BY

ANURAG GUPTA

NITI SAINI

SUDHANSHU RAWAL

All logos are trademarks and copyrights , this presentation is made by students of SPJCM for educational purpose.

Early Stage - Before mid 1994

Beginning of Crisis – mid 1994 to 1996

Financial Crisis of 1997

Financial Crisis of 1998

Management

Causes

No Financial Crisis post war till 1994

Financial deregulation started in 1970

Deposit Insurance Law

- Payoff – Y10 million per depositor

- Financial Assistance

Larger banks were perceived to be protected

Credit cooperatives - Tokyo Kyowa and Anzen failed

Financial Assistance from DIC

- No financial institution for claim

- Legal limit to payoff

Tokyo Kyoudou Bank or TKB established

- Y20 billion – Bank of Japan

- Y20 billion – Private Financial Institutions

Collective Approach - Hougacho

July 95 – Cosmo Credit Failed

Aug 95 – Hyogo Bank & Kizu Credit Co-op

Hougacho again followed

- Cosmo transferred to TKB

- Hyogo - Midori Bank, Y80 bn share capital

- Kizu - losses exceeded Y100 billion

- transferred to RCB

- Deposit Insurance Law amended

1995 – 1996 Jusen became major issue

Aggregate losses of Y6,410 billion

Tax Payers money was used

Deposit Insurance Law amended

TKB reorganized to RCB

- RCB given wider role

Nippon Credit Bank(NCB) restructuring in April- Assets of Y15 trillion

- Heavily exposed to real estate and large NPL’s

- Bank of Japan inducted Y290 billion

- December 1998 NCB failed and nationalised

Hokkaido Takushoku Bank(HTB) failed in November- Loans soured after bubble burst

- Merger with regional bank

- Deposit withdrawals accelerated

Sanyo Securities filed with Tokyo district Court for reorganization

- defaulted on repayment of unsecured call money

- Bank of Japan two-way operation

Central Point – A default by one Financial Institution, whether a bank or a non-bank, could have developed into major disruption, especially when overall financial system was fragile

Yamaichi Securities collapsed

- MOF and BOJ understanding to use

Compensated Fund for Deposited Securities

- BOJ faced credit risk

- who would bear final cost still unresolved

Tokuyo City Bank failed

- Rumor banks were on brink of collapse

Legislation to use Public Funds – Y30 trillion

Financial Crisis Management Committee

- No supervisory Power

All major banks collectively applied for Capital Injection – Y1.8 trillion

Long Term Credit Bank failed

- Assets of Y26 trillion

- Sumitomo Trust bank – Size of NPL’s

- Derivatives Portfolio

Financial Reconstruction Law

- Failed bank under Financial Reorganization

Administration

- Temporarily Nationalized

- Bad Loans were removed

- Losses covered by shareholders and DIC

- Feb 2000 LTCB purchased by New LTCB

partners

Financial Reconstruction Law

Financial Function Early Strengthening Law

Financial Reconstruction Committee(FRC)

Financial Supervisory Agency

Available public funds doubled

FRC injected Y7.5 trillion in march 99

Tier 1 capital – preferred stock

Unrealized capital losses and potential losses

Required banks to submit plans for improving profitability

RCB reorganized to RCC for removing bad loans

Securitization of bad loans using SPC’s

As of July 2002 major banks consolidated to 5 large financial groups

Deposit Insurance Law amendment

- current deposits and ordinary deposits would be

fully protected until March 2003

Problem of non-performing Loans

Negative Impact on economy

- Corporate sector

- Economy in recession

- Securitisation became available in late 90’s

Insufficient Provisioning

- 97-reporting requirement to MOF abolished

- Self assessment of loan portfolio

- Further guidelines in 99 – Profitability reduced

Inadequate Market Discipline

- Public disclosure of NPL’S non existent

- Moral Hazard

- 1999 – Comprehensive disclosure requirement

Deterioration of Bank’s Capital Positions

- Low profitability

- New stock impossible

- Capital injection using public funds not easily

available

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