The Rise and Fall of Abacus Banking in Japan and China phần 4 ppt

The Rise of Abacus Banking in Japan 41

securing cooperation in keeping economic objectives going smoothly.’’54

According to Abegglen, this means that

the government of Japan stands behind the debt position of major Japanese com￾panies, thus both making possible the financing necessary for rapid growth and

ensuring that the government through the power of persuasion will play a cen￾tral role in determining the nature and the direction of that growth.55

Standing behind the debt of large corporations, the Japanese govern￾ment in essence eliminated both traditional and non-traditional banking

risks for Japanese banks. But government bureaucrats provided another,

perhaps even more effective way of eliminating risks for Japanese

banks—tight financial and banking regulation—which, as stated earlier,

controlled the behavior of bank managers and made risk management

irrelevant altogether.

Specifically, financial regulation eliminated risks for banks by limiting

competition both across banking and securities industries and within the

banking industry. MOF regulation insulates Japanese banks from outside

competition while preventing excessive competition among them. The

MOF ‘‘extended an unqualified guarantee against failure, promising im￾plicitly to use its full armada of powers to keep banks afloat.’’56 Exchange

rate controls and restrictions on foreign capital flows limited the entry

of foreign banks and securities companies into the Japanese financial

markets, eliminating the exchange rate risks. ‘‘Restrictions on inward and

outward capital flows prevented savers and borrowers from exploiting

foreign capital markets, ensuring that domestic credit restraint was not

frustrated by capital inflows under the fixed exchange rate system.’’57

The Securities and Exchange Law of 1948, the Japanese version of the

Glass-Steagall Act of 1933, limited competition between traditional bank￾ing and securities, except for the purchase of securities for their own

account. But financial regulation reached beyond industry entry restric￾tions. It strictly defined the types of business and products to be offered

by banks, creating city banks, regional banks, and trust banks and over￾seeing their day-to-day operations. ‘‘In addition to keeping government

control of foreign interest rates and preventing the siren song of market

forces from luring capital offshore, a rigid segmentation of financial in￾stitutions historically worked to keep Japan’s flow of funds in a constant

steady state.’’58

In some cases, the MOF intervened either alone or with other banks

to rescue a failing bank. According to Ikeo,

42 The Rise and Fall of Abacus Banking in Japan and China

When, in the past, the government recognized a failing bank, it intervened di￾rectly and the bank’s operations were restored. If it proved impossible to restore

the bank using the bank’s own resources the government appealed to other banks

and financial institutions, either for assistance or to absorb the failing institution

into their own organization.59

Japan’s tight banking regulation replicates a government cartel, a

Gosou-sendan Houshiki, an ‘‘escorted convoy’’ system. MOF ‘‘destroyers’’

protect banks from outsiders and ensure that they are all moved in tan￾dem, without crushing one against the other (see Exhibit 2.9). In plain

economic terms, government regulation has turned the Japanese banking

industry into an oligopoly cartel, where prices are closely controlled.

According to Hartcher,

Prices—in the form of interest rates—were closely controlled by the ministry in

unofficial but binding consultation with the banks. Even after the banks were

legally granted full freedom to decide their own interest rates, they continued to

set them in concert at agreed levels. The banks also worked intimately with the

ministry deciding the level of services they offered customers and even the sal￾aries they paid their staff.60

To preserve this type of cartel-like system, MOF ‘‘sanctions are imposed

on cartel-breakers by public authorities whose role is to preserve the

integrity of the cartel.’’61

One way that the MOF keeps banks moving together is through li￾censing (i.e., the requirement that banks must submit any new business

proposal to the MOF for approval). The MOF approves applications for

the establishment of banks, applications for the reductions in bank cap￾ital, the opening and closing of branches, and the merger and liquidation

of existing bank operations. Once the MOF approves a new business for

a bank, it applies it to all banks. The development of jusen is a case in

point. Within a year after their approval, the MOF convinced banks to

enter the market for individual homeowner mortgages, intensifying com￾petition and eliminating market rents for jusen. In this sense, banks can

compete in one way only, through volume (i.e., through growth of the

overall industry), making the pieces of the pie larger by making the pie

larger (see Exhibit 2.10). Thus, ‘‘a clear distinction between innovating

leaders and less innovative followers has been clouded by the Japanese

government through a system of administrative licensing and approvals,