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Characteristics of the UK & Japanese Financial Systems

Characteristics of the UK & Japanese Financial Systems. Daniel Cavanagh Rajashree Jena Matthew Pittman Gerardo Vigueras Sabrina Wu Masatoshi Watanabe Jen Jeng. Where do financial systems fit in?. How do businesses innovate? Dependent on: Technological characteristics of industry

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Characteristics of the UK & Japanese Financial Systems

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  1. Characteristics of the UK & Japanese Financial Systems Daniel Cavanagh Rajashree Jena Matthew Pittman Gerardo Vigueras Sabrina Wu Masatoshi Watanabe Jen Jeng

  2. Where do financial systems fit in? • How do businesses innovate? • Dependent on: • Technological characteristics of industry • Social institutions (educational, legal and financial) in which it operates • Fundamental conditions: • Organizational Integration • Financial commitment • Creates norms governing how enterprises make strategic decisions

  3. USERS USERS SAVINGS INVESTMENTS Transformed USERS USERS USERS Financial Systems

  4. Financial Systems main Concepts Intermediary Broker/Agent Not Bank Financial Institution Bank Financial Institution Primary Market Secondary Market

  5. Broker/Agent Mechanism of Exit Mechanism of Voice

  6. How can we classify various Financial Systems • Financial Systems vary on three dimensions: • The importance of different markets in shifting resources from saving to investments • Capital markets, Loans or Credits • The way prices are set • Unfettered markets • Institution Dominated • Government Establishes Prices • The roles played by governments • Direct or Indirect?

  7. Three Models of Finance • The result is a spectrum of financial models across nations • Capital market-based (e.g.. US and UK) • Security issues are the main source of funds • Credit-based system (e.g.. France) • With government administered pricing • Credit-based system (e.g.. Germany and Japan?) • Where a limited number of institutions dominate • Not dependent on the state • Recent trends: Internationalisation of the banking system

  8. The Financial Systems The UK Japan

  9. UK Financial System • No major changes since the 19th Century • Capital market based financial system • Stocks and bonds main source of long-term industrial funds • Role of the state: • Limited (Intervention in corporate affair required legislative authorisation) • Role of the Central Bank: • Concerned with control of monetary aggregate – not involved in the allocation of resources

  10. 9i UK Financial System • External Source of capital: • Privatisation program, Mass public ownership • Tax Efficient Saving Plans – ISA’s & Pep’s • Employee Share Ownership • Assets Priced by: • Moderately efficient market • Small Capitalised companies “ignored” • Capital allocation: • By market - seeking highest return • Extremely short term & volatile • Liquidity of the market: • High • Significance of market: • High – FTSE 100 quoted on the main evening news!!

  11. Consequences of Financial Systems • Bank Equity Ownership: Low • Clearing Banks • Venture Capital • Control of Equity: • Short-term • Venture capital  predetermined exit strategy in 3-5 years • Primary Function of intermediaries: • Portfolio holdings • Fund raising • Bank and firms interdependency: • Arm’s length relationship

  12. Consequences of Financial Systems • Standardised financial Accounting system: • Issue of FRS and SSAP - compulsory adoption • Knee-jerk reaction following financial scandals : • Polly-Peck – FRS 3 Financial Performance • Maxwell – Pension Regulations • Barings Bank – FRS 4 Capital Instruments • Power of finance function: • Role of finance director  second to MD • Importance of internal budgets for control • Importance of external forecast (profit warnings)

  13. Impact on business strategy Internal • Shareholder wealth maximisation • Neither shareholders or banks are involved in the management of the company • Shareholders control over top management is weak External • Easy to reallocate investment - lack of stability in ownership • Transition from manufacturing to service oriented • Work force more interested in personal financial gains than long term commitment

  14. Financial Service Agency (FSA) Ministry of Finance (MOF) Bank of Japan monitoring Yen City Bank Mizuho, SMBC, UFJ, Mitsubishi-Tokyo, etc Regional Banks (64 banks) Development Bank of Japan (DBJ), etc Special Purpose Bank Shinsei Bk, Aozora Bk. Developing industry (Big project, Infrastructure building, small/medium size business support) Toshiba, Toyota, etc. City banks (Across the Japan Island) Regional Banks (Region specific) Structure of Japanese Financial System State Firms

  15. Bank loans • Bond issue related services • Payment settlement accounts • Supply of information & resources Relationship between banks and firms under “Main Bank” system Stylized facts of a main bank Main Bank(s) • Largest lender of bank loan • Largest shareholder (among banks) • Long-term stable business relationship • Personnel exchange • Monitor/business adviser Firms Functions Other Banks

  16. Zaibatsu(財閥) <Pre-WW2> Iwasaki Family Capital Holding Company Direct control Heavy Industry Bank Trading Shipbuilding Main Bank System: How it started(Historical Background) • Dispersion of shareholder • Take-over ⇒ instability • Reconstruction ⇒funding needs Dissolving a Zaibatsu

  17. Iwasaki Family Capital Holding Company Direct control Heavy Industry Bank Trading Shipbuilding Main Bank System: How it started Keiretsu(系列)<Post-WW2> Take-over prevention  crossholding of equity shares Easy Funding - Bank loan • Dissolving a Zaibatsu • Dispersion of shareholders • Take-over ⇒ instability • Reconstruction ⇒funding needs Zaibatsu(財閥) <Pre-WW2> Firm B Firm A Share holding funding Bank Firm C Firm D *Main bank system *Group banding thru cross share holding

  18. Positive Strong Relationship Banks can rescue critical firm or vice versa Long-term Relationship Free from intervention from outsider ( cross share holding) Common consensus(Long-term plan;low dividend) Ex ante/ interim/ post monitoring Negative If the partner is in trouble the other will be affected Lock-in Leads inefficiency Shareholder power diminished dysfunction of monitoring Impact of Main Bank system on firm strategy

  19. Current Conditions Diversification of Funding Resources (main bank function reduced) Dissolution of cross holding of equity share Globalization Deregulation Growing competition Future Vision Firms shareholder-oriented (⇒Anglo-Saxon model?) More efficient operation -- release from banding New collaborations beyond the traditional Keiretsu Vetted by bank Financial sector Further integration / rationalization Creating new business chances: e.g. IT investment Current condition & Future vision

  20. Summary

  21. Got questions?

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