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

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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

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Yoshi Fujiwara | ETH Zurich | 20120911 1

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

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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

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Banks-Firms credit Firms’ credit on supplier-customer NW Interbank Banks Firms

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#Banks #Firms

0.2K 2M

Distress propagation on Banks-Firms credit Distress propagation on Supplier-Customer NW

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Banks-firms Credit NW

Credit network between banks and firms = bipartite graph with weights = amount of credit

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Distress propagation between banks and firms : level of bank ’s financial distress : level of firm ’s financial distress

corresponding to  shrinking amount of supplied credit  increasing interest-rate  shortening the due time of repayment causing  delaying repayment to banks  default / bankruptcy

banks firms

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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

  • thers (credit associations, agricultural, Shoko Chukin)
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Firms’ debt from banks

Source: Small & Medium Enterprise Agency (2008)

Large: capitalized at 100M yen or more Small-Medium: otherwise

~160T yen #L-firms= 1.25% #S-firms= 98.75%

(trillion yen)

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 annual snapshots: from 1980 to 2005  bankrupted or merged banks included; #banks ~ 230  surviving firms included; #firms ~ 2,000

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Listed firm’s debt Cumulative PDF

A small fraction of firms account for nearly all loans due to long-tailed distribution of debt.

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Bank’s lending Cumulative PDF

And similarly for long-tailed distribution of banks’ lending amount.

city regional trust insurance

  • thers
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MST: closer banks have similar lending City and metropolitan banks Regional banks Regional banks

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City and metropolitan banks

Tokyo Mitsubishi UFJ MitsuiSumitomo Mizuho Risona

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Regional banks

Banks in Tohoku region Banks in Hokkaido and Northern regions

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Regional banks

Banks in Chubu region Banks in Kinki region

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  • 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

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Dependency or Relative Exposure bank on firm total lending banks firms Distress propagation

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Dependency or Relative Exposure firm on bank total borrowing banks firms Distress propagation

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banks’ distress = solution of eigenvalue problem

(1) Eigenvector Approach

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without trivial-mode expand by eigen-modes propagation of fragility-profile larger eigenvalues ~ more robust modes

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 strong peak in the late 80s  drop in 1990  peaks in 1992 and 1997

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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)

  • cf. Ogawa, Sterken, Tokutsu (2007)

Brewer, Genay, Kaufman (2003)

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

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components of eigenvectors

 stable patterns 80-85, 00-05  change in late 80s  bubble collapse and 90s  back to previous profile with more peaks in late 90s

long-term, city regional banks (primary, secondary) trust insurance

  • thers
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(2) DebtRank approach (S. Battiston et al., 2012)

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[ UNDISTRESSED, ACTIVE, INACTIVE ] INACTIVE = It cannot propagate distress to others, while it can receive distress from others.

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DebtRank

Total-assets of bank Total impact to financial system Total impact to firms

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city banks regional banks long-term trust banks

1986

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city banks regional banks long-term trust banks

1987

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city banks regional banks long-term trust banks

1988

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city banks regional banks long-term trust banks

1989

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city banks regional banks long-term trust banks

1990

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city banks regional banks long-term trust banks

1991

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city banks regional banks long-term trust banks

1992

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city banks regional banks long-term trust banks

1993

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city banks regional banks long-term trust banks

1994

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city banks regional banks long-term trust banks

1995

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city banks regional banks long-term trust banks

1996

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city banks regional banks long-term trust banks

1997

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city banks regional banks long-term trust banks

1998

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city banks regional banks long-term trust banks

1999

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city banks regional banks long-term trust banks

2000

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city banks regional banks long-term trust banks

2001

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city banks regional banks long-term trust banks

2002

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city banks regional banks long-term trust banks

2003

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city banks regional banks long-term trust banks

2004

city banks regional banks long-term trust banks

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city banks regional banks long-term trust banks

2005

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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

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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