The Macroprudential Implications of the 1990s Japanese Financial Crisis
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EMBARGOED UNTIL 9:30 A.M. CENTRAL EUROPEAN SUMMER TIME (3:30 A.M. U.S. STANDARD TME) ON FRIDAY, JUNE 21, 2019 OR UPON DELIVERY The Macroprudential Implications of the 1990s Japanese Financial Crisis Eric S. Rosengren President & CEO Federal Reserve Bank of Boston 5th Annual Macroprudential Conference Eltville, Germany June 21, 2019
Overview of the paper: Causes of Japanese Financial
Crisis in the Late 1990s
▶ The paper by Professor Mitsuhiro Fukao provides rich details of what led to
the Japanese financial crisis
▶ Among the causes of the crisis:
▶ Macroeconomic context: rapidly rising real estate prices and stock prices
▶ Rapid growth in real estate lending, including to Jusen (Japanese non-bank
mortgage-lending institutions)
▶ Unstable funding models: Bank liabilities at long-term credit banks that could “run”
▶ Cross-holdings of shares by banks and their customers
▶ Problems were exacerbated by several factors:
▶ Lack of transparency as problems increased
▶ Banks were not forced to address problems quickly
▶ Accounting strategies obfuscated problems
▶ Recapitalization was delayed, lengthened the time to recovery
▶ I agree that all these factors contributed to significance of problems 2My Observation: Two Other Aspects of the Crisis
Deserving Attention
▶ The repercussions of the crisis – the large macroeconomic
consequences
▶ How macroprudential regulations could have mitigated problems
3Macro Spillovers – Banking Problems and the
Consequences for the Real Economy
▶ Credit crunch – impact on broader economy from failure to mitigate
banking problems – banks reduced lending to raise capital ratios
▶ Misallocation of already-reduced credit – funds flowed to prop up weak
borrowers/banks, potentially at the expense of higher-return projects
▶ Global ramifications – Japan’s capital-constrained banks had large
global presence, and the withdrawal of credit had implications for host
countries – often reduced global lending before domestic lending
▶ At the time, policymakers were focused more on avoiding fiscal
problems generated by bank bailouts than on the broader domestic
and global costs of allowing the problems to linger; e.g., slow
realization of losses and raising of capital
4Figure 1: Japanese Urban Land Price Indices
March 1970 - March 2015
Index, March 2000=100
300
Urban Land - Six Major Cities
250 Urban Residential Land - Six Major Cities
200
150
100
50
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: Japan Real Estate Institute 5Figure 2: Stock Prices in Japan: The Nikkei 225
January 1970 - May 2019
Index
50,000
Japanese Nikkei 225
40,000
30,000
20,000
10,000
0
Jan-1970 Jan-1980 Jan-1990 Jan-2000 Jan-2010
Source: Nikkei, Haver Analytics 6Could Current Macroprudential Policies Have Helped in
the Japanese Financial Crisis?
1. Bank Stress Tests:
▶ The “severely adverse” scenario in this year’s U.S. stress test asks
banks to consider implications of a peak to trough decline in stock
prices of 50%, and in residential and commercial real estate prices of
about 25% and 35% respectively. If used in the late 1980s, beneficial
effects:
▶ If applied during the rise in real estate and stock prices, it would have
encouraged banks to retain more capital
▶ Stresses of cross-holdings of stocks and investments in Jusen would have
been more apparent, and may have discouraged such aggressive lending
(Continued…)
7Could Current Macroprudential Policies Have Helped?
▶ Would have made clearer to regulators and the government potential
systemic implications of policies
▶ Since stress tests are normally released publicly, would also have
encouraged government to recognize losses more quickly and to be more
transparent
▶ Greater transparency might also have led to a more vigorous
recapitalization of banks
8Could Current Macroprudential Policies Have Helped?
2. Countercyclical Capital Buffer (CCyB):
▶ Could potentially have had a big impact
▶ When asset prices rose so abruptly, raising a CCyB would have provided a
much bigger bank capital cushion during the period when asset prices rose
▶ Capital cushion would have further insulated banks from the capital-eroding
effects of falling asset prices, and likely would have discouraged aggressive
lending into increasingly risky sectors
▶ Once asset prices began to fall, the CCyB could have been reduced – easing
binding capital requirements, reducing the pressure on banks to shrink
domestic and global lending
▶ Buffers unlikely to eliminate “credit crunch” but would have helped
9Figure 3: Average Return on Average Assets for the Three Largest
Banking Organizations
2018:Q1 - 2019:Q1
Percent
1.4
United States Euro Area Japan
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
2018:Q1 2018:Q2 2018:Q3 2018:Q4 2019:Q1
Note: The U.S. average includes Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co. The Euro Area average includes Banco
Santander, SA, BNP Paribas SA and Crédit Agricole SA. The average for Japan includes Mitsubishi UFJ Financial Group, Inc., Mizuho Financial
Group, Inc. and Sumitomo Mitsui Financial Group, Inc. Japan Post Bank Co., Ltd. is excluded due to its unique postal-banking business model.
10
Source: S&P Global Market Intelligence, SNL Financial DataFigure 4: Average Price to Tangible Book Ratio for the Three Largest
Banking Organizations
2018:Q1 - 2019:Q1
Percent
200
United States Euro Area Japan
175
150
125
100
75
50
25
2018:Q1 2018:Q2 2018:Q3 2018:Q4 2019:Q1
Note: The U.S. average includes Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co. The Euro Area average includes Banco
Santander, SA, BNP Paribas SA and Crédit Agricole SA. The average for Japan includes Mitsubishi UFJ Financial Group, Inc., Mizuho Financial
Group, Inc. and Sumitomo Mitsui Financial Group, Inc. Japan Post Bank Co., Ltd. is excluded due to its unique postal-banking business model.
11
Source: Bloomberg Finance L.P.Implications for Japan Today
▶ Japanese macroeconomy poses significant challenges for banks
▶ Demographics provide fewer lending opportunities
▶ Low term premia make financial intermediaries’ transformation of assets role
less profitable
▶ Low short- and long-term rates make banks less profitable more generally
▶ Key questions:
▶ How critical are more vibrant and profitable banks for dynamism in the
economy?
▶ How will Japan’s banks fare in an economic downturn given their current
performance?
12Figure 5: Example of CLO Holdings and Capital of One Large
Japanese Bank
Trillions of Japanese Yen
8.0
CLO Holdings Common Equity Tier 1 Capital (CET1)
6.0
4.0
2.0
0.0
Mar-2017 Mar-2018 Mar-2019
Source: Publicly available financial statements 13Is the Environment Encouraging Reach for Yield Behavior?
▶ Japanese banks have become an important source of financing for
CLOs in the U.S. and Europe
▶ Holdings tend to be AAA tranches of CLOs
▶ High ratings – high interest rates – profitable even with hedging cost
▶ Risk – economic downturn – significant credit migration
▶ Large losses at some institutions in U.S. during the financial crisis
▶ Just one example of reach for yield risk of current macroeconomic
environment
14Concluding Observations
▶ Japanese financial crisis had significant implications:
▶ Japan’s domestic economy was severely impacted
▶ Global economy was impacted by severity of problems at Japanese global
banks and the protracted response
▶ Macroprudential policies could have mitigated problems:
▶ Rigorous stress tests
▶ Countercyclical Capital Buffer
▶ Japanese situation now:
▶ Little room for profitability
▶ Difficult macroeconomic environment that encourages reach for yield
▶ Important to address resilience for possible global economic scenarios
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