Electronic Business: Concepts, Methodologies, Tools, and Applications (4-Volumes) P229

2214 Chapter 7.16 IT Development and the Separation of Banking and Commerce: Comparative Perspectives of the U.S. and Japan Takashi Kubota Waseda University, Japan ABSTRACT Unlike the UK, Germany, France, and some ma-jor countries that permit entries from banking to FRPPHUFHDQGYLFHYHUVD³WZRZD\´UHJXODWLRQ the United States and Japan have maintained a policy of separating banking and commerce out of concern that the mixing of the two activities would result in the misallocation of credits, anti-competitive effects, exposure of deposit insurance, and taxpayers to greater risks from commerce and additional supervisory burdens on banking and antitrust regulators. However, this separation is now being reconsidered both in the U.S. and Japan. With IT development, linking online banking DQG,QWHUQHWFRPPHUFHPD\LQFUHDVHSUR¿WDELOLW\ through operating synergies between the two ¿UPVDQGUHGXFHDYHUDJHFRVWVDQGLQIRUPDWLRQ FRVWV)XWXUHFKDQJHVLQWKH¿QDQFLDOHQYLURQPHQW may produce other synergies and the degree of separation should be suitable for such business development. This chapter introduces current laws and discussions in both countries and considers the future of the separation policy in Japan. INTRODUCTION The Separation Policy of Banking and Commerce Unlike the U.K., Germany, France, and some major countries that allow entries from both banking to commerce and vice versa, the United States and Japan have maintained the policy of separating banking and commerce out of concern that the mixing of the two activities would result in bad effects as stated. Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited. IT Development and the Separation of Banking and Commerce $FFRUGLQJWR%URZQ³WKH86KDV maintained this long-standing policy of separat-ing banking and commerce out of concern that the mixing of banking and commercial activities would result in the misallocation of credit, exten-sive anti-competitive practices, and exposure of the federal safety net established for banking to a broad range of risks emanating from commercial sectors of the economy. Other concerns posed by the mixing of banking and commerce include overburdening the supervisory resources of the federal banking regulators, consumer privacy problems, and reduction of credit availability in local communities.” Japanese regulators have similar concerns. Although the indirect ties between main banks DQGFRPPHUFLDO¿UPVXQGHUWKHNHLUHWVXFRQWURO had been criticized by U.S. trade negotiators, Japanese law had long maintained the strict policy of separating banking from commerce until recently. This structural division between EDQNLQJDQGFRPPHUFHKDVEHHQFRGL¿HGLQWKH Banking Act1 and the Antimonopoly Code.2 As in the United States, Japan has maintained this separation policy out of concern that the mixing of banking and commercial activities would result in (1) the misallocation of credits, (2) anti-competi-tive effects, (3) exposure of the deposit insurance and taxpayers to greater risks from commerce, and (4) additional supervisory burdens by banking and antitrust regulators. The United States and Japan both learned from past economic crises (in 1929 in the U.S., in 1927 in Japan) before World War II and created the current system. As a result, banking is heavily regulated and separated from commerce, which is less regulated. Lifting the Separation? However, this separation is being reconsidered both in the U.S. and Japan. With IT development, linking online banking and Internet commerce PD\ LQFUHDVH SUR¿WDELOLW\ WKURXJK RSHUDWLQJ V\QHUJLHVEHWZHHQWKHWZR¿UPVDQGUHGXFHDYHU- age costs and information costs. Future changes LQWKH¿QDQFLDOHQYLURQPHQWPD\SURGXFHRWKHU synergies and the degree of separation should be suitable for such business development. Compared with the strict separation in the U.S.3 except for unitary thrifts, the Japanese gov-HUQPHQWUHFHQWO\DOORZHG³RQHZD\´HQWU\IURP commerce to banking with some requirements. Actually two recent reforms were introduced to allow commerce to enter into banking with fewer regulatory burdens. First, in August 2000, -DSDQHVH¿QDQFLDOUHJXODWRUVDOORZHGFRPPHUFLDO FRPSDQLHVWRHQJDJHLQ³,QWHUQHW´EDQNLQJDQG the securities business with fewer requirements than a normal banking business. Second, in April 2006, commercial companies were allowed to become bank agencies by meeting some require-ments. As a result, the current Japanese regula-tion of the separation of banking and commerce LV FDOOHG ³RQHZD\´4 regulation, which means that commercial companies can start banking businesses but banks are restricted from starting commercial or non-banking businesses of their own and from holding many shares (details are shown later). Compared with Japanese regulation, WKH86UHJXODWLRQLVFDOOHG³QRZD\´5 regulation, which restricts both entries from banking and commerce. On the other hand, the regulations in the U.K., France, Germany, and other major (8FRXQWULHVDUHFDOOHG³WZRZD\´6 regulation, which permits both entries from banking and commerce. These trends can also be observed in the World Bank survey (Caprio, G., Levine, R.E., & Barth, J.R., 2001). Some Japanese bankers insist that Japan VKRXOGPRYHWR³WZRZD\´UHJXODWLRQE\SHUPLW-WLQJEDQNV¶VXEVLGLDULHVRUDI¿OLDWHVWRHQJDJH in commercial business (e.g., real estate). Before illustrating the situations of both countries, let us observe why banks want to hold commercial shares. Many promoters in the U.S. and Japan insist that a combination between commerce and bank-LQJPD\HQKDQFHSUR¿WDELOLW\WKURXJKRSHUDWLQJ 2215 IT Development and the Separation of Banking and Commerce V\QHUJLHVEHWZHHQWKHWZR¿UPV7KHHPHUJHG entity may reduce average costs by producing a wider array of complementary products. Ac-FRUGLQJWRWKH)5%6)³DVQHZWHFKQRO-ogy has changed the way banks deliver their services, bank cost structures have come to look more like the cost structures of other non-bank information providers. Banks with excess data processing capacity, for example, would want WR¿OOWKDWFDSDFLW\E\RIIHULQJVHUYLFHVWRRWKHU companies. Some national banks have leveraged their positions as providers of online banking to offer other Internet services to their customers. It is even easier to imagine that established Internet service providers would want to add banking services to their list of products.” However, one question can be raised. In the FXUUHQW¿QDQFLDOVLWXDWLRQLVWKHUHPXFKURRP for producing synergies between banking and commerce? Banks can lend money, give advice, and send people to the commercial companies. In fact, even without a merger, banks have strongly FRQWUROOHGFRPPHUFLDOFRPSDQLHVXQGHUWKH³NHL-UHWVX´DQG³PDLQEDQN´V\VWHPLQSRVWZDU-DSDQ Then, why do they need to own shares? Why do They Want to Own? As an answer, the FRBSF explains as follows: To UHGXFHLQIRUPDWLRQFRVWV³EDQNVZRXOGZDQWWR RZQ¿UPVLHKROGHTXLW\LQRUGHUWRHQKDQFH their position as intermediaries. For example, by holding a large block of equity or by sitting on a company’s board, a bank could provide a source of discipline to the management that would reas-sure less-informed investors. Liability to other creditors in the case of bankruptcy would tend to discourage banks from exercising control at the riskiest companies. But for many companies, this ULVNZRXOGEHRXWZHLJKHGE\WKHEHQH¿WWKHEDQN FRXOGSURYLGHE\UHGXFLQJ¿QDQFLDOFRQVWUDLQWV Another information-related reason for banks to hold equity is to reduce their exposure to moral KD]DUG,ILWLVGLI¿FXOWIRUDOHQGHUWRPRQLWRU a borrower’s risks, limited liability borrowers will have incentives to increase the risk in their operations. Banks who anticipate this risk-shift-ing will either charge a higher price for the loan RUGHPDQGPRUHFROODWHUDO2QHZD\D¿UPFDQ overcome this problem is to offer the bank an equity claim. The case of start-up ventures is a JRRGLOOXVWUDWLRQ%\GH¿QLWLRQVWDUWXSVKDYH no track record on which to base an investment decision. Moreover, start-ups typically have little capital of their own and few tangible assets with which to collateralize a bank loan. If banks are WRSURYLGH¿QDQFLQJWRWKHVH¿UPVWKH\ZRXOG need to take an equity claim.” However, at least in the Japanese context, these discussions are not very persuasive. By KROGLQJDODUJHEORFNRIHTXLW\EDQNV¶¿QDQFLDO conditions may be riskier and much affected by PDUNHWÀXFWXDWLRQ2EVHUYDWLRQVE\EDQNOHQGHUV are not usually less effective than those by equity shareholders due to the interlocking director-ships within the keiretsu system, although it has weakened. This chapter introduces current laws and discussions in the United States and Japan, and considers the future of the separation policy. It FRYHUVWKH86VLWXDWLRQ¿UVWWKH-DSDQHVHVLWX-ation second, and considers the Japanese discus-sions third. THE SITUATION OF THE SEPARATION IN THE U.S. /HWXVREVHUYHWKH86VLWXDWLRQ¿UVWE\UHIHUULQJ to FRBSF (1998). Legislative History In the U.S., banking and commerce have not always been separate. In the beginning of the 20th century, banks, including Chase Manhattan and Wells Fargo routinely took equity positions LQFRPPHUFLDO¿UPVDQGVDWRQFRPSDQ\ERDUGV 2216 IT Development and the Separation of Banking and Commerce However, such relationships were criticized be-cause banks could use their positions on multiple corporate boards to encourage collusion and because it may cause excessive concentration of economic power in their hands. From this anti-monopoly perspective, the Clayton Act8 was made in 1914 as an amendment to the Sherman Antitrust Act to prohibit interlocking directorates. In addi-tion, after the stock market crash and subsequent bank failures in 1929, the Glass-Steagall Act9 in 1933 and later the Bank Holding Company Act of 1956 0 reduced the scope of operations for banks and created a separation between banking and commerce. But this separation has some exceptions. Bank holding companies can hold up to 5% of the voting stock and up to 25% of the voting and QRQYRWLQJVWRFNLQDQ\¿UP1DWLRQDOEDQNVFDQ receive part or all of the interest payments on ORDQVLQWKHIRUPRIZDUUDQWVRU³HTXLW\NLFNHUV´ DQGFDQRZQDVWDNHLQDYHQWXUHFDSLWDO¿UP WKDWRZQVXSWRRIDQ\¿UP,QDGGLWLRQ ³XQLWDU\WKULIWV´11, thrift holding companies that own a single savings bank, have wide latitude to engage in commercial activities. Approximately one-quarter of the unitary thrifts now use their commercial powers to operate in real estate devel-RSPHQW&RPPHUFLDO¿UPVFDQSXUFKDVHWKULIWV ,QWKHV¿UPVVXFKDV)RUG0RWRU&RPSDQ\ and Sears Roebuck bought thrifts. Wal-Mart tried to buy a thrift, but failed due to resistance from regional bankers. After this battle, the Gramm-Leach-Bliley Act of 1999 2was introduced in 1999 DQGFRPPHUFLDO¿UPVZHUHSURKLELWHGIURPEX\-LQJWKULIWV³1RZD\´UHJXODWLRQZDVPDLQWDLQHG but thrifts can still engage in other business to protect their privilege. Regulators’ Concerns In the discussion of promulgating the Gramm-Leach-Bliley Act of 1999, the separation was DFWLYHO\GHEDWHGDQG¿QDOO\WKHVHSDUDWLRQZDV maintained because of regulators’ strong con-cern. $FFRUGLQJWR)5%6)³7KH`HSUHV-sion-era legislation that separates banking and commerce was originally designed to check banks IURPH[HUFLVLQJXQGXHLQÀXHQFHRYHUWKHFRP-mercial sector. The same fears of uncompetitive SUDFWLFHVSHUVLVW´,QDGGLWLRQ³GHSRVLWLQVXUDQFH is part of the federal safety net and can act as a IRUPRIVXEVLG\WREDQNERUURZLQJ´³*LYHQWKHLU current powers, banks, of course, have plenty of risk-taking opportunities to exploit the deposit LQVXUDQFHRSWLRQ´³$WURXEOHGFRPPHUFLDO¿UP might have an incentive to shift bad assets to its EDQNLQJDI¿OLDWHDQGH[HUFLVHWKHGHSRVLWLQVXU-ance option); or, a bank, in order to preserve its reputation, might have an incentive to bail out DVWUXJJOLQJDI¿OLDWH,QDZRUVWFDVHVFHQDULR SUREOHPVDWDFRPPHUFLDODI¿OLDWHFRXOGFDXVH runs on the bank’s deposits.” However, they do not deny the possibility of future reform. According to FRBSF (1998), ³VLQFHWKH*ODVV6WHDJDOOEDUULHUVDUHLQSODFHLW LVGLI¿FXOWWRVD\ZKHWKHUWKHJDLQVIURPOLQNLQJ banking and commerce would be greater or less WKDQWKHSRWHQWLDOFRVWV´³7KHSRWHQWLDOEHQH¿WV of linking banking and commerce are real and could grow in the future. If, someday, lawmak-ers choose to augment bank powers, they should proceed cautiously and with a mind to ensuring that the safety net does not extend beyond the banking sector.” Even after the passage of the Gramm-Leach-Bliley Act of 1999, the separation of banking and commerce continues to be debated in the Congress. Some, including the ABA and Federal Reserve, argue that the failure to main-tain a line of separation, especially in terms of ownership and control of banking organizations, would have potentially serious consequences, UDQJLQJIURPFRQÀLFWVRILQWHUHVWWRDQXQZDU-UDQWHGH[SDQVLRQRIWKH¿QDQFLDOVDIHW\QHW2WKHUV argue that, if adequate safeguards are in place, WKHEHQH¿WVIURPDI¿OLDWLRQVEHWZHHQEDQNLQJ and commerce can be realized without jeopardy to the federal safety net. 2217 IT Development and the Separation of Banking and Commerce JAPANESE SITUATION Legislative History 7KH¿UVWEDQNLQJODZLQ-DSDQZDVWKH1D-WLRQDO%DQN$FW7KH¿UVWODZFRQFHUQLQJFRP-mercial banks was the 1890 Banking Act, which was modeled on the British banking system. 3 At that time, there were two types of Japa-nese banks: big city banks, such as Mitsui Bank, Mitsubishi Bank, and Sumitomo Bank and small regional banks (Kaizuka, K., Kousai, Y., & Non-aka, I., Eds., 1996). 4 Big city banks had a wide variety of good customers but small regional banks had only a few borrower companies and were substantially linked to them. For example, 70% of Taiwan Bank’s lending was to Suzuki Showten Corporation in the 1920s. 5 When the performance of textile companies fell in the 1920s, such linked regional banks suf-fered from severe non-performing loan problems. In 1923, the Great Kanto Earthquake occurred and many banks and companies suffered losses. To rescue regional banks and to mitigate the losses, the central bank (the Bank of Japan) and the Japanese government bailed out the banks and compensated the losses very loosely, but this also produced a moral hazard. 6 In the National Diet, opposition parties strongly required the disclosure of poor bank performances, and a slip of the tongue 7 by the Minister of Finance trig-gered a run on regional banks. To cope with the banking crisis, the government strongly promoted mergers among regional banks and established the new Banking Law in 1927. The new law set minimum capital requirements. Out of the total of 1420 banks, 809 banks (57%) did not meet the requirement in 1927. From 1920 to 1932, the number of banks declined from 2001 to 625: In an average year, 19.6 banks were established, 43.5 banks failed, and 88.0 banks were merged. 8 In the 1930s, Japanese companies obtained funds not so much by borrowing from banks (21.1%), but mainly by issuing stocks (31.0%) and raising the funds on their own (37.0%). During the war and early post-war period, they increased bank borrowing (1941-1944: 45.8%, 1946-1955: 31.7%) DQGWKH³NHLUHWVX´V\VWHPZDVFUHDWHG$FFRUG-LQJWR%URZQ³,Q-DSDQODUJHEDQNVDUH OLQNHGWRODUJHFRPPHUFLDO¿UPVWKURXJKPXWXDO control mechanisms that differ greatly from the WUDGLWLRQDOSDWWHUQVRIFRUSRUDWHDI¿OLDWLRQDQG control found in the United States and Western Europe. Typically, a large Japanese bank will be a key member in a group of large corporations known as a keiretsu. The other members of a NHLUHWVXDUHJHQHUDOO\ODUJHFRPPHUFLDO¿UPV DOWKRXJKRWKHU¿QDQFLDOLQVWLWXWLRQVVXFKDVLQ-surance companies, may be included. The large Japanese banks do not dominate associated com-PHUFLDO¿UPVLQWKHPDQQHURIWKHODUJH*HUPDQ banks. In fact, Japanese antitrust law prohibits a bank from owning more than 5% of the shares RI D FRPPHUFLDO ¿UP 1RQHWKHOHVV -DSDQHVH banks are key members of their keiretsu. Dur-ing the early post-World War II period, Japanese industry was heavily dependent on bank loans to ¿QDQFHFDSLWDOLQYHVWPHQW,QPRUHUHFHQW\HDUV the emergence of the Japanese stock market as RQHRIWKHZRUOG¶VOHDGLQJ¿QDQFLDOFHQWHUVDQG high corporate earnings have provided Japanese FRPPHUFLDO ¿UPV ZLWK DOWHUQDWLYH VRXUFHV RI funds. However, a large bank within a keiretsu still provides important commercial loan services to its fellow members.” 5HVSRQGLQJ WR WKH HFRQRPLF DQG ¿QDQFLDO change after the oil crisis, the Banking Law underwent total revision and the current Bank-ing Law 9came into effect in 1981. The current ODZGRHVQRWKDYHVSHFL¿FDUWLFOHVFRQFHUQLQJ the separation of banking and commerce, but the scope of business conducted by banks is limited (Article 10) and the license requirements for entering banking are generally heavy.20 The background idea of this separation derives from the experience of the banking crisis in 1927. 2218 ... - tailieumienphi.vn