Interesting to watch as Japanese financial authorities look around the globe for models by which to fashion a bank rescue policy of their own.
We've watched and speculated in this column recently as Swedish officials have gently urged their experience upon the Ministry of Finance.
Now it's confirmed. Diplomats and bankers familiar with the matter tell me the MOF has been avidly studying not just the Swedish bank rescue model but also -- with even more interest -- the Finnish method of rescuing their troubled banks back in the 1990s. Haruhiko Kuroda, vice minister for international affairs at MOF, was in Helsinki for several days of talks in mid-March, they tell me.
Heizo Takenaka, Japan's minister for economics and fiscal policy, even planned to spend his Golden Week holidays talking to the Finns. That would have landed him in Helsinki last weekend, but the trip was canceled at the last moment due to delays in securing the required permission for the journey from the Diet.
All roads are now pointing the same way: One way or another, the MOF is apparently preparing for some form of government intervention and temporary nationalization where necessary in order to solve the lingering problem of non-performing loans.
That is what the Nordics have on offer by way of a solution.
Fasten your seatbelts, then: It could be an interesting summer.
The distinction between the Swedish and Finnish rescue models is subtle but important. Helsinki came up with a path out of their problems that was more expensive but also more pragmatic than Stockholm's, less given to legal rigor and more to informal understandings. There's a better way to say this: The Finnish model is far more suited to Japanese sensibilities and Tokyo's Confucian bureaucratic style.
There's nothing too surprising about the causes of Finland's early-1990s crisis. Lending got out of hand at banks with weak management structures and asset values bubbled. A fixed rate of exchange for the Finnish markka attracted huge capital imports, exacerbating what became known as "the casino economy." Rising debt and a tightening monetary policy had begun to make things look wobbly when the coup de grace arrived: The Soviet economy's collapse in 1991 deprived Finland of its largest market.
All the major institutions suffered, none more than the savings banks. The first nationalization came in 1991; the two largest commercial banks merged in 1995.
Apart from direct state intervention, parliament required the government to guarantee all bank commitments without exception.
The majority of bad assets went to a state-owned asset-management company and the rest to Bank of Finland. Banks still operating were offered capital subsidies of 8 billion Finnish markkas (US$1.24 billion) and received additional support by way of increased market share when the government sold them equal shares of the viable assets of shuttered savings banks.
Capital losses, paid by the government and the banks combined, were calculated on a variety of bases, but they came to roughly a fifth of total bank lending at the start of the crisis.
That translates into about 18 percent of gross domestic product, which makes Finland's crisis a third larger than Sweden's and the largest among the Nordic countries.
Now what about these models? Well, Finland's is similar to Sweden's in some respects. Government guarantees were extended, transfers of bank ownership were kept to a minimum, and restructuring in the sector was limited to banks requesting official support. Finland, like Sweden, averted a major capital crisis.
But it's the differences that make Japan's interest in the Finnish case so telling. The Finns missed some of the lessons Sweden applied: the value of speedy action, the value of a transparent assessment of a troubled bank's actual condition, the value of fixed timetables in identifying and disposing of the problems. They also put most of the burden on taxpayers: Government commitments in Finland were 60 billion markkas, plus an additional 30 billion markkas in guarantees, compared with 10 billion markkas for the banks and their shareholders. (The markka has now given way to the euro.) If the keynote in Stockholm was order, procedure, and transparency, in Helsinki it was pragmatism. The Finnish government made minimal use of enabling legislation, and there was no organization equivalent to Sweden's Bank Support Authority, a politically independent body set up to manage the crisis. Indeed, the Finns decided that the rescue process must remain political in nature because so much public money was involved.
Support for the banks, in the Finnish case, was doled out in stages, and the whole procedure went forward on a case-by-case basis. Again, this was widely at variance with the Swedish approach, which was strictly regimented in order to preserve confidence in domestic and international markets. Helsinki's strategy was, by contrast, minimalist. One consequence of this was that banks were allowed to delay recognizing losses; no great steps were taken to strengthen surviving banks.
Have any bells gone off yet? A few should. In essence, the MOF appears to be impressed with the Swedish model but desirous of a more Asian version of it. The Finnish model may look rough around the edges by comparison, but what attracts the Japanese is that it is flexible, less given to law than practice and understandings, and it preserves the bureaucratic prerogative -- something close to sacred at the MOF.
Swedes, as a friend points out, have developed a very exportable bank rescue model -- they could bottle it and ship it abroad, more or less. The Finns didn't. Theirs is less Teutonic and more Asiatic in character, which can't be a surprise if you have a map handy. It's a special taste, like that East-meets-West cuisine one finds here and there in Tokyo. And it seems to appeal to the Japanese.
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