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Banking Sector

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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 12:12 pm

Like Goldilocks Japanese government learned that too many banks is bad..

Therefore banks were forced to merge by passing the Banking Act.

This simply opened the way for a few huge Zaibatsu ( Japanese term for Korean Chaebol ) banks to emerge. The four biggest ones came to control credit and its getting out of Government control.

Goldilocks understand too little is also bad..

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Japanese got into second world war and Military Dictators closely aligned to Zaibatus banks to get military equipment produced .

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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 12:42 pm

Japanese lost the war, surrendered in 1945 and Supreme Commander for the Allied Powers (SCAP) altered the country's financial structure fundamentally.

Zaibatsu ownership of banks were ended.

The SCAP acquiesced in the setting up of a powerful Ministry of International Trade and Industry (MITI), which provided direction to the banking system.

Bank ownership was distributed among diversified groups of corporate owners with the typical investor holding a fraction of 1%. This left MITI with no competitors in providing directions to the financial system.


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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 12:53 pm

We Sri Lankans share a thinking of totally destroying and re-making...

But the Japanese got the very best out of what SCAP left them. MITI , banking system all were utilized properly without destroying what is left..

Earlier Regime of SL were merging banks and NBFIs. New regime immediately destroy that...

The Japanese state exercised control over the banking system via a mechanism called re-discounting..

In post-war Japan, qualification for re-discounts depended on the export performance and sector focus of the firm that commercial banks ultimately lent to.

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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 1:01 pm

Japanese financial system was kept on a short , if gradually lengthening , leash for thirty years. MITI was controlling where the credit goes. It went to export oriented manufacturing


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Japanese corporations depended on the banking system for 40-50% of their funding requirements. That was 30% in Germany and 20% or less in UK and US.

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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 2:16 pm

MITI bureaucrats were able to develop industrial plans sector by sector in the knowledge that the banking system would deliver what they wanted.

Corporations are like Children. During Infancy they need guide, control , support but the more they grow they seek independence.

By mid 1980s Japanese well established firms were going global and finding funds at cheaper rates outside and .......


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Akio Mortia of Sony got listed Sony in US stock exchange and wrote a book on How to get Listed in US, which paved way for other big companies to get listed in US and get zero cost funds.

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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 2:23 pm

After three decades of dragging its heels in 1980 Japan lifted capital controls and then in 1985 bowed to US pressure over trade surplus and allowed yen to appreciate.

Banks were deregulated. (Dog got out of leash )

Money was freely flowing to non-productive assets. Real estate price was booming up... Stocks were creating bubble.

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From the winter 1989-90 the asset bubble began to deflated and stock market index fell by three quarter and real estate value plummeted to rock bottom.

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The eldest son of Nishiyama Koichi, the diary-writing Niigata farmer, lost the family's entire accumulated wealth playing in stock market.

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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 2:29 pm

Above two charts send alarming signals for any developing nation that just try to follow IMF and to boom the economy by allow banks to fund Stock Purchases and Real estates


Time to revisit bubbles

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What Japan was developing till 1980 before deregulation of banks were real assets but after deregulating , was paper assets


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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 4:49 pm

Lets again meet General Park Chun Hee...of South Korea with banking sector development


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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 4:50 pm

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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 4:50 pm

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Re: Banking Sector

Post by yellow knife on Thu Nov 05, 2015 5:17 pm

General Park Chun Hee believed in State Owned banks and that is one thing IMF never liked to see...

Before moving further studying Korean Banks, lets have a look at the importance of Sri Lankan state banks...

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Re: Banking Sector

Post by yellow knife on Fri Nov 06, 2015 2:40 pm

In Japanese Golden Era of development, (1950-1980) the banks were kept in check,Central Bank re-discounting held banks on hook but inflation was held low and not much overseas borrowings taken.

But Park Chun Hee's Korea was very aggressive. Re discounting of export loans were unlimited. In other words any bank that lent against exports as proven by a letter of credit from a foreign customer got almost as much as money back from the Central Bank in order to further expand its loan book.

Unlimited re-discounting and printing money lead to inflation.

As long as Korean firms were following the developmental plan and could sell their goods abroad, the banks were told to lend them.

It was this funding context that exports rose an average 40% a year in the 1960s over 25% a year in 1970s, increasing from 3.4% of GDP in 1960 to 35% by 1980s.

Meanwhile inflation averaged 15-20% annually.

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Re: Banking Sector

Post by yellow knife on Mon Nov 09, 2015 1:00 pm

Park Chun Hee re-nationalized all banks which were privatized in 1957.

The cheaper loans went to exporters.

Other favoured category of loans flew to industrial projects which have not yet commenced exporting


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Many countries do not consider Export as a special priority for Lending as seen above of Indian AWPLR


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Re: Banking Sector

Post by yellow knife on Mon Nov 09, 2015 2:16 pm

What really happened in Korea is the depositors got minimal or nor interest at all. However, there was still money in the banks. The savings of the parsimonious government were kept there. The working capital accounts of large businesses remained there because otherwise they would not be eligible for cheap lending. And a part of household and small business savings was also deposited in the banking system for lousy terms, because the system was the only formal one available.

The remaining chunk of private savings found its way into illegal but tolerated NBFI sector and known as Kerb Market.

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Re: Banking Sector

Post by yellow knife on Wed Nov 11, 2015 10:10 am

From 1974 to 1980 , at the height of Korean Heavy Industry drive the average real borrowing rate in the banking system was 6.7%.

In the same country borrowing rate for consumption in the " Kerb Market " (illegal but tolerable NBFI sector ) was 18.5%.

There were 221 different types of preferential loan for heavy industrialists.

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Re: Banking Sector

Post by yellow knife on Wed Nov 11, 2015 10:24 am

This resulted in forming the South Korea today.

In Sri Lanka when we select the best Revenue makers as BOC, PB and the banking sector it is the manufacturing sector that comes in South Korea today..

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South Korea’s got its eggs in two baskets

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Re: Banking Sector

Post by yellow knife on Wed Nov 11, 2015 10:31 am

Korean Development Bank, (KDB) increased its borrowings of cheaper funds offshore, the KDB increased guarantees for Chaebol to borrow international , turning a blind eye to the exchange rate risk.

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Re: Banking Sector

Post by yellow knife on Wed Nov 11, 2015 11:41 am

The IMF, WB and US government- the last of which provided vast amounts of aid to South Korea, did not like General Park's approach to financial management.


When risk came home to roost in a major crisis that began in 1969, General Park, forgot his promise to US advisers to regard savers and price capital according to the market, enforcing a three year interest moratorium on kerb lenders that in effect made the general public bail out the industry. Ordinary Koreans provided most of the kerb's funds, while Chaebol sourced marginal loans there that they could not obtain from banks. By stopping payments on this high interest debt Park freed  up Chaebol funds to pay their bank debts, and prevented bank collapses. The public lost its interest income from the kerb market, while bank rates were cut again.

=================================

mor·a·to·ri·um
ˌmôrəˈtôrēəm/
noun
noun: moratorium; plural noun: moratoria; plural noun: moratoriums


In SL we heard this term Moratorium in 2008 when we were facing the Forth Eelam war, accompanied by Tea and Rubber price down.


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Re: Banking Sector

Post by yellow knife on Wed Nov 11, 2015 11:44 am

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Re: Banking Sector

Post by yellow knife on Wed Nov 11, 2015 12:32 pm

Such conditions contributed to Korea having a somewhat lower rate of house-hold savings than Japan or Taiwan.

But there was not the kind of collapse in individual saving that the many economists predicted.

In par this was because savers  were less sensitive to deposit interest rates than the mathematical models favoured by economists assumes: savers focused instead on the need to hold money against future liabilities a state with little welfare. In par, the savings also held up because it was not easy to consume, especially if this involved using foreign exchange. Imported consumer goods were either banned or enormous expensive due to high tariff.

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Re: Banking Sector

Post by yellow knife on Tue Dec 01, 2015 1:52 pm

Its time to continue Banking Sector analysis that cover different banking practices of the world.

We at Sri Lanka are happy to hear that EXIM bank will be incorporated .  Investment Banking, Hedge Funds, well developed derivative markets are yet to follow and adding Venture Capital is a  good move to be on the cards.

=====================================

In the 1960s and 1970s Korea had been the fasterest rate of foreign debt accumulation in the world. By 1985 Korea was the second most internationally indebted developing country after Brazil.

However because of its emphasis on exports, Korea's foreing debt payments relative to its foreign exchange  earnings actually declined from 1970. Payments of interest and principal as a share of exports were 28% in that year and only 20% in the early 1980s.

Export discipline was Korea's financial get-out of jail card.

==================================

Today's daily mirror had an article with following chart.


By Chandeepa Wettasinghe
The government will be forced to delay the capital investment projects if the revenue targets outlined in the Budget are not met, the global credit rating agency, Moody’s Investors Service (Moody’s) warned.

“If revenue underperforms during the year, as it has in the past two years, authorities may have to revisit investment plans to meet deficit targets, since recurrent expenses will be difficult to roll back,” a report said. - See more at: [You must be registered and logged in to see this link.]
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Re: Banking Sector

Post by yellow knife on Tue Dec 01, 2015 2:21 pm

Single Borrower Limit

Traditionally banks are very conservative and prefer to diversify risk.

This is how SBL is imposed in Sri Lanka and is a prudential measure.

Risk Diversification
Exposure Limits
The Single Borrower Limit (SBL) for domestic
LCBs and LSBs is 30% of the banks’ unimpaired
capital (defined as Tier-1 capital and 50% of
revaluation reserves). In order to further limit large
exposures (and hence concentration risk), the
aggregate of all loans/advances exceeding 15% of
capital funds should not exceed 50% of the total
advances of the bank

***************************************

In South Korea Chaebols were very powerful that banks were compelled to grant them loans at cheap rates. With the Chabols both heavy and leveraged ( average debt was more than five times equity in the fifity biggest firms) the state banking system could no longer impose its will on businesses whose failure would bring down the banks itself. In the 1980s Chaebols started to buy small firms than competing with them and even banks funded that move.


[You must be registered and logged in to see this image.] President Chun Doo Hwan

The IMF, WB, the US government and gorup of Korean economists trained in US and becoming powerful in President Chun Doo Hwan era collectively argued that its time to deregulate finance industry. They got public support for curbing Chaebols.

The banks were privatized with a maximum 8% shareholding by any one investor, whcih ensured some independent from Chaebol influence. However, the central government continued to set banks credit quotas and interest rate ceilings and to appoint senior managers.

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Re: Banking Sector

Post by yellow knife on Tue Dec 01, 2015 2:41 pm

Lets look at how the ownership % of a bank is practiced in different parts of the world and in Sri Lanka.

=======================================

regulations of maximum share ownership in banks are implemented in many countries through several methods, i.e., specific provisions in the banking laws specifying the limits, regulations issued by the regulators specifying the limits in terms of banking laws and guidelines issued by the regulators. However, country practices in regulation of share ownership show diverse literature where it is difficult to derive a standard international practice.
Regulations in other country
There are a large number of countries without such regulation as well. According to a survey of 157 countries conducted by the World Bank in 2003, 112 countries (71 percent) did not have any limitations on bank ownership. The remaining 45 countries (29 percent) implemented ownership limits ranging from five percent to 50 percent.
Provisions in the
Banking Act
In terms of the Banking Act, which contains provisions relating to regulation of share ownership, the maximum limit of ownership in shares carrying voting rights that can be acquired or held by a single shareholder or a group of connected shareholders in a commercial bank without regulatory approval is 10 percent of the issued shares carrying voting rights.
However, the Monetary Board of the Central Bank, with the concurrence of the Finance Minister, is empowered to permit any acquisition of shares in excess of 10 percent if such acquisition is in the interest of promotion of a safe, sound and stable banking system and fair competition prevailing in the banking system and such party or parties acquiring material interest are fit and proper persons. However, in the case of specialised bank, there is no such legal threshold for share ownership and the Monetary Board is empowered to determine such limits


Last edited by yellow knife on Wed Dec 02, 2015 9:03 am; edited 1 time in total

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Re: Banking Sector

Post by yellow knife on Tue Dec 01, 2015 2:43 pm

The maximum percentage of ownership permitted in the issued share capital carrying voting rights in a bank will be 15 percent of the issued share capital (carrying voting rights). This limit will apply to acquisition or holding of shares by all categories of shareholders, individually or in a group (as specified in the Banking Act) whether acquired/held directly or indirectly or through a nominee or acting in concert with any other categories of shareholders. However, in the case of licensed commercial banks, to acquire shares carrying voting rights in excess of 10 percent requires prior approval of the Monetary Board given with the concurrence of Finance Minister

Source

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Re: Banking Sector

Post by Ethical Trader on Tue Dec 01, 2015 3:13 pm

YK, you seems to be a professor in economics. Thanks. It is a very informative discussion. Carry on.
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