Japanese Banking Problems: Implications for Lending in the United States
Peek, Joe, Rosengren, Eric S., New England Economic Review
Japanese banking problems have received substantial attention worldwide. Critics of Japanese policymakers have argued that problems at Japanese banks threaten the Japanese economic recovery. They also point out that because Japanese banks have been among the most active in expanding their presence beyond their domestic borders, they could play a major role in prolonging the financial problems in many other Asian and emerging market countries, as well.
Fueled by a high saving rate, active exporting firms, and a booming stock market, Japanese banks expanded aggressively worldwide during the 1980s. By 1988, all of the 10 largest banks in the world were Japanese, with a significant presence in Southeast Asia, Europe, Latin America, and the United States. The penetration into U.S. domestic markets was particularly striking. By the early 1990s, Japanese banks were the dominant foreign banks in the United States, accounting for about 18 percent of all commercial and industrial loans to U.S. addresses.
In the 1990s, however, the tide turned. Japanese banks experienced a significant diminution of capital as a result of sharp declines in the Japanese stock market and substantial increases in nonperforming loans. Increasingly constrained by international capital requirements, Japanese banks began to shrink their international operations while insulating their domestic lending operations. The reduction in foreign lending since 1990 has been substantial, with the Japanese share of the U.S. commercial and industrial lending market falling from roughly 18 percent in late 1991 to under 14 percent by the first quarter of 1998. This decline is likely to continue, as Japanese banks shrink further in order to satisfy capital requirements. Not only have Japanese banks reduced U.S. lending, but they also have announced major restructurings of their U.S. operations, including sales of some of their U.S. subsidiaries and consolidations among their U.S. branches and agencies.
Many of the actions of Japanese banks are being influenced by changes in government policies towards them. In March of 1998 major Japanese banks requested capital infusions from the government. As a condition for receiving the government funds, the banks were required to describe their plans for restructuring. Embedded in many of these proposals were dramatic decreases in their global activities. More recently, the Japanese government has committed 60 trillion yen of public funds to address the banking sector's problems, but it has insisted that poorly capitalized banks take remedial actions, including withdrawing from international operations. Furthermore, the two large banks that failed recently, Hokkaido Takushoku and Long-Term Credit Bank, each announced a cessation of international operations before it was closed or nationalized.
In addition to the plans to shrink operations announced in March 1998, many of the largest banks have subsequently announced withdrawals or plans to withdraw from international activities. For example, Daiwa, Yasuda Trust, Mitsui Trust, and Nippon Credit Bank have all stated that they plan to become purely domestic banks. Thus, while Japanese banks in general have been withdrawing internationally, the most troubled banks have taken the extreme step of completely abandoning their international operations.
This paper examines factors affecting the Japanese banking presence in the United States. In particular, it examines the role that capital requirements played in the decisions by Japanese banks to reduce their lending here. Because U.S. banking markets have been unusually open by international standards, and because of the large penetration by Japanese banks, the experience here provides useful insights into how globally active banks may react in the future to problems in their domestic markets.
The next section describes the dramatic fluctuations in stock market and urban land prices and how sharp declines in these prices could have an effect on other countries through Japanese bank lending. …