Tải bản đầy đủ - 0 (trang)
Table 7. Non-performing loans in the banking sector

Table 7. Non-performing loans in the banking sector

Tải bản đầy đủ - 0trang

Bringing deflation to an end



71



the 2005 target for reducing the major banks’ non-performing loan ratio to about

4 per cent.43 This highlights two fundamental problems facing the banks. First, they

do not have sufficient capital. Second, loan losses are undermining capital because

profitability is low.

The need for more capital

All four of Japan’s major banking groups have announced plans to raise

capital by issuing preferred or common stocks. While only one of the groups is

strong enough to issue common shares, two groups plan to sell preferred shares to

foreign financial institutions. The fourth intends to ask over 1 000 corporate clients

and institutional investors to buy preferred shares. Given the weak state of the

corporate sector, the practice of asking customers to provide capital raises concern

since, in essence, it amounts to banks lending money for the purpose of financing

the purchase of their stock.44 The FSA has issued guidelines calling on banks to

refrain from using their influence as lenders to force share purchases by corporate

customers. Specifically, the guidelines prohibit boosting capital through direct or indirect lending to customers that are not capable of paying back such loans. Banks are

also forbidden from selling shares to companies that they are assisting through cuts in

interest rates or debt forgiveness. However, the enforcement of the guidelines is

unclear. Since this issue falls under the Anti-Monopoly Law, which is enforced by the

Fair Trade Commission, the FSA argues that it is the Commission’s responsibility.

The amount of capital needed by the banks is likely to be larger than indicated by official statistics since there still remains the view among private-sector

experts that the level of non-performing loans is much higher than reported in

Table 7. This view is based on a number of arguments. First, the special investigations by the FSA, which were limited to 3 per cent of total loans, discovered that a

substantial portion of the loans classified as normal or needing attention were

actually non-performing. The fact that the percentage of loans downgraded fell

between the first and second investigations suggests progress in tightening

assessment of loan quality. However, there is likely to be a period of catch-up as

banks examine their entire loan books, thus significantly boosting the total level

of non-performing loans. Second, classifying loans on the basis of debt service

history does not give an accurate picture in a period of extremely low interest

rates. Even weak firms can meet this standard in the current environment, particularly since banks often give even lower rates to troubled firms. If interest rates

were closer to historical levels, loans to bad firms would be quickly downgraded.

Using forward-looking criteria that take account of the economic prospects of firms

and their ability to meet their interest obligations would likely give a much larger

magnitude of non-performing loans. Third, a number of firms have received debt

forgiveness, leading to the loans being classified too generously. In sum, a number

of analysts estimate that uncovered loan losses of banks total 20 to 30 trillion yen



© OECD 2004



OECD Economic Surveys: Japan



72



(4 to 6 per cent of GDP),45 nearly matching the total reported in March 2003. However,

the situation is improving with the implementation of the Takenaka Plan, which is

upgrading asset assessment in particular.

The size of the non-performing loan problem and the fact that capital is

not as large as reported, once adjustments to deferred tax assets are made, indicate the difficult predicament facing banks. These problems give banks a big

incentive to roll over loans to troubled companies, rather than recognise the

losses. Achieving an accelerated pace of non-performing loan disposal by making

further use of public funds to re-capitalise the banking sector appears inevitable.

According to estimates made by some experts in 2002, the cost for the major

banks alone might be more than 20 trillion yen (Kashyap, 2002). Under the current

framework, injections of public funds are only allowed when there is a risk of a systemic crisis in the financial sector. The Financial System Council, an advisory body

to the Prime Minister, issued a report regarding the use of public funds for financial institutions in July 2003. Following the release of this report, the FSA established an in-house group to examine the possibility of creating a new framework

based on this report.46

The authorities are also trying to strengthen bank balance sheets by

reducing their holdings of equities. Shareholding is to be reduced to 100 per cent

of tier I capital by September 2006. The objective is to diminish the influence of

stock market swings on bank capital and lower the risk of under-capitalisation. As

of September 2002, major banks’ holdings exceeded tier I capital by 24 per cent.

Meeting the target will require an acceleration of the declining trend that began

in 1998. Since then, banks’ share of total equities in Japan has fallen by half from

15 to 7½ per cent in FY 2002.

The challenge of boosting profitability

Dealing effectively with the stock problems of high levels of non-performing

loans and the low level of capital requires addressing the flow problem of weak

profitability. The low level of profitability makes it difficult for banks to cover the

increased loan default risk since the collapse of the bubble. For FY 2002, preliminary figures show gross operating profits of 6 trillion yen, insufficient to cover the

6.6 trillion yen in loan losses, let alone capital losses (Table 5). Increasing the profitability of banks in order that they can survive loan losses is thus essential. The

low profitability is not due to high operating costs. Indeed, costs are relatively low

in Japan, averaging only 1 per cent of assets during the second half of the 1990s,

compared to more than 3½ per cent in the United States (Figure 23). Moreover,

there has been a significant rationalisation of the banking sector during the past

decade. The number of employees at the major banks has fallen by 39 per cent

while the number of branches has fallen by 24 per cent (Panel B). Moreover, banks

need to invest heavily in information technology – an area that was neglected



© OECD 2004



Bringing deflation to an end



73



Figure 23. Operating expenses of banks

A, Operating expenses as a share of assets



1



Per cent



Per cent



4.0



4.0



3.5



3.5



3.0



3.0



2.5



2.5



2.0



2.0



1.5



1.5



1.0



1.0



0.5



0.5



0.0



0.0

Japan



France Germany



United

Kingdom



United

States



B. Number of employees and branches of the major banks

Peak = 100



Peak = 100



4 400 branches

100



100



90



Number of branches



196 000

employees



80



90



80

Number of employees



70



60



70



1989



1990



1991



1992



1993



1994



1995



1. Average for 1995-99 in per cent.

Source: OECD for Panel A and Bank of Japan for Panel B.



© OECD 2004



1996



1997



1998



1999



2000



2001



60



OECD Economic Surveys: Japan



74



during the 1990s – in order to remain competitive (Fukao, 2002). Banks are

attempting to raise profits by boosting fee income, such as imposing charges for

using ATMs on Saturday.

Weak profitability is fundamentally due to low interest margins on lending. Indeed, net interest income relative to assets is around three times higher in

the United States than in Japan (Table 8). Interest margins on lending in Japan are

insufficient to cover expenses and realised credit costs, making lending an unprofitable activity for banks (Figure 24). Low interest margins suggest that there is

overcapacity in the banking sector, despite the progress toward rationalisation.

The need for reduced capacity suggests that there should be some selectivity in

providing public funds to banks. Another key to boosting margins and enhancing

profitability is bringing deflation to an end. It is difficult for banks to increase

lending margins, given the zero bound on deposit rates and their inability to raise

borrowing rates in a weak economy.

Low interest margins also reflect the important role of government financial institutions, which provide severe competition, subsidised by taxpayers, for

banks. With direct subsidies from the government and the advantage of zero-cost

capital, the public institutions have a 60 basis-point advantage relative to private

financial institutions (Fukao, 2003). In terms of assets, banks’ share among depository institutions declined from 83 per cent in 1989 to 77 per cent in 2000, while the

Postal Saving System’s share doubled from 11 to 20 per cent. Banks’ share of

deposits fell from 84 to 77 per cent over the same period. Although reducing the

role of government financial institutions was a priority of the Koizumi government,

progress has stalled, in part due to concern about maintaining lending to SMEs.

The situation would be exacerbated if the Tokyo Metropolitan Government

follows through on its plan to create a bank, with capital of about 200 billion yen,

to provide loans to SMEs. With expected loans of around 5 trillion yen, it would be

Table 8. Comparison of bank profitability in Japan and the United States

Per cent

1990



1995



2000



2001



Return on assets

Japan

United States1



0.41

0.68



–0.31

1.74



0.01

1.75



–0.76

1.69



Net interest income as a share of assets

Japan

United States



0.76

3.40



1.27

3.57



1.17

3.33



1.27

3.26



Net interest income as a share of total income

Japan

United States



7.32

67.7



76.6

65.2



75.8

57.3



76.0

57.8



1. Pre-tax.

Source: Fukao (2003) and Kashyup (2002).



© OECD 2004



Tài liệu bạn tìm kiếm đã sẵn sàng tải về

Table 7. Non-performing loans in the banking sector

Tải bản đầy đủ ngay(0 tr)

×