The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies

By Masahiko Aoki; Hugh Patrick | Go to book overview
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5 The Role of Long-Term Credit Banks Within the Main Bank System

Frank Packer

The role of banks in financing Japan's post-war growth has been well documented. At the same time, there has been increasing recognition that special relationships between certain banks and their customers—the main bank system—may have lowered various costs associated with bank debt in Japan, and be partially responsible for the extraordinary reliance on bank debt for most of the post-war period.

One problem with the provision of long-term investment financing by commercial banks is that it can put at risk the uninterrupted provision of liquidity services to the population at large. Though economic models often abstract away from this problem with the assumption that banks providing liquidity services have the ability to diversify away the long-term risk of their outstanding loans, regulators have rarely been so sanguine. In general, the United States has depended on the existence of well-developed securities markets to supplement and, in many cases, replace the provision of long-term debt by commercial banks. In Japan, particularly the Japan of the high growth era, the answer has lain rather in the creation of special classes of banks whose principal sources of financing are other than individual deposits. This paper examines one such class of institution, the long-term credit banks.

The long-term credit banks differ from the other principal private suppliers of long-term loans in post-war Japan, the trust banks, in two major respects. One is that because they have access to fixed rate long-term financing, they have been able to make the provision of fixed rate long-term loans their principal business. Secondly, the long-term credit banks do not have an exclusive affiliation with any of the six major corporate groups which lie at the core of the main bank system in Japan. While the trust banks either lent to designated sectors or supplemented the loans of their group's city bank, and as a result have been traditionally weak in credit analysis, the long-term credit banks have built up substantial in-house

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