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Capital Positions of Japanese Banks

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  • Edward J. Kane
  • Haluk Unal
  • Asli Demirguc-Kunt

Abstract

This paper measures and analyzes two types of hidden capital at Japanese banks: (1) the net undervaluation present in accounting measures of on-balance-sheet assets and liabilities and (2) the net economic value of off-balance-sheet items. A model is constructed that explains changes in both types of capital as functions of holding that explains changes in both types of capital as functions of holding-period returns earned in Japan on stocks, bonds, yen, and real estate. The model is applied to annual data covering 1975-1989 and a four-class size/charter partition 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 five percent. This finding leads us to investigate what happens when we analyze Japanese bank stock returns by means of stationary and split-sample market models. Timeseries regressions show that very large Japanese banks have developed stockmarket betas in excess of two and that the value of a bank's beta has come to increase with measures of its size and accounting leverage. Future research will investigate the sensibility of our results to different ways of pooling data from individual banks and to more-sophisticated methods for estimating various parameters. We also plan to extend the analysis by imbedding it in a model of how variations in bank-customer contracting arrangements in Japan affect the returns that can be earned by bank stockholders.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3401.

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Date of creation: Jul 1990
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Publication status: published as Edward J. Kane & Haluk Unal & Asli Demirgüç-Kunt, 1990. "Capital positions of Japanese banks," Proceedings, Federal Reserve Bank of Chicago, pages 509-535.
Handle: RePEc:nbr:nberwo:3401

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References

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  1. Kane, Edward J & Unal, Haluk, 1990. " Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 45(1), pages 113-36, March.
  2. Chang, Eric C. & Pinegar, J. Michael, 1989. "Seasonal Fluctuations in Industrial Production and Stock Market Seasonals," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(01), pages 59-74, March.
  3. Reinganum, Marc R., 1981. "Misspecification of capital asset pricing : Empirical anomalies based on earnings' yields and market values," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(1), pages 19-46, March.
  4. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships," NBER Working Papers 3079, National Bureau of Economic Research, Inc.
  5. Portes,, 1987. "Threats to International Financial Stability," Cambridge Books, Cambridge University Press, number 9780521347891, 9.
  6. Pettway, Richard H & Tapley, T Craig & Yamada, Takeshi, 1988. "The Impacts of Financial Deregulation upon Trading Efficiency and the Levels of Risk and Return of Japanese Banks," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 23(3), pages 243-68, August.
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Cited by:
  1. Koch, Timothy W. & Saporoschenko, Andrew, 2001. "The effect of market returns, interest rates, and exchange rates on the stock returns of Japanese horizontal keiretsu financial firms," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 11(2), pages 165-182, April.
  2. Saporoschenko, Andrew, 2002. "The sensitivity of Japanese bank stock returns to economic factors: An examination of asset/liability differences and main bank status," Global Finance Journal, Elsevier, vol. 13(2), pages 253-270.

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