failure Close the bank 2, Create the Bridge Bank BB) 3, Keep banking business going on 4, Separate good assets/bad assets 5, Purchase BB to succeeding bank 1. Ease Monetary Policy before the Bubble Interest Rate and Money Supply of Japan M2 Interest ١٣

14 ١۴ Nikkei Stock Price ١٩٨٠ ١٩٨٠.٧۵ ١٩٨١.۵ ١٩٨٢.٢۵ ١٩٨٣ ١٩٨٣.٧۵ ١٩٨۴.۵ ١٩٨۵.٢۵ ١٩٨۶ ١٩٨۶.٧۵ ١٩٨٧.۵ ١٩٨٨.٢۵ ١٩٨٩ ١٩٨٩.٧۵ ١٩٩٠.۵ ١٩٩١.٢۵ ١٩٩٢ ١٩٩٢.٧۵ ١٩٩٣.۵ ١٩٩۴.٢۵ ١٩٩۵ ١٩٩۵.٧۵ ١٩٩۶.۵ ١٩٩٧.٢۵ ١٩٩٨ ١٩٩٨.٧۵ ١٩٩٩.۵ ٢٠٠٠.٢۵ ٢٠٠١ ٢٠٠١.٧۵ ٢٠٠٢.۵ ٢٠٠٣.٢۵ ٢٠٠۴ ٢٠٠۴.٧۵ ٢٠٠۵.۵ ٢٠٠۶.٢۵ ٢٠٠٧ ٢٠٠٧.٧۵ ٢٠٠٨.۵ ٢٠٠٩.٢۵ Nikkei Stock 27 Land Price Index ١٩٨٠ ١٩٨٠.٧۵ ١٩٨١.۵ ١٩٨٢.٢۵ ١٩٨٣ ١٩٨٣.٧۵ ١٩٨۴.۵ ١٩٨۵.٢۵ ١٩٨۶ ١٩٨۶.٧۵ ١٩٨٧.۵ ١٩٨٨.٢۵ ١٩٨٩ ١٩٨٩.٧۵ ١٩٩٠.۵ ١٩٩١.٢۵ ١٩٩٢ ١٩٩٢.٧۵ ١٩٩٣.۵ ١٩٩۴.٢۵ ١٩٩۵ ١٩٩۵.٧۵ ١٩٩۶.۵ ١٩٩٧.٢۵ ١٩٩٨ ١٩٩٨.٧۵ ١٩٩٩.۵ ٢٠٠٠.٢۵ ٢٠٠١ ٢٠٠١.٧۵ ٢٠٠٢.۵ ٢٠٠٣.٢۵ ٢٠٠۴ ٢٠٠۴.٧۵ ٢٠٠۵.۵ ٢٠٠۶.٢۵ ٢٠٠٧ ٢٠٠٧.٧۵ ٢٠٠٨.۵ ٢٠٠٩.٢۵ Land Price Index 28

15 Bank Credit / GDP Ratio Japan USA ١۵

16 US Housing Price/Income 4.0 倍 3.8 倍 3.6 倍 3.4 倍 3.2 倍 3.0 倍 2.8 倍 2.6 倍 2.4 倍 2.2 倍 2.0 倍 住宅価格 / 所得 1990 年 1991 年 1992 年 1993 年 1994 年 1995 年 1996 年 1997 年 1998 年 1999 年 2000 年 2001 年 2002 年 2003 年 2004 年 2005 年 2006 年 2007 年 2008 年 2009 年 2010 年 31 Micro behavior of bank and aggregated macro effect Individual bank loan Aggregated bank loans Japan s Bubble ( ) U.S. Bubble ( ) Japan s post bubble ( ) U.S. post bubble ( ) 32 ١۶

17 Growth Rate of Banking Loan to Housing Sector (USA) 20.0% 15.0% Housing Sector Total 10.0% 5.0% 0.0% -5.0% 33 Various Proposals for Minimum Capital Requirement exist 1, Adjustable minimum capital requirement ratio --->raise in good times and reduce in bad times 2, Boom country higher capital requirement Sluggish country Lower requirement 3, Adjustment Factors to the Basel Capital Requirement 4, Ryozo Himino (2009) Ex. Stock Price Index 34 ١٧

18 The Basel minimum capital requirement should be different from country to country since the economic structures are different from each other. A simple general equilibrium model suggests that the optimal minimum capital requirement ratio depends on the structure of the economy (i.e. Asset Price, GDP, Interest rate) 35 Japanese Banks Behavior 36 ١٨

19 Estimates of Bank Loans, Japan 37 Typical Profit-Maximizing and Actual Loan Amounts 38 ١٩

20 Optimal Reserves of Deposit Insurance 1, Future Expectation of bank closure about three banks 2, Who will bear the costs? Past depositors, future depositors 3, Whose burden? Both banks and depositors 4, Moral hazard, Not in Japan 5, Early warning mechanism by FSA 39 Stable Financial System 1, Safe banking sector 2, Minimum Insurance for Depositors 3, Early warning system for bank behavior 4, Systematically important FIs. 5, Insurance, Solvency margin 6, Securities, reserves for investors 7, Deposit Insurance Corporation of Japan (DICJ) DICJ can issue its own bond Capital injection, Failure resolution Purchase of NPLs, Deposit Insurance Scale economy and Scope economy, consolidation 40 ٢٠

21 Figure 1 Bank s Balance Sheet Sovereign Debt Problem Bank Loans Gov. Bonds Good Assets Non Performing Loans (NPL) Bad Assets Capital=A(q2) 41 Basel III are based on various risks of each asset class Pro-cyclicality of the Basel Capital Requirement Ratio and Its Impact on Banks Asian Economic Papers, MIT Press, 2011, Yoshino & Hirano 1, Macro economic variables affect all the asset classes Stock price, land price, GDP, interest rate ٢١

22 Derivation of the Optimal Value for θ (θ =minimum capital requirement) Minimize Loss = (L-L * ) 2 sub to Bank s Profits sub to Balance Sheet of Bank sub to A(q)/K(ρ e )>θ The optimal minimum capital requirement is expressed as follows: θ t* = f (L*, q 1, q 2, Y, i B ) 43 Empirical Results of Optimal Minimum Capital Requirement (1) Japan Estimation 1996 Q Q4 θ = % (=5.80%) 1998Q1-2008Q4 (2) USA Estimation 1995 Q Q4 θ = % (=12.42%) 2002 Q Q4 θ = %(=7.884%) 2001 Q Q4 (3) Canada θ= +0.37% (=8.37%) 2003 Q Q4 θ=+0.96%(=8.96%) 2006 Q Q4 44 ٢٢

23 Figure3 Two country model (Cross-Border) Country A Boom Capital Requirement A% Country B Recession Capital Requirement B% Domestic Loans (1) Cross-border Loans (3) Capital Requirement A% Domestic Loans (2) Cap. Req. B% 45 Bank based financing and Financing to Riskier Assets 1, Bank Loans to relatively safer borrowers 2, Regional mutual funds / Regional fund to provide financing to start ups Banking Loans Account Depositors Riskier Assets Regional Funds Mutual Funds Investors ٢٣

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25 Loan Supply Curve SME versus Large Companies Imformation Asymmetry Interest Rate SME Loan Supply Curve Large Companie s Loan Supply 49 SME in Japan have 4 accounts 1, show to Bankers 2, show to Tax Authority 3, show to his wife 4, his own account 50 ٢۵

26 51 SME Data base (CRD Data base) SMEs (14.4million data) Defaults (1.7million data) Credit Guarantee Corporations (Collect Data of SMEs) 52 Financial Institutions 200 Regional Banks Credit Associations Credit Cooperatives 1, Government Support Government Banks 2, Reliability 3, Security of Information Central Bank CRD 52 ٢۶

27 Bank based SME financing and Regional financing to Riskier Borrowers 1, Bank Loans to relatively safer borrower 2, Hometown Investment Trust Funds/ E-Finance, E-Fund Safer SMEs Riskier Borrowers Banking Account Regional Funds Mutual Funds Depositors Investors Keeping books by SMEs <Financial statements> (i) Cash & deposits (ii) Amount of Sales (iii) Inventories (iv) Buying price (v) Amount of goods laid in (vi) Various costs Equipment and Personal costs (vii) net profits 54 ٢٧

28 Financial Education for SMEs Education Program and Textbooks 1, Financial Planners Association Individual Borrowing 2, Central Bank of Japan Text books, Educate School teachers Regional Education Program 3, Various Financial Associations Bankers Association, Stock Exchange 55 Credit Rating of SMEs by Use of CRD Database (i) Profitability capital earnings ratio (ii) Efficiency (iii) Productivity (iv) Safety Liquidity ratio (v) Growth Potential profit growth 56 ٢٨

29 Credit Rating System 1, AAA, AA, BBB.. Single Number 2, Various Characteristics needed to be focused on: (i) Growth potential (ii) Good Management (iii) Technology etc. 3, Sudden Down-grading after Crisis Examples of HometownTrust Funds by Internet in Japan; E-fund 1, Solar Power Panel 2, Fishermen s funds 3, Forest trust fund 4, Music trust fund 5, Wind Power Generator funds 6, Green Finance ٢٩

30 Investors Community Type Infrastructure Wind power Generator Funds Japanese Wine Fund SME Hometown Trust Fund Large Projects and Professional Investors Pension Funds Insurance companies Mutual Funds Separate Accounts of SME financing 1, Traditional Bank finance Private banks 2, SME fund, Regional mutual funds, E-Finance Sell these mutual funds through banks branch offices 3, Separating two accounts (i) Banking accounts (Guarantee by FDIC) (ii) SME funds, Regional mutual fund (non-guarantee) ٣٠

31 61 62 ٣١

32 Donation and Investment to community ٣٢

33 Gross Debt/GDP ratio, 2012 Japan, USA, EU 250 Japan Greece Italy Portugal Ireland Belgium France United Kingdom Spain Hungary Cyprus Germany Malta 0 Source: CIA Fact Book Gross Debt/GDP ratio (2012) (Selected Countries) Japan Canada Italy Belgium Greece 0 Source: OECD Economic Outlook 66 ٣٣

34 References Naoyuki Yoshino, Tomohiro Hirano, and Kakeru Miura, (2009), The Optimal Basel Capital Requirement to Cope with Pro-cyclicality: A Theoretical Approach, (Financial Research and Training Center, Financial Services Agency (FSA), Government of Japan. FRTS Discussion papers, DP2009-6) Himino, Ryozo., (2009), A counter-cyclical Basel II, RISK magazine, 01, Mar 2009 Revankar N. and Yoshino, N., (2008) An Empirical Analysis of Japanese Banking Behavior in a Period of Financial Instability, Keio Economic Studies, Vol.45 No.1. Yoshino, Naoyuki and Tomohiro Hirano (2011) Pro-cyclicality of the Basel Capital Requirement Ratio and Its Impact on Banks (Asian Economic Papers, MIT Press, Vol.10,No.2 ). 67 Characteristics :Asian Countries 1, Bank-oriented financial system 2, Relatively stable banking system 3, Small share of bond markets Needs for long term financing 4, Lack of long term investors such as pension funds and insurance companies 5, High percentage of Small & Medium Sized Enterprises (SME) 6, Large share or Micro Credit (Finance companies), Lack of venture capital 68 ٣۴