The Rise and Fall of Abacus Banking in Japan and China

The Rise and Fall of Abacus Banking in Japan and China

The Rise and Fall of Abacus Banking in Japan and China

The Rise and Fall of Abacus Banking in Japan and China

Synopsis

Bankers in Japan and China are masters of accounting, not risk management, and American-style rescue packages won't solve their banking crises. Cleaning up balance sheets and purging non-performing loans won't work either, say Arayama and Mourdoukoutas. The problem goes deeper. It stems from high growth environments and tight government regulation. The result has been to limit competition in Japan and eliminate it in China. And that led to the control of management behavior, which weakened incentives for Japanese and Chinese bank decision makers to manage, hands-on, their traditional and nontraditional banking risks. They may be experts with the abacus but they have little experience with or understanding of the other more important aspects of banking. A challenging, provocative, readable study and analysis it is, an essential resource for academicians and policymakers in business, government, and international finance and investment.

Excerpt

Complacency is dangerous, especially in a rapidly changing world. For decades, Japanese bankers were complacent with a rapidly growing economy and with cozy relationships with government bureaucrats who pursued policies that virtually eliminated traditional banking risks. Rapid economic growth, for instance, provided a steady flow of deposits, which in turn financed corporate expansion. Rapid economic growth further fueled corporate profits and asset inflation that made the repayment of loans almost a certain bet. But what did make the repayment of loans a certain bet was Japan's industrial policy and tight regulation as practiced by the Ministry of International Trade and Industry (MITI) and the Ministry of Finance (MOF), especially policies bailing out declining industries and limiting competition among banks.

In addition, Japan's government regulators directly controlled the Postal Savings, a government agency, and monitored closely the day-to- day operations of private banks, in essence controlling the behavior of bank managers. in this sense, Japanese banking replicated more the banking of the former socialist countries, where managers were appointed by government bureaucrats and rationed credit according to the priorities of central planning, and less the banking of market economies, where credit is allocated according to the principles of risk management.

Complacency is not confined to Japanese bankers alone. It extends to Chinese bankers, too, if one can talk about Chinese bankers in the market . . .

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