Re: the share held by banks

[GGard97342@xxxxxx]

In a message dated 06/04/01 16:36:34 GMT Daylight Time,
kurose@xxxxxxxxxxxxxxxxxxxxxx writes:

> In the Financial Time published on 4th April, I found the comment on
>  Japanese emergency economic package. The core of the package is a proposal
>  to set up a government-backed fund to purchase up to $88bn of shares owned
>  by banks. It says as follows at the third paragraph.
>
>  "Behind the plan lies the frailty of the banking system, its exposure to
>  equities and the low level of the stock market. Notwithstanding its modest
>  rise on Wednesday, the Nikkei index closed at 13,242.73, 66 per cent below
>  its peak on the last day of 1989. Because Japanese banks hold large
>  quantities of shares, the weak market undermines their capital base. This,
>  in turn, constrains their ability to lend".
>
>  I would like you to pay attention to the last sentence. If the prices of
>  shares held by banks fall, the balance sheets of banks will certainly
>  deteriorate. However, does it really constraint their ability to lend? What
>  do you think about this article?
Presumably the purpose is to replace the investments of the capital base of
the banks with something sounder and less volatile.

In that case the move is to be commended, but the banks must never be allowed
to invest their capital base so unwisely again. It was a clever idea which
proved to be a little too clever. Moreover the Japanese banks had grossly
inadequate capital adequacy ratios (cars) before the implementation of the
1988 Basel Accord. I was surprised that the Japanese governement agreed to
implement the Accord before the cars were improved. The inadequacy was well
known in the West. Professor David Llewellyn wrote it up very conscientiosuly
more than a year before the Accord came into effect (Fiscal 1993).

The philosophy behind the Basel Accords seems to be still very little
understood by economists.

Geoffrey Gardiner