Due to globalization in finance, the restructuring of Japanese banking industry is accelerating. This paper focuses on the changes in the location of Japanese overseas banking and explores the backgrounds behind the trends. Two Japanese regional banks are taken as case studies. As a result, Japanese regional banks gravitated their overseas business into Asia throughout the 1990s. Simultaneously, decentralization from Hong Kong was proceeding among the locations of their overseas offices within Asia. The paper concludes that the business style of Japanese banks, which used to be very uniform, is becoming more diversified.
Abstract We study optimal financial contracting for centralized and decentralized firms. Under centralized contracting, headquarters raises funds on behalf of multiple projects. Under decentralized contracting, each project raises funds separately on the external capital market. The benefit of centralization is that headquarters can use excess liquidity from high cashâflow projects to buy continuation rights for low cashâflow projects. The cost is that headquarters may pool cash flows from several projects and selfâfinance followâup investments without having to return to the capital market. Absent any capital market discipline, it is more difficult to force headquarters to make repayments, which tightens financing constraints ex ante. Crossâsectionally, our model implies that conglomerates should have a lower average productivity than standâalone firms.
The previous chapter established that centralized countries registered relatively high levels of financial agglomeration. Without regulatory and legislative power, local governments in centralized countries could not â nor did they want to â stop center banks from opening a branch on every local âMain Street.â The reasoning, however, rested on an autarkic model â one without an international dimension. This chapter brings the international dimension into the picture, asking whether it ran parallel to or mitigated the process of agglomeration at work in the domestic economy. Theory and historical evidence both suggest that internationalization happened simultaneously with agglomeration, and more markedly in centralized than in decentralized countries. Consider a country with two regions â the basic model of chapter 2. Graft onto it another country with a similar structure. Allow capital to flow freely between regions of a same country but not across countries. Burden the exchange of financial products with information asymmetry so that the losses incurred are lower between two financial cores than between a given core and a foreign periphery. The rationale for this differential in asymmetric information is that nineteenth-century foreign investors had an overwhelming preference for large, central, visible assets in foreign countries â mostly government bonds â over small, peripheral, and unfamiliar ones. It is reasonable to expect from such a model that the coreâperiphery pattern within a country and the degree of internationalization of the financial sector in that country would be mutually reinforcing.
Moving Money analyses the influence of politics on financial systems. Daniel Verdier examines how information asymmetry and economies of scale over time have created a redistributional conflict between large and small banks, financial centres and their peripheries, and he discusses how governments have attempted to arbitrate this conflict. He argues that centralized states have tended to create concentrated, internationalized, market-based and specialized financial systems, whereas decentralized states have favoured dispersed, national, bank-based and, with a few exceptions, universal systems. Verdier then sets out to uncover the sources, political and economic, of cross-country variation in financial market organization, examining 15 to 20 OECD countries from 1850 onwards
This paper compares optimal financial contracts with centralized and decentralized\nfirms. Under centralized contracting headquarters raises funds on behalf of multiple projects and then allocates the funds on the firmâs internal capital market. Under decentralized contracting each project raises funds separately on the external capital market. The benefit of centralization is that headquarters can use excess liquidity from high-cash flow projects to buy continuation rights for low cash-flow projects. This allows headquarters to make greater repayments to investors, which eases financing constraints ex ante. The cost is that headquarters may pool cash flows from several projects, thereby accumulate internal funds, and make follow-up investments without having to return to the capital market. Absent any capital market discipline, however, it is more difficult for investors to force headquarters to pay out funds, which tightens ex-ante financing constraints.
I put forward a new theoretical framework to analyze the relationship between soft budget constraint syndrome and the economic performances of firms. It differs from the existing theoretical framework, Ă la Dewatripont and Maskin (1995), in the soft budget constraint literature. In this paper, soft budget constraint syndrome arises when firms that are expected to lose money are financed. The paper highlights a trade-off between hard and soft budget constraints. While soft budget constraints may compromise firms' incentives to improve performances, an all-out effort to harden budget constraints may put macro stability at risk, especially for economies suffering from allocative inefficiency. Based on this trade-off, the paper shows that a transition from centralized financing to decentralized financing in fact compromises firms' incentives to improve their performances, whereas a transition from centralized financing to a dual track system enhances efficiency. In the dual track system, budget constraints are soft in the centralized track but the macro stability of the economy is assured as a result. The macro stability enhances the disciplinary effect of hard budget constraints in the decentralized track, which in turn promotes firms' incentives to improve performances. The paper sheds light on a complementary relation between soft budget constraint syndrome in the state sector (i.e., the centralized track) and the remarkable growth of the non-state sector (i.e., the decentralized track) in China.
Alexander Gerschenkron argued that banks facilitate growth in âbackwardâ countries, and modern theorists sometimes similarly claim that banks can promote growth by reducing informational asymmetries and improving the allocation of funds. Japan has played a part in these debates. In early twentiethâcentury Japan, firms relied heavily on bank debt, observers argue. Those firms with preferential access to debt outperformed the others, and those that were part of the zaibatsu corporate groups obtained that access through their affiliated banks. In fact, Japanese banks did not play the role attributed to them. Japan was not a bankâcentered economy; instead, firms relied on equity finance. It was not an economy where firms with access to banks outperformed their rivals; instead, such firms earned no advantage. And it was not a world in which the zaibatsu manipulated their banks to favor affiliated firms; instead, zaibatsu banks loaned affiliated firms little more than the deposits those firms had made with the banks. During the first half of the last century, Japanese firms obtained almost all their funds through decentralized, competitive capital markets.
In any economic environment where decisions are decentralized, agents consider the risk that others might unfairly exploit informational asymmetries to their own disadvantage. Incomplete results, especially, lies at the heart of financial transactions in which agents trade real claims for promises of future real claims. Agents thus need to invest considerable resources to assess the trustworthiness of others with whom they know they can interact only under conditions of limited and asymmetrically distributed information. Thinking of finance as the complex of institutions and instruments needed to reduce the cost of trading promises among anonymous individuals who do not fully trust each other, the author analyzes how incomplete trust shapes the transaction costs in trading assets, and how it affects resource allocation and pricing decisions from rational, forward-looking agents. His analysis leads to core propositions about the role of finance and financial efficiency in economic development. He recommends areas of financial sector reform in emerging economies aimed at improving the financial system's efficiency in dealing with incomplete trust. Among other things, the public sector can improve trust in finance by improving financial infrastructure, including legal systems, financial regulation, and security in payment and trading systems. But fundamental improvements in financial efficiency may best be gained by eliciting good conduct through market forces.
Because of the presence of substantial informational asymmetries between borrowers and lenders, and an incomplete legal framework dealing with creditors' rights and bankruptcy, many debt financing vehicles which are used in developed market economies are poorly suited to economies that are in the transition from being centrally-planned to market-- driven. Our analysis indicates that asset leasing is an effective and efficient solution to the financing needs of borrowers in such countries, in that it lowers the risks and monitoring costs borne by lenders as compared with more traditional loans. INTRODUCTION Since the lifting of the Soviet Union's control over the former communist states of central and eastern Europe approximately a decade ago, and the subsequent dissolution of the USSR itself, the countries affected-- some of which have only recently been created--have been in the process of making the transition from centrally-planned to market-driven economies. In that process, they have been the recipients both of financial support and economic advice from the developed nations of the West. Among the critical choices the countries have had to face is the speed with which they should seek to accomplish their respective transitions. That has been a contentious domestic political issue in virtually every instance, and has been the subject of differences of opinion among the nations' Western advisors as well. Some have recommended taking the decentralization and privatization plunge immediately and comprehensively, while others have argued for a more deliberate pace. The choices made and the results achieved have varied widely across jurisdictions. While the debate about the most appropriate pace of transitioning continues, there appears to be general agreement that the creation of a well-functioning capital market at some point along the way is integral to the success of the effort. This involves more than simply setting up a securities exchange. It necessitates the establishment of ownership and control rights, transfer procedures, disclosure requirements, provisions for investor protection, bankruptcy laws and creditors' rights--and an effective regulatory and judicial system to enforce the rules fairly and reliably. These of course were and remain among the least-developed features of all the previously-socialist economies. The issue we address here is the means by which firms in such countries might most logically arrange to finance the acquisition of capital assets during the current early stages of the transition of their economies, when financial markets are in an embryonic state. We argue that leasing provides a near-ideal solution to firms' financing problems in that setting. LAWS, CAPITAL MARKETS, AND ECONOMIC DEVELOPMENT The overriding goal of privatizing the stateowned enterprises of a transitioning economy is to promote increased economic efficiency by exposing those enterprises to the discipline of competition in both the product and capital markets. There is evidence from a number of studies that privatization in fact generally accomplishes this objective. In the vast majority of cases, output and employee productivity rise, cash flow and profit margins improve, capital expenditure rates increase, debt levels are reduced, and more workers are ultimately employed (Boardman and Vining, 1989; Galal, Jones, Tandon, and Vogelsang, 1992; Megginson, Nash, and van Randenborgh, 1994; Pohl, Anderson, Claessens, and Djankov, 1997). In order to achieve these gains, not only goods and services but also the ownership claims to the newly-privatized corporate assets must trade freely among consumers and investors in the marketplace. The trading of those claims is what enables the economy's factors of production to be priced, and its assets thereby to be allocated to their most productive uses. The more efficient the marketplace for the claims, the better the resulting allocation. âŠ
The author analyzes the financial system's role in economic growth and stability, addressing several core policy issues associated with financial sector reform in emerging economies. He studies finance's role in the context of a circuit model, with interacting rational, forward-looking, heterogeneous agents. He shows finance to essentially complement the price system in coordinating decentralized intertemporal resource allocation choices made by agents operating with limited information and incomplete trust. He discusses the links between finance and incentives for efficiency and stability in the context of the circuit model. He also identifies incentives and incentive-compatible institutions for reform strategies for financial sectors in emerging economies. Among his conclusions: 1) Circuit theory features important methodological advantages to analyze the role of finance, and to assess structural weaknesses of financial systems under different institutional settings and in different stages of economic development. 2) Incentives for prudence and honesty can protect the stability of the circuit by directing private sector forces unleashed by liberalization. In particular: a) Financial institutions should be encouraged to invest in reputational capital. b) Governments should complement the creation of franchise value by strengthening supervision and by adopting a regulatory regime based on rules designed to align the private incentives of market players with the social goal of financial stability. c) Safety nets to reduce systemic risk should minimize the moral hazard from stakeholders by limiting risk protection and by making the cost of protection sensitive to the risk taken. d) Governments should encourage self-policing in the financial sector. e) Where information and trust are scarce, there is a potential market for them, and governments can greatly improve incentives for optimal provision of information. f) Governments should strengthen the complementarity between the formal and the informal financial sectors. Emphasizing incentives is not to deny the importance of good rules, capable regulators andsupervisors, and strong enforcement measures. It is to suggest that the returns on investments to set up rules, institutions, and enforcement mechanisms can be greater if market players have an incentive to align their own objectives with the social goal of financial stability.
The current economic problems in Southeast Asia can be attributed not to too much reliance on financial markets, but to too little . Like the U.S. economy a century ago, the emerging Asian economies do not have welldeveloped capital markets and so remain heavily dependent on their banking systems to finance growth. For all its benefits, banking is ânot only basically 19thâcentury technology, but disasterâprone technology.â The extreme maturity (and, in some cases, currency) mismatch on banks' balance sheets plus the firstâcome, firstâserved nature of the deposit obligations mean that banks are inherently vulnerable to massive runs by depositorsâand that their economies are subjected to periodic credit crunches. And, as the author says, âin the summer of 1997 a bankingâdriven disaster struck in East Asia, just as it had struck so many times before in U.S. history.â In this century, In this century, the U.S. economy has steadily reduced its dependence on banks by developing âdispersed and decentralizedâ financial markets. In so doing, it has increased the efficiency of the U.S. capital allocation process and reduced its susceptibility to the credit crunches that have occurred throughout U.S. history. By contrast, Japan has not reduced its economy's dependence on banks, and its efforts to deal with its banking problems have served only to destabilize itself as well as its neighbors. Developing countries in Southeast Asia and elsewhere are urged not to follow the Japanese example, but to take measures aimed at developing financial markets and institutions that will either substitute for or complement bank products and services.
About the Internet, there have been a number of indications recently, that the use of electronic methods not only for expanding business or creating new business, but also for making payments, may introduce a new " industrial and monetary " order. This idea, (millenarianism ?) implies a large adoption of new technologies, of e-business opportunities and usages and finally, the resolution of e-payment problems, especially taking into account the Internet's characteristics (decentralization and aperture). These problems do not depend only on implementation of information's technologies, cryptography or network management. Because payments concern the core of the market's economy, the e-payment systems involve i) the monetary regime - i.e. forms and nature of money creation - and ii) agents qualified to create money. On these points, the emergence of e-payment systems is not anodyne, because it participates in the evolution of the actual monetary regime in the direction of a weakening between money supply, quantity of money and economy financing by bank's credit. It participates also in the evolution of the " banking industry " in the direction of a real disintermediation.
Reviews the process of creating an economy dominated by the private sector, discussing the entry by new private businessâparticularly, the privatization of state-owned firms, farms, housing, and commercial real estateâand analyzing why different approaches to ownership change and divestiture can be associated with positive economic results. Different countries will launch privatization at different moments, but once adopted, firms and farms transitioning from central planning need major restructuring of their production and reorientation of their incentives. Entities that face strict financial discipline and competition and have clear ownership will most likely undertake the needed restructuring or exit, leaving room for new and better firms. In the short run, financial discipline can be fostered through stabilization and liberalization measures, but in the long run, decentralizedâpreferably privateâproperty rights and supporting institutions need to sustain financial discipline, respond to market-oriented incentives, and provide alternative forms of corporate finance and governance.
We study a credit model where, because of adverse selection, unprofitable projects may nevertheless be financed. Indeed they may continue to be financed even when shown to be low-quality if sunk costs have already been incurred. We show that credit decentralization offers a way for creditors to commit not to refinance such projects, thereby discouraging entrepreneurs from undertaking them initially. Thus, decentralization provides financial discipline. Nevertheless, we argue that it puts too high a premium on short-term returns. The model seems pertinent to two issues: âsoft budget constraintâ problems in centralized economies, and differences between âAnglo-Saxonâ and âGerman-Japaneseâ financing practices.
This paper analyzes the contribution of the German banking system to the modernization of small and medium-sized enterprises (SMEs) in industry. The simultaneous greater relative importance of and relatively high wages in German SMEs appear to be paradoxical in terms of dual labor market theory, which claims that lower wages and greater flexibility in the use of labor are important for helping small firms compensate for their constrained access to capital, R&Dk and skills resources relative to large firms. This paper suggests that the successful modernization of the German small firm sector despite pressure from below from industry-level wage bargaining and strong job protection can be attributed to support from above in terms of an institutional infrastructure helping small firms overcome the organizational deficiencies they face relative to large firm. The decentralized provision of long-term finance and sophisticated financial services for the modernization of SMEs is enabled by a three-tiered federalist form of corporatist organization in the cooperative and savings banks sectors, in which smaller banks at the bottom tier of the organization receive access to refinancing on capital markets and specialized services -- normally only available to large banks -- through the upper tiers of the banking organization.