Japenese Financial Crisis - SPJCM

Slide 1: BY ANURAG GUPTA NITI SAINI SUDHANSHU RAWAL All logos are trademarks and copyrights , this presentation is made by students of SPJCM for educational purpose.

Slide 2:  Early Stage - Before mid 1994  Beginning of Crisis – mid 1994 to 1996  Financial Crisis of 1997  Financial Crisis of 1998  Management  Causes

Slide 3:  No Financial Crisis post war till 1994  Financial deregulation started in 1970  Deposit Insurance Law - Payoff – Y10 million per depositor - Financial Assistance  Larger banks were perceived to be protected

Slide 4:  Credit cooperatives - Tokyo Kyowa and Anzen failed  Financial Assistance from DIC - No financial institution for claim - Legal limit to payoff  Tokyo Kyoudou Bank or TKB established - Y20 billion – Bank of Japan - Y20 billion – Private Financial Institutions  Collective Approach - Hougacho

Slide 5:  July 95 – Cosmo Credit Failed  Aug 95 – Hyogo Bank & Kizu Credit Co-op  Hougacho again followed - Cosmo transferred to TKB - Hyogo - Midori Bank, Y80 bn share capital - Kizu - losses exceeded Y100 billion - transferred to RCB - Deposit Insurance Law amended

Slide 6:  1995 – 1996 Jusen became major issue  Aggregate losses of Y6,410 billion  Tax Payers money was used  Deposit Insurance Law amended  TKB reorganized to RCB - RCB given wider role

Slide 7:  Nippon Credit Bank(NCB) restructuring in April - Assets of Y15 trillion - Heavily exposed to real estate and large NPL’s - Bank of Japan inducted Y290 billion - December 1998 NCB failed and nationalised  Hokkaido Takushoku Bank(HTB) failed in November - Loans soured after bubble burst - Merger with regional bank - Deposit withdrawals accelerated

Slide 8:  Sanyo Securities filed with Tokyo district Court for reorganization - defaulted on repayment of unsecured call money - Bank of Japan two-way operation Central Point – A default by one Financial Institution, whether a bank or a non-bank, could have developed into major disruption, especially when overall financial system was fragile

Slide 9:  Yamaichi Securities collapsed - MOF and BOJ understanding to use Compensated Fund for Deposited Securities - BOJ faced credit risk - who would bear final cost still unresolved  Tokuyo City Bank failed - Rumor banks were on brink of collapse

Slide 10:  Legislation to use Public Funds – Y30 trillion  Financial Crisis Management Committee - No supervisory Power  All major banks collectively applied for Capital Injection – Y1.8 trillion  Long Term Credit Bank failed - Assets of Y26 trillion - Sumitomo Trust bank – Size of NPL’s - Derivatives Portfolio

Slide 11:  Financial Reconstruction Law - Failed bank under Financial Reorganization Administration - Temporarily Nationalized - Bad Loans were removed - Losses covered by shareholders and DIC - Feb 2000 LTCB purchased by New LTCB partners

Slide 12:  Financial Reconstruction Law  Financial Function Early Strengthening Law  Financial Reconstruction Committee(FRC)  Financial Supervisory Agency  Available public funds doubled  FRC injected Y7.5 trillion in march 99  Tier 1 capital – preferred stock  Unrealized capital losses and potential losses  Required banks to submit plans for improving profitability

Slide 13:  RCB reorganized to RCC for removing bad loans  Securitization of bad loans using SPC’s  As of July 2002 major banks consolidated to 5 large financial groups  Deposit Insurance Law amendment - current deposits and ordinary deposits would be fully protected until March 2003

Slide 14:  Problem of non-performing Loans  Negative Impact on economy - Corporate sector - Economy in recession - Securitisation became available in late 90’s  Insufficient Provisioning - 97-reporting requirement to MOF abolished - Self assessment of loan portfolio - Further guidelines in 99 – Profitability reduced

Slide 15:  Inadequate Market Discipline - Public disclosure of NPL’S non existent - Moral Hazard - 1999 – Comprehensive disclosure requirement  Deterioration of Bank’s Capital Positions - Low profitability - New stock impossible - Capital injection using public funds not easily available

Slide 16: THANK YOU