Banking Crisis in Japan
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Code : ECC0005
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Region : Japan |
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The Reform Process The main factor that affected the banks during this period was the emergence of a vibrant bond market on the both domestic and foreign fronts5 . In 1979, unsecured straight bonds and convertible bonds were permitted. Bond issuance criterion, which until then was stringent, also was liberalized, and it was possible due to the reform in the Foreign Exchange and Trade Control Act in 1980. This allowed the Japanese firms in raising capital from the foreign markets. Foreign markets were very attractive to Japanese corporations because there was no need for any collateral to issue bonds. It also allowed the companies to bypass the strict rules of Bond Issuance Committee and it led to high issuance of bonds in the foreign markets... Three-Step Plan In response to this, the Ministry of Finance in the early 1990s came out with a three-step plan to deal with the situation. First, funds amounting to 60 trillion yen were set aside for banking sector, which roughly formed 12% of GDP17 . Out of which, 25 trillion yen were set aside for recapitalizing the weak banks, 18 trillion yen for dealing with insolvent banks, and 17 trillion yen for deposit protection. The Japanese government tried to inject this money into the system to keep the banks afloat, and these funds were earmarked to bail out the banking sector from cash crunch that it was facing... |
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The Keiretsu System One of the major factors that resulted in the collapse of the banking sector was keiretsu system or industrial groupings. This was a common practice among the Japanese industries. It involved interlocking of the shares where the banks held some percentage of shares in the firms within keiretsu27 and the firms own some percentage of shares in the bank. This cross holding pattern created close-knit relationships between banks and firms. This kind of grouping allowed the firms to gain easy access to bank loans and protection against hostile take-over. A large horizontal keiretsu had a wide span of industries like banking, steel, trading, gas and so on...
The Change Shinsei, which in Japanese means a new beginning, was formerly known as Long Term Credit Bank (LTCB) that collapsed in 1998 . The Japanese government spent nearly seven trillion yen or $66 billion trying to restore LTCB's balance sheet . Finally, it was sold to Ripplewood holdings for one billion yen. Ripplewood pumped in an additional 120 billion yen35 to restore LTCB. This was the first time that a Japanese bank was sold to a foreign company. Shinsei bank was due for listing in February 2004, in Tokyo stock exchange, and it was expected to rake in 1.3 trillion yen to Ripplewood holdings....
