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Compares Japan & Mexico. Regulatory action of private financial systems, banking reform, deregulation in Japan; Mexican banking sector & impact of NAFTA.... More...
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Paper Abstract:
Compares Japan & Mexico. Regulatory action of private financial systems, banking reform, deregulation in Japan; Mexican banking sector & impact of NAFTA.
Paper Introduction:
The commercial banking and financial sectors of Japan and Mexico are compared. The commercial banking and financial sectors in both countries are privately (as opposed to governmentally) owned; however, government in each country exercises high levels of control over the commercial banking and financial sectors through regulatory action.
Deregulation in the Japanese financial system was initiated in the late-1970s. The process of financial liberalization in Japan has been slow and deliberate over the past 23 years. A major focus of the deregulation policy has been to improve the efficiency of Japanese corporate finance. The policy developments stemmed largely from pressures external to the Japanese domestic banking sector itself, such as the substantial increase in government debt as a result of changes in the flow of fu
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Such provisions, if imposed,will be required to end entirely by 2 7. The North American Free Trade Agreementand the banking industry. In the post-transition period, American and Canadian banks will beallowed to expand beyond this ceiling only through internally generatedgrowth, including capital injections from a parent institution (Katter,1992). Organ banks in Japan are also sources of coordination within thekeiretsu. The keiretsu also established insurance and trust companies to mobilizefinancial resources for their entrepreneurial ventures. Federal Reserve Bulletin, 78, 579-593. Failures of intermediate forms:A study of the Suzuki "Zaibatsu." Organization Studies, 16, 55-8 . During the transition period, American and Canadian bankswill be allowed to acquire domestic Mexican banks only up to the 1.5percent individual market share limit. These provisions of the law were the authorizations (1) forJapanese banks to borrow and lend foreign currencies freely (both at homeand abroad), subject only to financial prudence guidelines, and (2) forJapanese corporate enterprises to finance themselves abroad throughborrowing denominated in foreign currency (Frankel & Morgan, 1992). S. (1999, July). Few capital generation alternatives to bank financingexisted for corporate enterprises in Japan during this period (Frankel &Morgan, 1992). Institutional Investor, 27, 27-28. (1992, December). Under NAFTA, Mexico permitsAmerican and Canadian banks to open subsidiaries and invest in or purchasebanks in Mexico. Lynn, L. After the transition period, market share limit will endunless Mexico imposes temporary safeguard provisions if foreign bank marketshare rises too quickly. These firms have total assets of (13.5 trillion-the equivalentof 2.5 per cent of Japan's GDP. Market share is measured by percentage share oftotal Mexican bank capital. During the transition period that ends in 2 , Americanand Canadian bank subsidiaries in Mexico are limited to an aggregate marketshare of beginning at eight-percent and gradually increasing to 15 percentby 2 . These loss-sharingarrangements tend to preserve a segmented system by requiring a gradualapproach to deregulation in which adequate time is provided to assessaccurately the effect of each liberalization policy before another steptoward reform is implemented. Thesecompanies initially lent to finance house purchases and subsequentlyexpanded into the commercial real estate market, using funds raised fromloans from other financial institutions rather than from private sectordeposits. (1992, April). (1998, February). Market share caps for individual banks in Mexico are 1.5 percentthroughout the transition period. (1994, January-February). Deregulation in the Japanese financial system was initiated in thelate-197 s. Business Economics, 34, 45-54. Heath, J. This approach wasinfluenced by concerns about the adverse consequences of bank entry on thecompetitive positions of the smaller securities firms in Japan (Nakaso,1999). In 1993, however, further deregulation of Japan's financial systempermitted certain banks to underwrite securities while securities housesare now allowed to enter the trust banking business, all through theirsubsidiaries (Hirsch, 1993). The Ministry of Finance decision to allow thecrossover between the two industries is coming under criticism,particularly from the securities sector. Currently, the Mexican banking sector is implementing measures tobecome internationally competitive. Katter, A. The organ banks possess inside information that results in theefficient evaluation of risk, and thus the efficient allocation of capital. When necessary, bank managers are expected to discipline inefficient group-member firms by holding out the threat of calling in the loans or eventaking control of the troubled sub-unit (Lynn & Rao, 1995). Market share is measured by percentage share of total Mexicanbank capital. For more than 3 years following the end of the Second World War, theJapanese financial system was highly regulated. Centralized purchasing and sales organizations were used tofoster markets (Lynn & Rao, 1995). A major focus of the deregulationpolicy has been to improve the efficiency of Japanese corporate finance.The policy developments stemmed largely from pressures external to theJapanese domestic banking sector itself, such as the substantial increasein government debt as a result of changes in the flow of funds in Japanafter the OPEC (Organization of Petroleum Exporting Countries) oil shocks,increased competition in international financial markets, and a newemphasis on bank capital management (Frankel & Morgan, 1992). During thetransition period that ends this year (2 ), American and Canadian banksubsidiaries in Mexico are limited to an aggregate market share ofbeginning at eight-percent and gradually increasing to the level of 15percent this year (2 ). The potential losses of these companies werethought likely to create a systemic failure within the Japanese bankingsystem. (1992, August). Prior to this liberalization,the Bank of Japan provided all funds required by Japanese commercial banks. Nevertheless, this situation ismore favorable for American banks than is the situation in Japan (Nakaso,1999). Banking and finance in Mexico also was closely controlled by thegovernment until Mexico joined the North American Free Trade Agreement(NAFTA). The NAFTA provides for full national treatment for American andCanadian banks operating in Mexico. Long-term potential: NAFTAopens doors to Mexican markets for U.S. American and Canadian banks, however, arerequired to form subsidiaries to do business in Mexico, as opposed to theestablishment of a subsidiary operation in Mexico. Thus, the Japanese policy would allow allbanks to fail (Nakaso, 1999). banks. Mexico today: Bouncing back from the pesocrash. A dispute between the Obuchi Governmentand the opposition, however, resulted in a revised policy that allowed theLong-Term Credit Bank to fail. Before 2 , capital size for individual banks will beallowed to increase through internally generated growth but not throughacquisition. As a result of pressures on the Japanese banking system, the Ministryof Finance announced in 1999 measures to underwrite some of theirrecoverable debts of the seven housing loan corporations. Approximately one-half of these debts arethought to be unrecoverable. Japanese monetaryauthorities administratively determined all interest rates, including thoseon bank deposits and loans as well as coupon rates on government bonds andbank debentures. This practices free Japanese firmsfrom the short-term obligations of stocks. Under this policy, (8 trillion (US$6 billion) in problem loans would be dealt with in a way that would providestability to the financial sector and the economy generally. Leading brokers contend that thenew rules heavily favor the banking industry. H., & Rao, H. The Long-TermCredit Bank would be nationalized, and (13 trillion (US$1 billion) inpublic funds that had been set aside by the previous government to rescuefailing banks would be abolished. The different types of banking firms and other financialservice firms were legally and administratively restricted to a specifiedrange of activities and capital markets were required to operate underguidelines that included strict collateral requirements for the issuance ofcorporate bonds. Haraf, W. Beginning in 2 1, however, American andCanadian banks may make acquisitions up to four-percent of total marketshare. After the transition period, market sharelimit will end unless Mexico imposes temporary safeguard provisions ifforeign bank market share rises too quickly. The clustering of Japanese companies around large banks permits thekeiretsu corporate groups to finance more than two-thirds of theirinvestments from within the keiretsu. In the mid-198 s, reforms were introduced that gave Japanese banksincreased access to international markets. B. Retained profitswere allocated to new ventures through internal finance and budgetingsystems. In-house "organ banks" enabled the keiretsu to overcome the weakness of theJapanese stock exchanges and channel resources to entrepreneurial ventures. REFERENCES Frankel, A. Thus, American and Canadian banksoperate in Mexico under the same rules and standards that apply to Mexicanbanks. B., & Morgan, P. In the post-transition period, American and Canadian banks will beallowed to expand beyond this ceiling only through internally generatedgrowth, including capital injections from a parent institution (Katter,1992). In return, however, the commercial banks were required to adhere todomestic lending policies prescribed by the Bank of Japan (Frankel &Morgan, 1992). Japanese banks and securities firms were givenformal authority for a market-rate funding mechanism for their bondpurchases through the use of short-term repurchase agreements (Frankel &Morgan, 1992). Japan's Prime Minister Keizo Obuchi (newly in office at the time)negotiated a compromise policy with the political opposition to reform thenation's financial sector. Thus, an orderly liquidation of the firms has been viewed as aprerequisite to restoring stability within the financial sector as a whole(Morgan & Pain, 1998). Bank Management, 7 , 26-28. Nakaso, H. Such provisions, if imposed, will be required toend entirely by 2 7. NationalInstitute Economic Review, (159), 25-56. As an example, the financial reform policiesintroduced by the Japanese government in 1992 did not provide for theprovision of stock brokerage services by Japanese banks. Two provisions of the Foreign Exchange Law of 198 were important tothe integrating of Japanese domestic money markets with internationalmarkets. Journal of Commercial Lending, 75, 11-15. The process of financial liberalization in Japan has been slowand deliberate over the past 23 years. Under NAFTA, Mexico permits American and Canadian banks to opensubsidiaries and invest in or purchase banks in Mexico. One of the first financial reforms in Japan was the introduction ofsecondary market, which resulted in the end of absolute government controlof interest rates in Japan. Recent banking sector reforms in Japan.Economic Policy Review (Federal Reserve Bank of New York), 5(1), 344-361. Morgan, J., & Pain, N. (1995, Winter). Aside from lacking thebanks' enormous capital resources and long-established relationships withcorporations, securities firms contend that they are handicapped by theirinability to deal in foreign exchange (Nakaso, 1999). A major impetus for this preparationis the advent of full foreign competition in the Mexican banking sector.Similar changes do not appear to be imminent in Japan (Nakaso, 1999). Financial liberalizationpolicies in Japan have been balanced in an attempt to minimize the costsfor any one sector of the financial system. (1999, July). The subsidiary ispermitted to function as a financial holding company which, in turn, canoperate a bank, a securities firm an insurance firm, a leasing business,and a factoring business (Haraf, 1994). It's bankers versus brokers as Japan's Glass-Steagall starts to break down. Banking reform in Japan has not ended the structure of separationbetween banking and credit intermediaries. As a consequence, both productsand markets may be permitted to develop slowly over years, as opposed tothe short-term payoffs demanded by North American corporate managers. Market share caps for individual banks are 1.5 percent throughout thetransition period. American and Canadian banks can engage in local currency lendingand deposit taking, foreign-exchange services in the local market, anddomestic securities trading. The commercial banking and financial sectors in both countriesare privately (as opposed to governmentally) owned; however, government ineach country exercises high levels of control over the commercial bankingand financial sectors through regulatory action. After 2 , however, American andCanadian banks may make acquisitions up to four-percent of total marketshare. The world economy. Deregulation andcompetition in Japanese banking. Hirsch, M. The commercial banking and financial sectors of Japan and Mexico arecompared.
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