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Politics : President Barack Obama -- Ignore unavailable to you. Want to Upgrade?

To: RetiredNow who wrote (128474)	12/5/2012 10:59:17 PM
From: tejek	Read Replies (2) \| Respond to of 149317

Japan did not deal with their banks adequately like the US did in the early 90s and again in 2008: The Japanese government during the 1990s has taken a number of steps to address the financial problems. Starting with the loan purchasing program set up in early 1993, followed by the establishment of banks to buy out failed credit cooperatives and the jusen, and culminating in the reforms that reorganized the supervision authority for banks and earmarked over ?60 trillion for bank reorganization and capitalization, there have been a nearly continuous set of attempts to fix the banking problem.3 In the latest attempt, the Long-Term Credit Bank of Japan (LTCB) and Nippon Credit Bank (NCB) were nationalized in late 1998, and three regional banks were put under receivership in the first half of 1999. Their balance sheets are supposed to be cleaned up so that they can be sold. Meanwhile, in March 1999, 15 large banks applied for a capital injection and received ?7.4592 trillion of public funds. These banks are also required to carry out restructuring plans that will include eliminating 20,000 workers, closing 10% of their branches, and increasing profits by 50% over the next four years.4 Nevertheless critics, including the U.S. Treasury, have argued that these steps have been inadequate.5 In the latter half of 1999, two more regional banks were shut down and ?260 billion of public funds were injected to re-capitalize four other regional banks. As of this writing there is still widespread pessimism about whether the banks have turned the corner. We believe that a recurring problem with the Japanese government's attempts to overcome the crisis has been the lack of a clear vision for the future of the Japanese banking system. For instance, the debate that culminated in the passage of the Financial Reconstruction Bill in the fall of 1998 was drawn out because the ruling Liberal Democratic Party (LDP) and the major opposition party (the Democrats) haggled over two competing plans. On the surface, the negotiation seemed to center on what should happen to the Long-Term Credit Bank, which had been rumored to be insolvent for almost 4 months. At a deeper level, however, the two plans represented competing views about the current condition of the Japanese banking system. LDP leaders believed that the major banks could not be allowed to fail. To them, the biggest problem with the Japanese banks was they were not strong enough to support (supposedly) healthy customers. Thus, the desired solution was to inject public funds into the major banks as they did in March 1998, to prevent a credit crunch. In the event of a failure, protecting solvent borrowers, by transferring the failed bank's business to a bridge bank, was given the highest priority. The Democrats argued instead that giving public funds to the weak banks was a waste of taxpayers' money. Weak banks should be nationalized and restructured. Through this process, the Japanese banking sector would reemerge smaller but healthier. In the end the LDP and the Democrats reached a compromise and passed the Financial Reconstruction Act. This law allows the newly created Financial Reconstruction Commission to choose between nationalization and a bridge bank scheme when a bank fails. However, shortly thereafter, over the objections of the Democrats, the LDP also formed a coalition with the Liberal Party and managed to pass the Prompt Recapitalization Act to help recapitalize supposedly healthy banks.6 Thus, the struggle in the Diet during the fall of 1998 amounted to a battle over whether the Japanese banking sector has too little capital or whether Japan is currently overbanked. To settle this issue one needs to ask what the banking sector will look like once the current crisis is over and the deregulation is complete. This question has attracted little attention. For instance, although there is now some discussion of how many large banks might be viable, aside from Moody's (1999) and Japan Economic Research Center (1997) (which we discuss in detail below) we are unaware of any attempts to determine how many assets will remain in the banking sector.7 More importantly, the mergers and closures that have occurred thus far (including the fall 1999 megamergers) have not reduced capacity in the industry. If the overbanking hypothesis is correct, these adjustments alone will probably not help. Similarly, the March 1999 capital injection required the 15 banks that received funds to reduce their general administrative expenses by ?300 billion, but at the same time to increase loans to prevent a so-called "credit crunch." We believe that one needs a clear vision of the future of the industry to evaluate this situation. nber.org The Japanese have played with this issue for 2 decades now and nothing has changed. The US is not Japan.