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| Damage Caused by the Liberalization of Interest Rates |
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Why, then, did such large-scale reorganization of the banking industry take place?
The financial system unique to Japan played an extremely large role during the process of the country's post-war economic reconstruction. After the end of World War II, an extremely idiosyncratic financial system, which consisted of the government's low-interest rate policy and the main bank system, was established in Japan in order to restore Japanese industries through limited funds. This system was made possible by government control over the financial services industry and closure of the market. However, once Japan became the second largest economy in the world and began posting massive current account surpluses, it became substantially difficult for Japan to maintain a closed financial system of this kind. Moreover, it also became difficult to upkeep government control over interest rates as corporate and domestic finance areas developed. Liberalization of the financial services system and the internationalization of the yen was a path that Japan could not avoid going through for the country that had matured.
The liberalization of the financial services system began through pressure from the United States. A concrete schedule for the liberalization of interest rates and the internationalization of the yen was decided after the Japan-US Yen Dollar Committee was established in the mid-80s to promote such liberalization and internalization.
The liberalization of interest rates had a great negative impact on the earnings of banks, which had up to then enjoyed excess-profits under regulated interest rates. Furthermore, another major change in the environment surrounding bank management came about from the fact that companies began increasing fund procurement through the capital market instead of relying solely on loans from banks. It decreased the profit margin between interest rates paid on deposits and interest rates received on loans. Banks could not longer secure profits, as in the past, simply by making loans to companies. |
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| Matters Made Worse by the Bank of International Settlement's Regulation on Equity Capital |
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Tokyo Main Office of Sumitomo Mitsui Banking Corporation |
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As if to make matters worse, the Bank of International Settlement (BIS) decided to introduce a regulation related to the equity capital of banks. Through this regulation, an equity ratio of 8 percent needed to be maintained in order for banks to continue international operations. Furthermore, even domestic operations would not be permitted if a bank did not meet an equity ratio standard of 6 percent. Japanese banks, which are generally undercapitalized, met such standards by adding on the unrealized capital gains of the client shares they owned, as main banks, in great amounts. |
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| Changes in the business environment, which took the form of reductions in profit margins and declines in financing demand by companies, compounded by the introduction of the equity capital regulation by BIS became the driving forces that accelerated the reorganization of the Japanese financial services industry. |
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