Chained Financial Failures at Nation-wide Scale in Japan Yoshi - PowerPoint PPT Presentation

Chained Financial Failures at Nation-wide Scale in Japan Yoshi Fujiwara Graduate School of Simulation Studies, University of Hyogo, Kobe Hideaki Aoyama Graduate School of Sciences, Kyoto University, Kyoto Yoshi Fujiwara | ETH Zurich | 20120911 1

collaboration / discussion with Yuichi Ikeda, Hiroshi Iyetomi, Wataru Souma Giulia De Masi, Mauro Gallegati, Bruce Greenwald, Joseph E. Stiglitz Stefano Battiston, Michelangelo Puliga, Rahul Kaushik partially supported by FP7 FOC funding for Kyoto node Yoshi Fujiwara | ETH Zurich | 20120911 2

Interbank Banks Banks-Firms credit Firms Firms’ credit on supplier-customer NW Yoshi Fujiwara | ETH Zurich | 20120911 3

0.2K #Banks Distress propagation on Banks-Firms credit 2M #Firms Distress propagation on Supplier-Customer NW Yoshi Fujiwara | ETH Zurich | 20120911 4

Banks-firms Credit NW Credit network between banks and firms = bipartite graph with weights = amount of credit Yoshi Fujiwara | ETH Zurich | 20120911 5

Distress propagation between banks and firms : level of bank ’s financial distress banks corresponding to  shrinking amount of supplied credit  increasing interest-rate  shortening the due time of repayment : level of firm ’s financial distress firms causing  delaying repayment to banks  default / bankruptcy Yoshi Fujiwara | ETH Zurich | 20120911 6

Data  firms: listed in Japanese stock-exchange markets covering large firms  based on financial statements & surveys by Nikkei, Inc.  short-term + long-term borrowings from financial institutions  banks: commercial banks are selected long-term and city banks regional (primary/secondary) trust banks insurance companies others (credit associations, agricultural, Shoko Chukin) Yoshi Fujiwara | ETH Zurich | 20120911 7

Firms’ debt from banks (trillion yen) ~160T yen #L-firms= 1.25% #S-firms= 98.75% Large: capitalized at 100M yen or more Small-Medium: otherwise Source: Small & Medium Enterprise Agency (2008) Yoshi Fujiwara | ETH Zurich | 20120911 8

 annual snapshots: from 1980 to 2005  bankrupted or merged banks included; #banks ~ 230  surviving firms included; #firms ~ 2,000 Yoshi Fujiwara | ETH Zurich | 20120911 9

A small fraction of firms account for nearly all loans due to long-tailed distribution of debt. Cumulative PDF Listed firm’s debt Yoshi Fujiwara | ETH Zurich | 20120911 10

And similarly for long-tailed distribution of banks’ lending amount. Cumulative PDF city regional trust insurance others Bank’s lending Yoshi Fujiwara | ETH Zurich | 20120911 11

MST: closer banks have similar lending Regional banks Regional banks City and metropolitan banks Yoshi Fujiwara | ETH Zurich | 20120911 12

City and metropolitan banks Tokyo Mitsubishi UFJ Mizuho MitsuiSumitomo Risona Yoshi Fujiwara | ETH Zurich | 20120911 13

Regional banks Banks in Tohoku region Banks in Hokkaido and Northern regions Yoshi Fujiwara | ETH Zurich | 20120911 14

Regional banks Banks in Chubu region Banks in Kinki region Yoshi Fujiwara | ETH Zurich | 20120911 15

- bank supplies credit in anticipation of interest margin - firm uses credit as a source of financing in anticipation of growth in its business  edge of credit = dependency of one agent on the other a same amount of credit has different importance to bank and firm Yoshi Fujiwara | ETH Zurich | 20120911 16

Dependency or Relative Exposure total lending bank on firm banks propagation Distress firms Yoshi Fujiwara | ETH Zurich | 20120911 17

Dependency or Relative Exposure total borrowing firm on bank banks propagation Distress firms Yoshi Fujiwara | ETH Zurich | 20120911 18

(1) Eigenvector Approach banks’ distress = solution of eigenvalue problem Yoshi Fujiwara | ETH Zurich | 20120911 19

propagation of fragility-profile without trivial-mode expand by eigen-modes larger eigenvalues ~ more robust modes Yoshi Fujiwara | ETH Zurich | 20120911 20

 strong peak in the late 80s  drop in 1990  peaks in 1992 and 1997 Yoshi Fujiwara | ETH Zurich | 20120911 21

Bubble in the late 80s  Large firms became less dependent on bank loans after financial deregulation  Many banks increased loans to real-estate Bubble collapse in 1990  Financial institutions had accumulated loan losses nearly 80 T Yen (15% of GDP) Long recovery in 90s and even longer  Reduced bank capitalization  Failures of 3 major banks and other small banks in 1997 2 of the 3 banks nationalized  other political decisions for stability of financial system 1991/92  most banks decreased the supply of credit immediately even by reducing existing loans  firms suffered loss of funding for a decade or longer cf. Ogawa, Sterken, Tokutsu (2007) Brewer, Genay, Kaufman (2003) Yoshi Fujiwara | ETH Zurich | 20120911 22

components of eigenvectors trust insurance others long-term, city regional banks (primary, secondary)  stable patterns 80-85, 00-05  change in late 80s  bubble collapse and 90s  back to previous profile with more peaks in late 90s Yoshi Fujiwara | ETH Zurich | 20120911 23

(2) DebtRank approach ( S. Battiston et al. , 2012) Yoshi Fujiwara | ETH Zurich | 20120911 24

[ UNDISTRESSED, ACTIVE, INACTIVE ] INACTIVE = It cannot propagate distress to others, while it can receive distress from others. Yoshi Fujiwara | ETH Zurich | 20120911 25

Yoshi Fujiwara | ETH Zurich | 20120911 26

DebtRank Total impact to financial system Total impact to firms Total-assets of bank Yoshi Fujiwara | ETH Zurich | 20120911 27

1986 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 28

1987 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 29

1988 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 30

1989 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 31

1990 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 32

1991 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 33

1992 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 34

1993 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 35

1994 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 36

1995 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 37

1996 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 38

1997 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 39

1998 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 40

1999 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 41

2000 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 42

2001 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 43

2002 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 44

2003 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 45

2004 city banks city banks regional banks regional banks long-term long-term trust banks trust banks Yoshi Fujiwara | ETH Zurich | 20120911 46

2005 city banks regional banks long-term trust banks Yoshi Fujiwara | ETH Zurich | 20120911 47

summary  Structure and temporal change of credit network between banks and large firms from 1985 for 25 yrs with each snapshot as a bipartite weighted graph  Influence from debtor to creditor, and vice versa quantified by relative exposure  Distress propagation can be described by (1) Eigenvalue problem (2) DebtRank calculation for bipartite NW  These methods can quantitatively describe stability / fragility of the credit NW during the past 25 years Yoshi Fujiwara | ETH Zurich | 20120911 48

Papers (downloadable) Y. Fujiwara, H. Aoyama, Y. Ikeda, H. Iyetomi, and W. Souma , Structure and temporal change of credit network between banks and large firms in Japan Economics E-Journal (2009); arxiv/0901.2377 G. De Masi, Y. Fujiwara, M. Gallegati, B. Greenwald, and J. E. Stiglitz , An Analysis of the Japanese Credit Network Evolutionary and Institutional Economics Review (2011); arxiv/0901.2384 Y. Fujiwara and H. Aoyama , Lage-Scale Structure of a nation-wide production network, 2010 European Physical Journal B (2010); arxiv/0806.4280 Yoshi Fujiwara | ETH Zurich | 20120911 49