Will the U.S. Bank Recapitalization Succeed? Lessons from Japan

Takeo HoshiAnil K Kashyap

Jacquemin seminar European CommissionJune 18, 2009

1

Outline

2

1. Similarities between the U.S. and Japan 1997-1999 in Japan = Fall 2008-2009 in the U.S.

2. Lessons from the Japanese asset purchase and capital injection experience

3. Analysis of bank capital rebuilding in Japan

Contributions

3

1. Concise overview of the Japanese experience

2. Some new analysis, especially on what finally ended the capital shortage in Japan and the adverse effects of directed credit

3. Highlight a number of policies experimented with in the U.S. that failed in Japan

4

1998Q1

1998Q4

1999Q3

2000Q2

2001Q1

2001Q4

2002Q3

2003Q2

2004Q1

2004Q4

2005Q3

2006Q2

2007Q1

2007Q4

2008Q3

2009Q2

2010Q1

2010Q4

2011Q3

2012Q2

2013Q1

2013Q4

2014Q3

2015Q2

2016Q1

2016Q4

2017Q3

2018Q2

2019Q1

2019Q4

2020Q3

2021Q2

2022Q1

1998Q1

1999Q2

2000Q3

2001Q4

2003Q1

2004Q2

2005Q3

2006Q4

2008Q1

2009Q2

2010Q3

2011Q4

2013Q1

2014Q2

2015Q3

2016Q4

2018Q1

2019Q2

2020Q3

2021Q4

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Land Prices in the U.S. and Japan

US (left, bottom axes) Japan (right, top axes)

Case-Shiller National Index

Commercial Prices 6 Major Cities

Mar. 2008 to Feb. 2009 in the U.S.• Unexpected failure of large institutions (Mar and Sep 2008)• Spike in the interbank borrowing rate, sharp rise in the cost of

insuring debts, frozen capital markets• Call for suspending mark-to-market accounting, restriction on

short sales (Sep 2008)• Original TARP (Oct 3, 2008)• Capital Purchase Program (Oct 14, 2008)• Republicans lost big, new President chosen (Nov 2008)• 2nd capital injections to Citigroup, Bank of America• Freefall of bank stock prices• Geithner Plan (From Feb 2009): Stress tests, capital assistance,

PPIP, expansion of TALF

5

Nov. 1997 to Mar. 1999 in Japan(Chapter 8 of Hoshi and Kashyap 2001)

• Unexpected failure of large institutions (Nov 1997)• Spike in the interbank borrowing rate• New accounting to cover up problems (Jan 1998)• Half-hearted recapitalization (Mar 1998)

– All banks get the same injection = amount desired by the strongest bank

• LDP loses election, government resigns (June 1998)• Second round crisis legislation (Oct 1998)• Several major financial firms nationalized (Nov 1998)• Second round recapitalization (Mar 1999)

– MOF official declares crisis “will be over in 2 weeks” (Feb 1999)

6

7

Chronology of Japanese experience

1. Late 1997-early 1999: classic credit crunch

2. 1999 to 2003: bank capital shortage and raging zombie problem

3. 2003 to 2007: bank capital rebuilding and economic recovery

1/1995

4/1995

7/1995

10/1995

1/1996

4/1996

7/1996

10/1996

1/1997

4/1997

7/1997

10/1997

1/1998

4/1998

7/1998

10/1998

1/1999

4/1999

7/1999

10/1999

-20

0

20

40

60

80

100

120

Japan Premium: 1995-1999 (bp)

8

9

1998 Capital Injections

Preferred Shares Subordinated loans/debts

S&P Rating

Total Funds

Type Amount dividend rate

Conversionstart

Forced conversion

Type Amount yield for 5 years

yield after 6th year

City banksDai-ichi Kangyo BBB+ 99 CPS 99 0.75 7/1/1998 8/1/2005Fuji BBB+ 100 SDP 100 L+1.10 L+2.60Sakura BBB 100 SDP 100 L+1.20 L+2.70Sanwa A- 100 SD10 100 L+0.55 L+1.25Sumitomo A- 100 SDP 100 L+0.90 L+2.40Tokyo Mitsubishi A 100 SDP 100 L+0.90 L+2.40Asahi BBB+ 100 SLP 100 L+1.00 L+2.50Daiwa BBB- 100 SLP 100 L+2.70 L+2.70Tokai BBB+ 100 SDP 100 L+0.90 L+2.40Long-term Credit bankInd. Bank of Japan A- 100 SD10 100 L+0.55 L+1.25LTCB BBB- 177.6 CPS 130 1.00 10/1/1998 4/1/2008 SLP 46.6 L+2.45 L+3.95Nippon Credit Bank NR 60 CPS 60 1.00 10/1/1998 4/1/2018Trust banksMitsubishi Trust A- 50 SDP 50 L+1.10 L+2.60Sumitomo Trust A- 100 SDP 100 L+1.10 L+2.60Mitsui Trust BBB+ 100 SDP 100 L+1.45 L+2.95Chuo Trust NR 60 CPS 32 2.50 7/1/1998 8/1/2018 SLP 28 L+2.45 L+3.95Toyo Trust NR 50 SDP 50 L+1.10 L+2.60Regional BankBank of Yokohama BBB 20 SLP 20 L+1.10 L+2.60Hokuriku Bank NR 20 SLP 20 L+2.45 L+3.95Ashikaga Bank NR 30 SDP 30 L+2.95 L+4.45

1997/98 Capital Shortage and Credit Crunch in Japan

• BoJ minutes

• Tankan survey data

• Mix between CP and bank lending

• Regression evidence

10

Bank of Japan January 1998 minutes:

“Members noted that the current phase of the economy featured (1) a substantial decline in private consumption, ……; (2) a significant deterioration of confidence in the economic outlook ……, leading to amplified concern about the economy; and (3) a vicious circle created by interaction between the real economy and financial activity ……” The minutes go on to report that “the prospects for a more restrictive lending attitude of financial institutions and its possible effects were discussed in detail.” (emphasis in the original).

11

FOMC Oct 29, 2008 meeting: “[FOMC] Participants were concerned that the negative spiral in which financial strains lead to weaker spending, which in turn leads to higher loan losses and a further deterioration in financial conditions, could persist for a while longer.”

12

Accommodative ↑

Tight↓

13

14

March 1999 injections Preferred shares Subordinated debt/loansS&P

RatingTotal Type Amt div.

rateConversionstart date

Forced conversion

Type Amt yield after step-up

step-up date

Dai-ichi Kangyo BBB 900 CPS 200 0.41 8/1/2004 8/1/2006 SD10 100 L+0.75 L+1.25 4/1/2004CPS 200 0.70 8/1/2005 8/1/2008 SD11 100 L+0.75 L+1.25 4/1/2005NCPS 300 2.38

Fuji BBB+ 1,000 CPS 250 0.40 10/1/2004 2/1/2009 SDP 200 L+0.65 L+1.35 L+2.15

4/1/20044/1/2009

CPS 250 0.55 10/1/2006 2/1/2011NCPS 300 2.10

Sakura BBB 800 CPS 800 1.37 10/1/2002 10/1/2009Sanwa BBB+ 700 CPS 600 0.53 7/1/2001 8/1/2008 SDP 100 L+0.34 L+1.34 10/1/2004Sumitomo BBB+ 501 CPS 201 0.35 5/1/2002 2/27/2009

CPS 300 0.95 8/1/2005 2/27/2009Asahi BBB+ 500 CPS 300 1.15 7/1/2002 12/1/2009 SLP 100 L+1.04 L+2.54 4/1/2009

CPS 100 1.48 7/1/2003 12/1/2014Daiwa BB+ 408 CPS 408 1.06 6/30/1999 4/1/2009Tokai BBB- 600 CPS 300 0.93 7/1/2002 3/31/2009

CPS 300 0.97 7/1/2003 3/31/2009Industrial Bank of Japan

BBB+ 600 CPS 175 0.43 7/1/2003 9/1/2009 SDP 250 L+0.98 L+1.48 4/1/2004CPS 175 1.40 9/1/2003 9/1/2009

Mitsubishi Trust BBB 300 CPS 200 0.81 7/31/2003 8/1/2008 SDP 100 L+1.75 L+2.25 4/1/2004Sumitomo Trust BBB 200 CPS 100 0.76 4/1/2001 3/31/2009 SD12 100 L+1.53 L+2.03 4/1/2006Mitsui Trust BBB- 400 CPS 250.3 1.25 7/1/1999 8/1/2009 SLP 150 L+1.49 L+1.99 3/31/2004Chuo Trust NR 150 CPS 150 0.90 7/1/1999 8/1/2009Toyo Trust NR 200 CPS 200 1.15 7/1/1999 8/1/2009Bank of Yokohama BBB 200 CPS 70 1.13 8/1/2001 7/31/2009 SDP 50 L+1.65 L+2.15 4/1/2004

CPS 30 1.89 8/1/2004 7/31/2009 SL10 50 L+1.07 L+1.57 4/1/2004

Cross-section regression of new loan growth on capital ratio

15

Year Reported capital ratio Adjusted capital ratio

1995 .0047 (.0055) .0010 (.0026)

1996 .0148 (.0070) ** .0104 (.0045) **

1997 .0023 (.0038) .0026 (.0025)

1998 .0168 (.0039) *** .0156 (.0028) ***

1999 .0073 (.0053) .0119 (.0030) ***

2000 .0201 (.0080) ** .0177 (.0074) **

2001 .0014 (.0013) .0011 (.0012)

2002 .0007 (.0036) .0034 (.0019) *

2003 -.0046 (.0046) -.0042 (.0042)

2004 -.0028 (.0040) -.0027 (.0039)

2005 -.0022 (.0033) -.0017 (.0030)

16

Non-Performing Loans (Risk Management Loans): 1996-2008 (100 million yen)

How big was the problem in Japan? (All banks, ¥ billion)

17

End of Loan Losses Cumulative Loan Losses since 4/1992

Number of Major Banks

3/1994 3.872 5.512 21

3/1995 5.232 10.744 21

3/1996 13.369 24.113 20

3/1997 7.763 31.877 20

3/1998 13.258 45.135 20

3/1999 13.631 58.766 17

3/2000 6.944 65.710 18

3/2001 6.108 71.818 18

3/2002 9.722 81.540 15

3/2003 6.658 88.198 13

3/2004 5.374 93.572 13

3/2005 2.848 96.420 13

3/2006 0.363 96.783 11

3/2007 1.046 97.829 11

3/2008 1.124 98.953 11

≈19% of GDP

Economic fallout post-1998

• Banks gambling for reclamation through rolling over loans– Government pressure to lend especially to SMEs

• Zombie firms continuing receive credit

• Productivity slowdown in zombie infested sectors

18

19

Independent variable

Year Lag 1 Lag 4 Year Lag1 Lag4

Real estate loan 1998.348

(.083).312

(.065)2002

.242(.079)

.213(.069)

SMC loan.038

(.026).027

(.021).111

(.024).062

(.032)

Real estate loan 1999.653

(.174).684

(.165)2003

.141(.056)

.134(.059)

SMC loan-.021(.041)

-.051(.053)

.108(.018)

.083(.019)

Real estate loan 20001.534(.573)

1.132(.553)

2004.009

(.044).045

(.048)

SMC loan-.082(.114)

-.029(.108)

.101(.014)

.097(.017)

Real estate loan 2001.430

(.164).388

(.233)2005

.006(.054)

-.039(.054)

SMC loan.201

(.083).075

(.041).066

(.017).085

(.018)

Cross-section regression of NPL ratio

20

Year Lag 1 Lag 2 Lag3 Lag4

2001 -.1070(.0521)

-.0437(.0260)

-.0452(.0256)

-.0465(.0264)

2002 -.0213(.0240)

-.0128(.0218)

-.0079(.0130)

-.0107(.0142)

2003 -.0085(.0052)

-.0072(.0056)

-.0049(.0058)

-.0038(.0054)

2004 -.0158(.0054)

-.0142(.0043)

-.0083(.0034)

-.0126(.0054)

2005 -.0107(.0044)

-.0115(.0037)

-.0113(.0036)

-.0067(.0033)

Cross-section regression of bank profit rate on SME loans

21

70

80

90

100

110

120

80 82 84 86 88 90 92 94 96 98 00 02 04

MANUFACTURING NONMANUFACTURING

Total Factor Productivity by Industry: 1980-2002 (1995=100)

Overview of the Responses

Strategies adopted1. Asset management companies

2. Liquidation of Jusen

3. Protection of bank liabilities

4. Capital injections

5. Temporary nationalization of insolvent but systemic important banks

6. Takenaka plan

(Fiscal cost)

22

Name Dates (purchases)

Target Purchases Amount Spent (¥ Trillion)

Amount Collected (¥ Trillion)

Comments

Cooperative Credit Purchasing Co. (CCPC)

12/1992-3/2001

Non-performing loans with land collateral of contributing banks

5.8 (market ) [=15.4 book]

Bank financed, created tax benefits by buying loansLiquidated in 3/2004

Tokyo Kyodo Bank 1/1995-4/1999

Initially assets of failed credit unions, later assets of any failed banks

4.718 5.362 Reorganized as Resolution and Collection Bank (RCB) in 9/1996

Housing Loan and Administration Corp. (HLAC)

7/1996-4/1999

Loans of failed jusen (specialty housing loan companies)

4.656 (market) 3.233 Financed with mix of public and private money

Resolution and Collection Corp.

4/1999-6/2005

Combined RCB and HLAC, mandate extended to allow purchases of assets from solvent banks

0.356 (market) [=4.046 book] (beyond earlier HLAC and RCB spending)

0.649 Starting in 2001 also reorganized loans, ultimately involved in restructuring 577 borrowers

Industrial Revitalization Corp. of Japan

5/2003- 3/2005

Buy non-performing loans through 2005, restructure them within 3 years

0.53(market)[=0.97(book)]

NA[0.094 surplus as of 5/2007]

Restructured 41 borrowers with 4 trillion total debtClosed in 5/2007

1. Asset Management Companies

23

24

2. Jusen (background)• Specialized housing finance companies created in the

1970s to provide mortgage financing• In the 1980s, banks (founders of jūsen) started to enter

home mortgage business as they started to lose their traditional customers to capital market

• Jūsen started to lend more to real estate developers• Land price boom intensified the trend• Increasing fund coming from agricultural coops • Non-performing loans of ¥4.6 trillion (38% of total loans)

in 1991

25

2. Liquidation of jusen

• Government led (optimistic) restructuring plans in 1991 and 1993 failed

• By 1995, 75% of loans non-performing (60% completely unrecoverable), leverage > 150

• Write-off of ¥6.41 trillion (¥3.50 trillion by the founder institutions; ¥0.53 trillion by the agricultural coops; ¥1.70 trillion by the other lenders; ¥0.68 trillion by the taxpayers)

• The remaining assets (¥6.6 trillion) transferred to Jūsen Resolution Corporation

• Public anger over the taxpayer cost led to politicians to tread slowly in subsequent bailouts

26

3. Full protection of bank liabilities

1996 ¥10 million limit on deposit insurance (per account) was lifted (to expire on 03/2001)

1997 (Nov.) BOJ and MOF reiterated the full protection of deposits and announced “security” of interbank loans

1998 Bank liabilities were protected when LTCB and NCB were nationalized

2000 Expiration date of the assistance that exceeds the “pay-off costs” moved to 03/2002

27

5. Temporary nationalization

Financial Reconstruction Act of 1998• Weak banks were allowed to apply for nationalization• Long-term Credit Bank asked to be nationalized (Oct

1998) approved• FRC forced nationalization of Nippon Credit Bank

(Dec 1998)• Several failed regional banks put under receivership

(1999-2001)

DateOfficial

Core capital

DeferredTax

Assets

EstimatedUnder-

reserving

Modified Capital

Capital held by gov’t

BankAssets

Capital Gap

A B C D=A-B-C E F G=0.03*F-DMar-96 27.9 0.0 NA 27.9 0.0 846.5 -2.5Mar-97 28.5 0.0 15.0 13.5 0.0 856.0 12.2Mar-98 24.3 0.0 4.9 19.4 0.3 848.0 6.0Mar-99 33.7 8.4 4.0 21.3 6.3 759.7 1.5Mar-00 35.6 8.2 5.8 21.6 6.9 737.2 0.5Mar-01 37.6 7.1 7.5 23.0 7.1 804.3 1.1Mar-02 30.2 10.6 6.8 12.8 7.2 756.1 9.9Mar-03 24.8 10.6 5.4 8.8 7.3 746.3 13.6Mar-04 29.0 7.2 5.7 16.1 8.9 746.7 6.3Mar-05 31.4 5.7 6.9 18.8 8.1 745.9 3.6Mar-06 37.3 2.3 8.3 26.7 5.2 766.9 -3.7Mar-07 40.0 1.3 9.4 29.4 3.5 761.1 -6.5Mar-08 34.8 3.6 10.2 21.0 3.1 780.7 2.4

28

Crude evidence on forbearance

1. Have banks make more rigorous evaluation of assets using discounted expected cash flows or market prices of non-performing loans

2. Check cross-bank consistency in classifying loans to large debtors

3. Publicize the discrepancy between the banks’ self evaluations and the FSA’s evaluations

4. Be prepared to inject public funds if necessary

5. Prohibit banks from declaring unrealistically large deferred tax assets

6. Impose business improvement orders for banks that substantially underachieved the revitalization plans.

Takenaka Plan

29

30

Capital Evolution for Japanese Banks 2003 to 2007 (¥ trillion)

March-07 March-03 ChangePercent

contribution to change

Official Capital 40.0 24.8 15.2 100.00%

Common stock 9.3 10.2 -0.9 -6.13%

Capital surplus 8.7 8.6 0.1 0.39%

Retained earnings 13.4 4.4 9.0 59.07%

Net unrealized gains on stocks and others 8.2 0.1 8.1 53.25%

Revaluation reserve for land 1.0 1.5 -0.6 -3.70%

Net deferred gains on hedging instruments -0.3 0 -0.3 -2.07%

Note: Some small components have been omitted and because of this and rounding columns may not sum to totals.

31

Cumulative

(3/04-7/03)

March-07

March-06

March-05

March-04

March-03

Difference

(3/07-3/04)Net income 8.1 3.4 4.2 1.3 -0.8 4.2

Operating profits 11.5 4.3 4.8 1.9 0.5Extraordinary profits - Extraordinary losses

2.8 0.4 1.2 0.7 0.5

Operating income 19.2 18.0 16.9 17.6 1.6Operating expenses 14.9 13.3 15.0 17.0 -2.2

Unrealized capital gains 8.2 6.8 3.7 3.1

Nikkei 225 17,287 17,059 11,688 11,715 7,973GDP growth (% change from one year earlier)

1.7 2.5 2.4 2.0 2.1

Profit Decomposition for Japanese Banks 2004-2007 (¥ trillion)

Japan’s eventual macroeconomic recovery

32

33

Export-led recovery (contributions to growth, %)

Assistance Recovery

Monetary grants 18,868

Assets purchase 9,778 9,672

Capital injection 12,427 10,539

Others 5,995 4,861

Total 47,068 25,072

Fiscal Cost (FDIC financial assistance and recovery, Sept. 2008, ¥ billion)

34

Net : ¥21,996 billionJusen resolution: ¥ 680 billionLoss compensation for RCC: ¥ 292 billion

Total: gross ¥48,040 billion (about 9.6% of GDP)net ¥22,968 billion (about 4.6% of GDP)

Lessons1. Banks may refuse public funds (fear of signaling troubled situation; creation

of claims senior to the existing shares)

2. Buying troubled assets alone is not likely to solve the capital shortage. Assets purchase program must be combined with recapitalization program – could be privately funded.

3. Programs must be big enough.

4.  Programs must be preceded by rigorous inspection (to determine the size of the problem)

5. Troubled assets purchased by AMCs should be put back into the private sector or restructured swiftly.

6. Nationalization can be useful to wind down systemically important banks.  

7. Targeting total lending or lending to specific sectors can be counter-productive.

8. Recapitalization ultimately driven by macroeconomic recovery

35

Conclusions

• Asking the banks to “earn their way out” of the capital shortage is a gamble

• Politics can be very difficult if more money is needed– Is GM the largest zombie ever?

• Too early to declare “mission accomplished”

36

Extra slides

37

38

JPM Wachovia Bank of America State Street Wells Fargo$ Billions Bank % assets Bank % assets Bank % assets Bank % assets Bank % assetsLevel 2          Loans and leases 1.5 0.1% 0.0 0.0% 4.2 0.2% 0.0 0.0% 12.1 2.1%Trading assets 1336.0 53.6% 98.6 14.5% 668.4 38.7% 20.0 6.8% 10.0 1.8%Other financial assets 22.8 0.9% 0.0 0.0% 2.6 0.2% 0.1 0.0% 0.0 0.0%

Level 3          Loans and leases 5.9 0.2% 0.0 0.0% 7.6 0.4% 0.0 0.0% 5.1 0.9%Trading assets 65.4 2.6% 12.3 1.8% 11.0 0.6% 1.1 0.4% 0.4 0.1%Other financial assets 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0%

         Total Assets 2490.8 100.0% 680.8 100.0% 1728.6 100.0% 296.3 100.0% 569.3 100.0%

Citigroup Morgan Stanley Goldman Sachs Bank of NY$ Billions Bank % assets Bank % assets Bank % assets Bank % assetsLevel 2        Loans and leases 9.9 0.6% 7.2 19.0% 0.5 2.1% 0.0 0.0%Trading assets 676.3 37.9% 5.6 14.8% 7.6 34.9% 8.9 3.7%Other financial assets 0.1 0.0% 0.0 0.0% 8.2 38.1% 0.0 0.0%

Level 3        Loans and leases 0.1 0.0% 2.5 6.6% 1.0 4.8% 0.0 0.0%Trading assets 58.0 3.3% 0.0 0.0% 0.0 0.0% 0.1 0.1%Other financial assets 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0%

       Total Assets 1783.3 100.0% 37.6 100.0% 21.6 100.0% 238.8 100.0%

Source: Call Reports as of Sep 30 2008

Hard to value assets in the trading book of JPM, Bank of America and Citi exceeds $2.5 trillion

Data as of September 2008 (except Morgan Stanley and Goldman Sachs as August) Exposure to

NameTotal

AssetsTotal

Commitments Lending Real EstateCredit Card

Other Consumer

Equity/ Assets

Max Dividend Payout

JPMORGAN CHASE 2,251.5 1,223.6 57.8% 19.2% 25.3% 1.8% 6.5% 5.67BANK OF AMERICA 1,836.5 1,423.1 73.3% 29.4% 28.8% 3.0% 8.8% 5.84MERRILL LYNCH 875.8 123.7 20.0% 8.8% 0.0% 0.5% 4.4% 2.22STATE STREET CORP 286.7 50.9 20.3% 7.4% 1.1% 2.7% 4.6% 0.41CITIGROUP 2,050.1 1,560.0 65.0% 12.4% 32.9% 4.3% 6.1% 3.49BANK OF NY MELLON 267.6 45.5 33.4% 9.9% 0.2% 0.4% 10.3% 1.10WELLS FARGO (incl. Wachovia) 1,382.9 476.9 75.5% 45.7% 6.2% 5.2% 7.0% 4.52MORGAN STANLEY 987.4 162.0 15.8% 21.9% 0.0% 0.0% 3.6% 1.20GOLDMAN SACHS 1,081.8 78.5 9.3% 8.3% 0.0% 0.0% 4.2% 0.55

TOTAL 11,020.3 5,144.3 54.5% 21.1% 19.3% 2.6% 6.3% 25.0Note: Combined Merrill Lynch and Bank of America 2,712.2 1,546.8 60.8% 24.5% 22.0% 2.4% 7.4% 8.1

Selected Data on Major Institutions Participating in the TARP ($ billion)

39

40

Percent of Japanese Bank Loans Less than 1.5%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

1992 1994 1996 1998 2000 2002 2004 2006 2008

Raw Percentage

0

5

10

15

20

25

30

35

40

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

(%)

41

Asset-weighted Percentage

0

2

4

6

8

10

12

14

16

18

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

(%)

Zombies defined as firms getting subsidized creditThe sample is listed firms in manufacturing, construction, real estate, retail and wholesale (other than the nine largest general trading companies), and services

42

Zombies Hurt Non-Zombies

ijt t j

ijt jt

ijt jt ijt

Activity = constant + α year + δ industry

+ non-zombie + industry zombie%

+ non-zombie *industry zombie% +

Employment growth or Investment

43

Zombie’s Hurt Non-Zombies

Dependent Variable I/K ΔLog E

Sample 1993-2002

1993-2002

Constant 0.239(0.008)

0.014(0.002)

Non-Zombie Dummy 0.026(0.006)

0.0011(0.0018)

Industry Zombie % -0.137(0.038)

-0.045(0.012)

Non-Zombie * Industry Zombie% -0.089(0.033)

-0.023(0.010)

0.054 0.0902R

44

Cross-industry incidence of zombies

All Firms

-10

10

30

50

19811983

19851987

19891991

19931995

19971999

2001

%

Crisp

Fuzzy with (d1, d2) = (0, 50bp)

Fuzzy with (d1, d2) = (-25bp, 75bp)

All Firms

0

10

20

30

40

50

60

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

%

Manufacturing

0

10

20

30

40

50

60

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

%

Construction

0

10

20

30

40

50

60

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

%

Real Estate

0

10

20

30

40

50

60

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

%

Trade

0

10

20

30

40

50

60

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

%

Services

0

10

20

30

40

50

60

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

%

45

Selected Data on Major Japanese Banks (¥ million, 1998)

46

Exposures toBank total assets total loans Loans Real

EstateConstruction

Financial SMC capital/asstot

Dividends

IBJ 45,140,863 19,821,427 43.91% 5.44% 1.12% 8.09% 19.10% 2.36% 21586LTCB 26,190,005 14,639,649 55.90% 10.32% 1.52% 14.14% 25.86% 3.01% 14356NCB 12,659,064 7,678,561 60.66% 19.47% 2.25% 15.89% 37.20% 3.69% 0Daiichi Kangyo Bank 53,798,398 26,759,298 49.74% 6.07% 2.68% 4.10% 34.57% 2.68% 26527SAKURA BANK 51,650,386 29,303,132 56.73% 8.97% 3.08% 5.28% 40.04% 2.51% 32337Fuji Bank 51,088,094 23,442,092 45.89% 4.45% 2.14% 4.15% 34.76% 2.23% 25154ASAHI BANK 29,267,330 17,772,993 60.73% 7.17% 3.74% 2.98% 46.48% 2.58% 14437Sanwa Bank 52,708,359 24,247,237 46.00% 6.81% 1.98% 4.04% 35.73% 2.73% 24742SUMITOMO Bank 58,076,795 28,530,373 49.13% 6.89% 2.73% 3.78% 36.46% 1.96% 26698Daiwa Bank 16,740,731 10,730,139 64.10% 13.40% 3.52% 6.72% 45.28% 2.84% 10910TOKAI BANK 31,943,567 17,126,825 53.62% 7.55% 3.06% 4.96% 36.01% 2.44% 20684ASHIKAGA BANK 5,933,298 4,543,205 76.57% 6.13% 7.26% 3.61% 58.31% 2.38% 3110BANK OF YOKOHAMA 11,258,367 7,884,623 70.03% 9.37% 4.70% 4.61% 51.70% 2.45% 5688HOKURIKU BANK 6,619,220 4,838,597 73.10% 6.72% 8.00% 2.50% 52.91% 2.79% 1372MITSUI TRUST 12,056,928 8,960,108 74.32% 13.16% 2.45% 11.29% 35.43% 3.27% 5992MITSUBISHI TRUST 18,158,026 11,279,843 62.12% 10.65% 2.10% 11.35% 26.23% 2.70% 10418Toyo TRUST 8,154,838 7,117,605 87.28% 17.96% 2.48% 18.92% 42.92% 3.48% 5506CHUO TRUST 3,704,007 3,591,357 96.96% 18.32% 1.87% 20.18% 54.30% 4.89% 1383SUMITOMO TRUST 15,643,662 11,186,519 71.51% 12.92% 2.38% 13.98% 31.55% 2.44% 9952Total 510,791,938 279,453,583 54.71% 8.16% 2.63% 6.48% 35.65% 2.57% 260,852

47