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| History |
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| Policy Measures Taken to Prevent Bank Bankruptcies |
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| The rapid reconstruction and development of the Japanese economy after World War II was supported by industrial groups that centered on banks. The Japanese government's financial administration, dubbed the "convoy system," provided banks with utmost protection. Under this system, banks backed corporate business activities by actively providing loans to group industries in line with the government's industrial policy. This system created a uniquely Japanese financial practice called the "main bank system," a system that supported Japan's high economic growth. |
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The convoy system represented the basic policy of the Japanese financial authorities to keep banks from going into bankruptcies. Under the convoy system, banking policy administration kept in pace with the "slowest ship;" in other words, banks with the least profitability. This meant that even the least efficient bank was able to survive.
For many years, it was believed that a bank would never become bankrupt in Japan. Furthermore, while the government protected banks, it also implemented restrictions on interest rates and took measures in order to concentrate household savings to banks. In other words, executing a low interest rate policy set the interest rates on deposits lower than they really would have been, and the money that gathered at banks at these low interest rates was then supplied to industries in order to support capital investment and other corporate business activities. |
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| A Unique System for the Flow of Funds Created Under Government Guidance |
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| The government also controlled the flow of funds by clarifying the roles to be played by different types of banks, such as city banks, long-term credit banks, trust banks, regional banks and mutual banks. For example, the three long-term credit banks in Japan had restrictions on the number of branches they could open, but they were given the special privilege of being allowed to issue bank debentures. Long-term credit banks used the long-term funds collected through bank debentures to take on the role supplying companies with long-term funds for use in capital investments. Meanwhile, banks such as regional banks, which had a vast amount of excess cash, used their funds to purchase bank debentures, etc., and helped to create the unique system under government guidance for the flow of funds. |
| The convoy system, however, began to crumble in the 1990s. The myth that banks would never go under came to a complete end with the collapse of Hokkaido Takushoku Bank, Ltd. This was followed by the bankruptcies of two of the three long-term credit banks - the Long-term Credit Bank of Japan, Ltd. and Nippon Credit Bank, Ltd. - and they were placed under state control. Major reorganizations took place in the Japanese financial services industry triggered by the failure of these three banks. In 1998, public funds were poured into banks that could not meet an adequate equity ratio, and banks used the funding to advance their disposal of bad loans. Measures were taken to restore fiscal soundness and improve operations. |
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Headquarters of Mizuho Financial Group, Inc. |
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| Further reorganization of the financial services industry took place during this process, such as the virtual state control of Resona Bank, Ltd. The reorganization of the financial services industry is now beginning to enter its final stages. |
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