Capital positions of Japanese banks

Edward Kane, Haluk Unal and Asli Demirguc-Kunt

No 572, Policy Research Working Paper Series from The World Bank

Abstract: Japanese banks are promising sources of capital for developing countries wishing to finance a balance of payments gap. This paper shows that Japanese banks are highly capitalized in terms of market value; much of their capital is"hidden capital,"the divergence between accounting and stock market estimates. The authors developed a method for testing hypotheses about two types of hidden capital: the misvaluation of on-balance-sheet items and intangible values that the General Accepted Accounting Principles (GAPP) currently designates to be unbookable off-balance-sheet items. They construct a model that explains changes in both types of capital functions of holding-period returns earned in Japan on stocks, bonds, yen, and real estate. They apply the model to annual data for 1975-89 and a four-class size/charter participation of the Japanese banking system. For each type of hidden capital and each class of bank, the model develops estimates of the stock market, interest rate, foreign exchange, and real estate sensitivities of returns to bank stockholders. Only the stock market sensitivities prove significant, at 5 percent. Time-series regressions show that the large Japanese banks have developed stock market betas over two and that the value of the bank's beta has come to increase with measures of its size and accounting leverage.

Keywords: Banking Law; Financial Crisis Management&Restructuring; Banks&Banking Reform; Financial Intermediation; Economic Theory&Research (search for similar items in EconPapers)
Date: 1991-01-31
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Capital positions of Japanese banks (1990)
Working Paper: Capital Positions of Japanese Banks (1990)
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