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Capital positions of Japanese banks

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

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.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 572.

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Date of creation: 31 Jan 1991
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Handle: RePEc:wbk:wbrwps:572

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Keywords: Banking Law; Financial Crisis Management&Restructuring; Banks&Banking Reform; Financial Intermediation; Economic Theory&Research;

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References

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  1. 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, Cambridge University Press, vol. 24(01), pages 59-74, March.
  2. Portes,, 1987. "Threats to International Financial Stability," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521347891.
  3. 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.
  4. Edward J. Kane & Haluk Unal, 1988. "Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms," NBER Working Papers 2693, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.
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Cited by:
  1. 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.
  2. 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.

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