What China can learn from Japan's financial crisis

By Eiji Okuyama

Of course, the situation in Japan, where the main financial groups are dominated by commercial banks, differs from that of the United States (which has large capital markets) and of the major nations of Europe, where universal banking is permitted.

The shadow banking that took place during the subprime loan crisis in the United States became an effective ‘work-around’ mechanism for banks to evade the regulations imposed on them, such as regulations on capital adequacy ratios.

In other words, a huge loophole existed: the agricultural cooperative-related financial institutions provided money to the jusen, and the jusen subsequently provided real estate-related financing.

However, these regulations had a major flaw: they did not apply to the jusen, nor did they apply to agricultural cooperative-related financial institutions.

As holding companies, major financial institutions are able to manage banks, trust banks, securities companies and other financial institutions as corporate groups.

Consequently, the jusen, which were reliant on these financial institutions for customer introductions, found themselves facing an extremely tough business environment where their original role of providing home loans was diminishing quickly.

These regulations limited land-related financing by financial institutions, with the goal of controlling excessive real-estate development.

From the 1980s, large companies were able to raise funds directly from the capital markets as a result of an easing of financial regulation in these markets.

Read more here: Business Spectator

    

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