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Document Type

Case Study

Abstract

During the international financial turmoil associated with the Global Financial Crisis, Japan’s financial institutions remained relatively sound because their exposure to overseas structured credit products was limited. Restructuring in the aftermath of Japan’s own banking crisis in the late 1990s also contributed to making Japanese banks resilient to external shocks. Nonetheless, Japanese banks’ profitability was at risk. Due to the large amount of stockholdings, major banks had large market risks which might significantly worsen their capital ratios. The increasing volatility of stock prices could make banks conscious of capital constraints in the future and could trigger an adverse feedback loop between the financial system and the economy. Against the downside risks, on March 17, 2009, the Bank of Japan (BOJ) announced a new framework to provide subordinated loans to major banks that were subject to international capital standards as a safeguard. The framework was formally established at a regular meeting of the Policy Board of the BOJ on April 10, 2009. Four auctions were held under the framework, but only one bank made a bid. Reflecting the improvement of market conditions, the framework ended by the end of March 2010 as planned at the launch. The scheme was completed when the bank fully repaid its ¥20 billion ($209 million) loan on the earliest day allowed under the contract.

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