Newspaper article THE JOURNAL RECORD

Japanese Bankers Come to Baker on Deregulation / City Consultant's 'Asset/liability Management' Book in 8th Printing in Japan

Newspaper article THE JOURNAL RECORD

Japanese Bankers Come to Baker on Deregulation / City Consultant's 'Asset/liability Management' Book in 8th Printing in Japan

Article excerpt

In 1981, a book called Assetiability Management was written by James V. Baker Jr., president and chief executive officer of James Baker & Co. of Oklahoma City.

About 20,000 copies of the book, published by the American Bankers Association, were sold in America, but that was just the beginning. Another 20,000 translated copies in eight printings have been sold in Japan.

Now, with Japan's bank deregulation within two years of completion, Japanese banks are sending representatives to Baker in Oklahoma City to find out what to expect.

That happened last week with a visit by a group that included Prof. Hiroshi Kusumoto, who translated Baker's book.

"Mr. Baker's book has been read by every banking executive in Japan," said Kusumoto, "but there have been a lot of changes in U.S. banking since 1981. We need to know what he has learned since then and what problems we can anticipate in Japan."

Basically, Baker told his visitors that deregulation could have a series of potential effects:

- Higher interest rates, since savings rates in Japan now controlled at about 2.5 percent.

- Possible large swings in earnings of Japanese banks unless assets and liabilities are managed carefully.

- Potential banking crisis from time to time, especially in periods when interest rates become especially volatile.

- A movement of investments from the stock market to deposit instruments as a result of higher interest rates.

- A movement toward each bank calculating its own base lending rate rather than playing follow the leader bank's prime rate - a pattern under way now in America.

"Most community banks now establish their own base rates," said Baker. "Within five years, I expect the prime rate to disappear in America. Under deregulation, banks differ so much that they will have to establish their own base rates."

Though we have seen major banking changes in America since 1981, and have seen the banking industry suffer extensively in the Southwest as a result of oil and agriculture problems, the fundamentals presented by Baker in his book have held true.

It has become more and more clear that Baker was ahead of his time with his theories on analyzing the asset and liability "gaps" within a bank's overall framework and learning to project performance under a variety of interest rate conditions.

In his book, Baker debunked the idea that that a bank should always strive to reach an equalibrium of equal amounts of rate sensitive assets (primarly loans and investments) to rate sensitive liabilities (various forms of deposit instruments).

Instead, Baker says flexibility is needed in managing rate sensitive assets and rate sensitive liabilities.

"Japanese banks should devise management strategies according to their expectation of rising or declining interest rates and conditions of a bank," he told the visitors, "such as the capital position.

"If a bank has significantly more rate sensitive liabilities than rate sensitive assets, and interest rates go up, the bank can get killed.

"On the other hand, if the bank has significantly more rate sensitive assets than rate sensitive liablilities, and interest rates go down, the bank can get killed."

Therefore, he said, assets and liabilities must be adjusted according to expectations, which can be established with extensive research and the use of computers. …

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