Japan: The banks are back! Or are they?

Since fiscal 2003, the 'performance' of the Japanese banking sector, in terms of profitability, asset quality, and capital adequacy, has improved markedly as the real economy has recovered, suggesting that the widespread pessimism (see, for example, Hall, 2006 and IMF, 2003) expressed earlier concerning the fragility of the sector was somewhat overdone. Yet, despite these positive developments, a number of serious challenges still face the Japanese banking industry and their supervisors. Core profitability, for example, remains very weak, in part due to wafer thin lending margins at home and sluggish corporate loan demand. Asset quality has also widely suffered because of exposure to the re-regulated consumer finance industry and the US sub-prime market. And controversy still surrounds the issues of bank "under-reserving" and regulatory tolerance of "double gearing" on the capital adequacy front. These, and other, problems must be resolved if Japanese banks are to finally re-claim the ground lost to international competitors over the last 15 years or so and secure lasting improvement in their financial health.Japanese Banking; Performance – Capital Adequacy and Profitability; Supervision; Financial Stability.

BANK BAILOUT MARK "II" : WILL IT WORK?

On 19 January 2009, the UK Government unveiled a second comprehensive bank bailout plan. This followed the failure of its October bailout package to stimulate domestic lending, as intended. The various components of the new "rescue package" are duly explained and analysed in this article, which also addresses the likely future course of policy should the Government fail in its latest ambitions to stimulate lending and thereby revive the flagging economy.UK banks; banking regulation and supervision; central banking; failure resolution.

Estimating Liquidity Risk Using The Exposure-Based Cash-Flow-at-Risk Approach: An Application To the UK Banking Sector

This paper uses a relatively new quantitative model for estimating UK banks' liquidity risk. The model is called the Exposure-Based Cash-Flow-at-Risk (CFaR) model, which not only measures a bank's liquidity risk tolerance, but also helps to improve liquidity risk management through the provision of additional risk exposure information. Using data for the period 1997-2010, we provide evidence that there is variable funding pressure across the UK banking industry, which is forecasted to be slightly illiquid with a small amount of expected cash outflow (i.e. £0.06 billion) in 2011. In our sample of the six biggest UK banks, only the HSBC maintains positive CFaR with 95% confidence, which means that there is only a 5% chance that HSBC's cash flow will drop below £0.67 billion by the end of 2011. RBS is expected to face the largest liquidity risk with a 5% chance that the bank will face a cash outflow that year in excess of £40.29 billion. Our estimates also suggest Lloyds TSB's cash flow is the most volatile of the six biggest UK banks, because it has the biggest deviation between its downside cash flow (i.e. CFaR) and expected cash flow.Liquidity risk, Exposure-based CFaR, Risk Management, Funding Pressure

Environmental Factors Affecting Hong Kong Banking: A Post-Asian Financial Crisis Efficiency Analysis

Within the banking efficiency analysis literature there is a dearth of studies which have considered how banks have ‘survived’ the Asian financial crisis of the late 1990s. Considering the profound changes that have occurred in the region’s financial systems since then, such an analysis is both timely and warranted. This paper examines the evolution of Hong Kong’s banking industry’s efficiency and its macroeconomic determinants through the prism of two alternative approaches to banking production based on the intermediation and services-producing goals of bank management over the post-crisis period. Within this research strategy we employ Tone’s (2001) Slacks-Based Model (SBM) combining it with recent bootstrapping techniques, namely the non-parametric truncated regression analysis suggested by Simar and Wilson (2007) and Simar and Zelenyuk’s (2007) group-wise heterogeneous sub-sampling approach. We find that there was a significant negative effect on Hong Kong bank efficiency in 2001, which we ascribe to the fallout from the terrorist attacks in America in 9/11 and to the completion of deposit rate deregulation that year. However, post 2001 most banks have reported a steady increase in efficiency leading to a better ‘intermediation’ and ‘production’ of activities than in the base year of 2000, with the SARS epidemic having surprisingly little effect in 2003. It was also interesting to find that the smaller banks were more efficient than the larger banks, but the latter were also able to enjoy economies of scale. This size factor was linked to the exportability of financial services. Other environmental factors found to be significantly impacting on bank efficiency were private consumption and housing rent.Finance and Banking; Productivity; Efficiency.

A Cost-Benefit Analysis of Basel III: Some Evidence from the UK

This paper provides a long-term cost-benefit analysis for the United Kingdom of the Basel III capital and liquidity requirements proposed by the Basel Committee on Banking Supervision (BCBS, 2010a). We provide evidence that the Basel III reforms will have a significant net positive long-term effect on the United Kingdom economy. The estimated optimal tangible common equity capital ratio is 10% of risk-weighted assets, which is larger than the Basel III target of 7%. We also estimate the maximum net benefit when banks meet the Basel III longterm liquidity requirements. Our estimated permanent net benefit is larger than the average estimates of the BCBS. This significant marginal benenfit suggests that UK banks need to increase their reliance on common equity in their capital base beyond the level required by Basel III as well as boosting customer deposits as a funding source.Basel III, Cost-Benefit analysis, Tangible Common Equity Capital, Liquidity

Accounting for environmental factors, bias and negative numbers in efficiency estimation: A bootstrapping application to the Hong Kong banking sector

This paper examines the evolution of Hong Kong’s banking industry’s technical efficiency, and its macroeconomic determinants, during the period 2000-2006 through the prism of two alternative approaches to efficiency estimation, namely the intermediation and production approaches. Using a modified (Sharp, Meng and Liu, 2006) slacks-based model (Tone, 2001), and purging the efficiency estimates for random errors (Simar and Zelenyuk, 2007) , we firstly analyse the trends in bank efficiency. We then identify the ‘environmental’ factors that significantly affect the efficiency scores using an adaptation (Kenjegalieva et al. 2009) of the truncated regression approach suggested by Simar and Wilson. 2007). The first part of the analysis reveals that the Hong Kong banking industry suffered a severe downturn in estimated technical efficiency during 2001. It subsequently recovered, posting average efficiency scores of 92 per cent and 85 percent under the intermediation and production approaches respectively by the end of 2006. As for the sub-group analysis, commercial banks are, on average, shown to be the most efficient operators, while the investment bank group are shown to be the least efficient. Finally, with respect to the truncated regression analysis, the results suggest that smaller banks are more efficient than their larger counterparts, although larger banks are still able to enjoy gains from scale economies and benefit from the export of financial services. Moreover, private housing rent and the net export of goods and services are found to be negatively correlated with bank efficiency, while private consumption is shown to be positively correlated.Hong Kong Banks; DEA; Slacks; Environmental factors, Negative numbers; Bias.

The sub-prime crisis, the credit crunch and bank “failure”: An assessment of the UK authorities’ response

On 8 October 2008 the UK Government announced a far-reaching plan to restore financial stability, protect depositors and re-invigorate the flow of credit to businesses and individuals in the UK. The £400 billion bailout plan embraced three elements: a massive expansion in emergency liquidity support from the Bank of England; recapitalisation of UK banks and building societies using taxpayers' money; and the provision of a Government guarantee of new short- and medium-term debt issuance made by UK-incorporated banks and building societies. This action proved necessary in the wake of continuing and substantial weaknesses in many banks' share prices despite the temporary ban on short-selling imposed by the Financial Services Authority. It followed two revisions to domestic deposit protection arrangements, and the adoption of a piecemeal approach to failure resolution which saw the eventual nationalisation of Northern Rock in February 2008, the nationalisation of Bradford and Bingley in September 2008 and the brokering of takeover rescues of Alliance and Leicester and HBOS by Banco Santander and Lloyds TSB respectively in July and September 2008, and of the Cheshire and Derbyshire Building Societies by the Nationwide Building Society in September 2008. This metamorphosis in approach to failure resolution by the UK authorities in response to the sub-prime crisis and the credit crunch – nationalisation by default to (part) nationalisation as the preferred course of action - is duly analysed in this article, as well as their proposals for banking reforms which still have to be agreed by Parliament.UK banks; banking regulation and supervision; failure resolution; central banking; deposit protection.

BACK FROM THE BRINK: YEAR THREE OF THE CRISIS

With 'green shoots' giving way to more definite signs of recovery in the global economy - most leading nations have already emerged from recession, with the UK being the latest – and with the global financial system back on an even keel (stock markets around the globe have recovered most of the ground lost after the collapse of Lehman Brothers in the Autumn of 2008 and credit markets have thawed out to a degree following the stabilisation of house prices in the West) now is perhaps a good time to bring to a close my survey of the sub-prime-induced credit crunch and the damage it wrought around the World. Internationally-co-ordinated action on the fiscal, monetary and financial fronts and a determination to resist protectionist tendencies appear to have successfully pulled back the World economy from the brink of depression and the financial system from near collapse. Of course, the real recovery is likely to be weak and protracted and unemployment, as a lagging indicator, is likely to continue its remorseless rise, albeit at a slower pace, for some time yet in most parts of the globe, but the worst does seem to be behind us. Wary of damaging the nascent recovery, policymakers are still developing their "exit strategies" – from extraordinary fiscal and monetary stimuli and state intervention in the financial system – rather than implementing them, with much discussion being devoted to how to reform financial regulation with a view to preventing a recurrence of a similar-style systemic collapse. These and other policy issues thus necessarily appear prominently in the analysis below. For now, without being complacent, our political masters can congratulate themselves for having spared their citizens from an even worse maelstrom, but much remains to be done if history is not to repeat itself and taxpayers are to be shielded from the consequences of financial "excess" in the future.

The sub-prime crisis, the credit squeeze, Northern Rock and beyond: The lessons to be learnt

On 14 September 2007, after failing to find a 'White Knight' to take over its business, Northern Rock bank turned to the Bank of England ('the Bank') for a liquidity lifeline. This was duly provided but failed to quell the financial panic, which manifested itself in the first fully-blown nationwide deposit run on a UK bank for 140 years. Subsequent provision of a blanket deposit guarantee duly led to the (eventual) disappearance of the depositor queues from outside the bank's branches but only served to heighten the sense of panic in policymaking circles. Following the Government's failed attempt to find an appropriate private sector buyer, the bank was then nationalised in February 2008. Inevitably, post mortems ensued, the most transparent of which was that conducted by the all-party House of Commons' Treasury Select Committee. And a variety of reform proposals are currently being deliberated at fora around the globe with a view to patching up the global financial system to prevent a recurrence of the events which precipitated the bank's illiquidity and the wider financial instability which set in towards the end of 2008. This article briefly explains the background to these extraordinary events before setting out, in some detail, the tensions and flaws in UK arrangements which allowed the Northern Rock spectacle to occur. None of the interested parties – the Bank, the Financial Services Authority (FSA) and the Treasury – emerges with their reputation intact, and the policy areas requiring immediate attention, at both the domestic and international level, are highlighted. A review and assessment of both the House of Commons Treasury Committee's Report on Northern Rock and the Tripartite Authorities' proposals for reform are also provided before analysis of the subsequent measures taken to stabilise the UK financial sector – involving further nationalisation of banks, the brokering of takeover rescues of banks and building societies, a £400 billion bailout of the deposit-taking sector and a subsequent bank bailout scheme – is undertaken. Accordingly, this paper represents an update, covering developments until end-January 2009, of my earlier paper on the Northern Rock affair (Working Paper No. WP 2008-09), which was published in September 2008. Specifically, it covers the latest domestic (i.e. UK) developments on a number of fronts. The text, for example, provides updates on the reform proposals of the Tripartite Authorities, amendments to deposit protection arrangements, and the emergency funding initiatives adopted by the Bank of England. Table 2 (where, along with Table 1, most of the new material is located), meanwhile, provides updates and analysis of the following: the latest developments in the UK housing market; the latest developments in the real economy; the latest financial statements of the major banks; the latest nationalisation moves;* the latest inflation figures and interest rate decisions of the MPC; the latest government bailout plans for deposit-takers; the latest official support packages introduced for the housing market, mortgage borrowers and small businesses; the latest fiscal stimulus plans (e.g. as contained in the Pre-Budget Report of November 2008); and the latest domestic financial and regulatory developments. Meanwhile, Table 1 provides up-to-date information on: emergency funding initiatives undertaken by the Fed, the ECB and other major central banks; financial institution takeovers/bailouts in the US and Europe; interest rate developments in the major economies; financial and regulatory developments in the US and Europe; developments in the real economies of the US and Europe; the financial statements of banks in the USA and Europe; the evolution of official bailout plans in the US ('TARP') and Europe; deposit protection developments in the US and Europe; fiscal stimulus packages adopted in the US, Europe and the wider international community; G7/EU plans to tackle the worsening financial crisis; IMF 'bailouts' of beleaguered countries; and the Basel Committee's proposals for revamping Basel II in the light of the crisis. *A more detailed discussion of these developments is provided in Hall (2008).Sub-prime crisis; credit crunch; banking regulation and supervision; failure resolution; central banking; deposit protection.

RECENTBANKINGSECTOR_JAPAN

Should be added soonBanking, Japan