Academic journal article ABA Banking Journal

Competing with Japanese Banks

Academic journal article ABA Banking Journal

Competing with Japanese Banks

Article excerpt

America's largest bank, Citibank, ranks 24th in the world by asset size. All of the top ten banks, and five of the next ten, are Japanese.

In New York, America's banking capital, foreign banks make 60% of all business loans; nationally, some two-thirds of those loans are made by Japanese banks. In California, five of the biggest ten banks are Japanese subsidiaries. U. S. banks' share of total world banking assets has dropped to a distant second behind that of Japan's banks, which now hold nearly 40%.

If size and market share are the criteria of success, America's international banks are rapidly losing ground to Japan's banks-both at home and around the world. As some bankers see it, America's mightiest banks, although more profitable than their larger competitors, are handicapped by burdens not entirely of their own making: high costs of funds, high costs of supervision, antique regulations.

Looking across the Pacific at the world's new financial powerhouse, many American bankers see a twilight zone of biased rules and tacit understandings seemingly designed to perpetuate the present imbalances. And then there's the nagging feeling that even if both countries could agree on a new set of rules, the competitive imbalance would remain.

What's going on here?

To help answer that question, this article will focus on two aspects of the Japanese banking phenomenon: Why Japanese banks are so strong in the U. S., and why U.S. banks are not stronger in Japan.

Simple arithmetic. Trade and direct foreign investment are the economic forces propelling the penetration of Japanese banking in the U.S.

To begin to understand what's behind these forces, said E. Gerald Corrigan, president of the Federal Reserve Bank of New York, in a recent address, you have to look at the underlying economic fundamentals.

The first of these, he said, is the simple arithmetic of national saving and investment and how they affect international capital flows. Americans consume more than we produce, and we don't save enough to finance our own trade deficits-the biggest being the deficit with Japan, which last year was $49 billion. So we must find some thriftier foreigners to finance them for us-through portfolio investment (in our bonds and stocks) and direct investments (in our businesses and our real estate).

Japanese families and businesses, conveniently, save more than they invest in their own economy. During the 1980s, this excess of savings over domestic investment-a stream of huge current-account surpluses-amounted to some $360 billion. So the flow of capital has to go from them to us.

Banks follow trade. With more Japanese multinationals actively exporting and importing through California, the demand for trade-related financing, exchange, clearing, and other banking services naturally grew-and naturally grew with a Japanese accent. During the 1980s Japanese banks' share of California's total banking assets grew in step with Japan's share of the state's total trade volume. By the end of 1988, the share of assets had grown from 10% to 25%. In business lending, Japanese banks held 30% of the California market at year-end 1988. They held a commanding 44% of the trade-related market for standby letters of credit. For a Japanese bank's perspective on this trend, see following article.)

Interestingly, foreign banks' share of the state's total bank assets did not change much. While Japan's commerce with California was climbing fast, Britain's trade in the state was practically flat. So the British, who in 1982 held about 15% of California's commercial bank assets, sold most of their bank subsidiaries in the state-to the Japanese. Gary C. Zimmennan, an economist at the San Francisco Fed, summarized in a report:

"Over the last five years, foreign banks' market share increased only modestly, from 30.8% to 32.3%. Rather than wresting market share from domestic banks, Japanese banks have essentially replaced the British banks as the dominant foreign banking power in the California market. …

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