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Impact of operating and balance sheet performance of Japanese international banks on bank safety levels and risk ratings

  • J. Evans
  • J. Simpson
  • A. A. Mahate
  • R. Evans

Using a simultaneous equation model initially developed by Shrieves and Dahl this article shows that Japanese banks in comparison to European banks, have focused on factors other than those that impact on bank safety levels. This has left Japanese banks in a vulnerable position with respect to levels of non-performing loans and indicates that less attention has been paid to prudent credit risk assessment and management practices. Recent events and actions initiated by the Japanese government suggests that Japanese banks are in crisis in terms of their dangerously large burden of non-performing loans. The broad objective of this study is to demonstrate that the attention of any healthy and safe banking system needs to be focused on operating and balance sheet fundamentals. Focus needs to be on maximization of earnings, determination of the appropriate level of financial risk, careful management of expenses and the optimisation of bank size in a deregulated, competitive environment where prudent lending criteria are applied.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0960310042000233890
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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 14 (2004)
Issue (Month): 8 ()
Pages: 599-610

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Handle: RePEc:taf:apfiec:v:14:y:2004:i:8:p:599-610
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  1. Jacques, Kevin & Nigro, Peter, 1997. "Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach," Journal of Economics and Business, Elsevier, vol. 49(6), pages 533-547.
  2. Loughran, Tim & Ritter, Jay R, 1997. " The Operating Performance of Firms Conducting Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 52(5), pages 1823-50, December.
  3. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  4. Tolga Ediz & Ian Michael & William Perraudin, 1998. "The impact of capital requirements on U.K. bank behaviour," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 15-22.
  5. Wall, Larry D. & Peterson, David R., 1990. "The effect of Continental Illinois' failure on the financial performance of other banks," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 77-99, August.
  6. Shrieves, Ronald E. & Dahl, Drew, 1992. "The relationship between risk and capital in commercial banks," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 439-457, April.
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