Re: Japan

[GGard97342@xxxxxx]

In a message dated 25/02/2000 22:01:56 GMT Standard Time, rosserjb@xxxxxxx
writes:

> Geoffrey,
>        Very interesting data source.  It definitely shows a
>  peak in land prices around 1991 with gradual declines
>  since.  This contradicts what is in Ito and Iwaisaku.
>  Barkley Rosser

Barkley,

I remember there are about three other similar sites, but I did not keep a
note of them.

I answered Basil Moore's message in a hurry, completely forgetting that some
important data is already available on the bis.org site. It is BASLE
COMMITTEE ON BANKING SUPERVISION WORKING PAPERS, No 1 - April 1999. This
lists the studies done. See particularly page 34.

To recap, the final form of the Basle Accord was agreed in July 1988, and
Accord had to be fully operative in all banks by the end of their 1992 fiscal
years. I believe Japanese companies commonly use the calendar year as their
financial year, so the crucial date was 1st January 1993. It makes sense
therefore that the fall in property values started in 1991 as a result of the
preparations for the 1993 deadline. Llewellyn, in his Jan 1992 article
illustrated the problem the Japanese banks had by comparing the 1988 figures
of National Westminster Bank and Dai-Ichi Kangyo. The Tier One capital
adequacy ratio of Nat West was 6.1%, and that of Dai-Ichi 2.4%. Basle
requires 4%. The profits of the two banks were virtually identical, but
Dai-Ichi had assets twice as big to earn them. It could work on a lower
margin.

I have not kept my workings but my recollection is that I calculated that
Dai-Ichi could charge a corporate borrower one half of one per cent less than
Nat West, and still achieve that same earnings per share, indeed slightly
more on Llewellyn's figures.

Until Llewellyn's paper I do not think British bank chiefs understood what
was going on. Although my then status was comparatively junior, I was briefly
involved in high level policy making in Barclays Bank in the early 1970s, and
even represented the bank at an exclusive high level conference on the
control of inflation. At that conference - in October 1973 - I argued to the
deaf ears of economists and government officials alike the importance of
capital adequacy ratios in determining the level of the money supply.

Brain work commanded a low status in Barclays, and I reverted to management,
where the money was far better. But I saw enough to be able to state that
although Barclays was the lead bank at that time, technical understanding was
not a feature of top management or the board, with a very few notable but
powerless exceptions. In 1984 I got out of Barclays, probably the last but
one to abandon ship of those who entered via Barclays' first ever graduate
recruitment drive in 1952. One remained: Sir John Quinton. He became Chairman
and chief executive, the first time the job was held by a person who was not
a descendant of one of the old Quaker banking families who created Barclays.

Quinton publicly complained about the competitive interest rates which
Japanese banks were offering corporate borrowers in Britain, and which were
getting them all the good business. He thought the Japanese were dangerously
undercharging, obviously not realising the advantage of a low capital
adequacy ratio. The professional economists employed by Barclays must have
been equally ignorant. He decided to hit back, dramatically. In May 1988 he
launched the biggest rights issue in British corporate history -
£920,000,000. When added to other increased capital resources this fresh
capital enabled Barclays to expand its balance sheet by almost  £17 billion
(19 per cent) by the end of the year, to be responsible for 33 per cent of
the increase in M3, to expand its UK lending by 32 per cent, and to increase
its mortgage lending by 51 per cent.

The following year, despite (or because of?) ever higher interest rates, its
balance sheet was expanded by a further  £24 billion. This was done while
high interest rates, the Treasury's favourite homeopathic remedy, were
supposed to be discouraging borrowing and therefore controlling inflation.
The staff tell me that there was a corporate target, "Number One by Ninety
One," but management later denied this. Economists suppose that high interest
rates discourage borrowers. They totally underestimate the marketing skills
of banks, and banks are of course motivated to lend more when rates are high.
Every member of Barclays' staff (90,000 people at the peak) had been given a
course on selling, and the instruction was backed up by the technique of
"Management by Objectives." An APR as high as 31% was no hindrance whatsoever
to increasing lending.

Quinton moved too soon. If he had waited until 1990 he could have picked up
the loans the Japanese were trying to get rid off in order to get within the
Basle Accord limits. Instead he got the dud loans they would not touch, and
he lost the whole of the £920,000,000, and more. I have that fact in a hand
written letter from his successor as Chief Executive, Martin Taylor.

So the Japanese problem had very serious repercussion in Britain too. The
actions of Quinton and others sent house prices here rocketing, and then in
1990 came the crash. In the following years hundreds of thousands of people
became homeless as a direct result of interest rate policy. It is a
heart-rending tale, and is about to be repeated. Lord Vinson is a member of
the House of Lords Monetary Policy Committee and was also a director of
Barclays UK Management Ltd (the subsidiary which runs the domestic banking)
during the 1980s. He asked the Bank of England to set higher capital adequacy
ratio requirements in respect of house loans above 70 per cent of the house
value because competition was forcing even prudent lenders to concede up
to100 per cent loans. He was fobbed off.

Apologies if I am repeating what is already well-known to you.

Geoffrey Gardiner
Knutsford, England, WA16 8QT
+44 1565 653544