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Approaches for Improving and Maintaining Soundness of
Credit Supplementation System
November 17 , 2015
Motohide HashimotoExecutive Director
2
Problem Awareness
Over the past ten years the Japanese economy was hit by two major crises, namely the Global Financial Crisis and the Great East Japan Earthquake.
Credit Supplementation System played significant roles in overcoming these two major crises.
However, as Credit Supplementation System played major roles, the system held huge risks.
How can we maintain the soundness of Credit Supplementation System while dealing with these two major crises ?
3
1. The Global Financial Crisis, the Great East Japan Earthquake, and Credit Supplementation System
(1) Damage to Japanese Economy from the Global Financial Crisis and the Great East Japan Earthquake
(Source) Mi ni st ry of Economy, Trade and I ndust ry. "I ndi ces of I ndust r i al Product i on".
117.3(Aug.2007)
76.6(Feb.2009)85.8(Mar.2011)
124.0(Jun.2001)
94.5(Mar.2008)
70.0
80.0
90.0
100.0
110.0
120.0
01 02 03 04 05 06 07 08 09 10 11 12 13 14
(FY10= 100)1) Trends in Industrial Production
Ressionary phase Production index Inventory index
Great EastJapan Earthquake
GlobalFinancial Crisis
2001
4
(Source) Mi ni st ry of I nternal Aff ai rs and Communi cat i ons. "Labor Force Survey".(Source) Mi ni st ry of Heal th, Labour and Wel f are. "Empl oyment Ref erral s f or General Workers".
3.6(Jul.2007)
5.5(Jul.2009)
1.08(Jul.2006)
0.42(Aug.2008)0.2
0.4
0.6
0.8
1.0
1.2
1.4
3.0
3.5
4.0
4.5
5.0
5.5
6.0
01 02 03 04 05 06 07 08 09 10 11 12 13 14
(Times)(%) Trends in Unemployment rate and Job-openings to appicants ratio
Unemployment rate
Job-openings to applicants ratio
GlobalFinancial Crisis
2001
5
(2) Massive Damage from the Great East Japan Earthquake (March 11, 2011)
1) The impact on Japan’s society and economy were enormous with 18,465 people killed or missing and with the industrial production index falling sharply.
(Source) White Paper on Small and Medium Enterprises in Japan 2011
Boat swept into the center of Miyako City, Iwate Prefecture
Shopping district buried under rubble in Ishinomaki City, Miyagi Prefecture
6
(Source) Mi ni st ry of Economy, Trade and I ndust ry. "I ndi ces of I ndust r i al Product i on".
40.0
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
140.0
08 09 10 11 12 13 14
(FY10= 100)Trends in Industrial Production
(All Japan/Affected regions : Iwate pref., Miyagi pref., Fukushima pref.)
All Japan Iwate pref. Miyagi pref. Fukushima pref.
Great East Japan Earthquake
2008
48.6(Mar.2011)
[ Credit Guarantee Corporations (CGCs) ]I. Establishment of “Emergency Guarantee Program” and “Great East Japan Earthquake Recovery Emergency Guarantee Program” II. Supporting demand for capital due to weakened fund raising capabilities, business reconstruction, and business stabilization
1) Establishment of Credit Guarantee Programs, Expansion of Special Treatment of Insurance
[ Japan Finance Corporation (JFC) ] - Expansion of Special Treatment of Insurance for the above credit guarantee programs
(3) Credit Supplementation System to Overcome the Global Financial Crisis and the Great East Japan Earthquake
Type of Insurable Funds
Max Amount ofInsurance
Insurance Coverage
Ratio
Insurance Premium Rate
(p.a.)
Guarantee Coverage
Ratio
Special Treatment of Insurance Related to
Business StabilityBusiness stabilization funds
Additional ceiling of 280 million JPY is set 80%
Ordinary/No-collateral
0.41%100%
Great East Japan Earthquake Recovery
Emergency Guarantees
Fund for reconstruction, other business stabilization
Additional ceiling is set:400 million JPY for Ordinary Insurance160 million JPY for No-collateral Insurance
90%Ordinary/
No-collateral0.41%
100%
General InsuranceOrdinary Insurance Business funds 200 million JPY 70% 0.25% - 1.69% 80%
7
8
2) Actions Taken by CGCs (Credit Guarantee Corporations)
I. Extended operating hours on weekdays, established weekend consultation desk to better respond to customer needs for financial advice.
II. Significantly increased guarantee screening officers
Credit Guarantees related to the Great East Japan Earthquake
11 12 13 140
100
200
300
400
500
0%
10%
20%
30%
40%
50%
60%
70%
423
114 101 124
65.8%
40.9%
32.0%38.4%
(Billion JPY)
(FY)
The ratio of the amount of insurance acceptance(affected 3 pref. ) related to “Great East Japan Earthquake Re-covery Emergency Guarantees” to the total amount of insurance acceptance(affected 3 pref.)
The amount of Insurance Acceptance (as of 2014)Affected regions : Iwate pref., Miyagi pref., Fukushima pref.
2011
9
(4) Credit Guarantee Results (guarantees accepted)
1) Amount of Guarantees Accepted
Amount of guarantee acceptance increases during times of economic crisis. Thus, Credit Supplementation System plays a significant role.
04 05 06 07 08 09 10 11 12 13 140
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000 Safety-net guaranteesGeneral guarantees
(FY)
(Trillion JPY)
Global Financial Crisis
Great East Japan Earthquake
Emergency Guarantee Program
Great East Japan Earthquake Recovery Emergency Guarantee Program
2004
10
2) Effects of Guarantee Program
Bankruptcies avoided through emergency guarantee program (estimate)
FY
Expected Bankruptcie
sA
ActualBankruptcie
sB
AvoidedBankruptcie
sC=A-B
2008 10,178 8,283 1,895
2009 23,706 14,732 8,974
2010 18,317 13,065 5,252
Total 52,201 36,080 16,121
11
Outstanding Guaranteed Liabilities (stock)
(5) Credit Guarantee Results
The amount of Outstanding Guaranteed Liabilities increases during times of economic crisis.
Outstanding Guaranteed Liabilities underscore the important role filled by Credit Supplementation System. This means that risks increase as the amount of Outstanding Guaranteed Liabilities increases.
05 06 07 08 09 10 11 12 13 140
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Outstanding Guaranteed Liabilities
Global Financial Crisis
Great East Japan Earthquake
Great East Japan Earthquake Recovery Emergency Guarantee Program
Emergency Guarantee Program
(FY)
(Trillion JPY)
2005
1) Schematic of Credit Supplementation System
(1) Risk Sharing through Two-tiered System
2. Approaches for Maintaining / Improving Soundness of Credit Supplementation System
12
JFC(Japan FinanceCorporation)
CGCs(Credit
GuaranteeCorporations)
SMEs
National Government
LocalGovernments
Loans
Contributions
Guarantee Contract
Insurance Contract
Credit Insurance System Credit Guarantee System
Financial Institutions
Guarantee Fee
Recovery
Subrogated Payment
Contributions
Insurance Premium
Payment of Recovered Money
Insurance Money
Loss CompensationSupervision
ContributionSupervision
13
2) Historic Context behind Establishment of Credit Insurance System
From the 1930s into the 1950s, many Credit Guarantee Corporations were established in regions across Japan (51 CGCs as of 1952).
A “Guarantee Insurance” system was established in 1952 to cover the risks held by CGCs.
- With functions similar to the current “Credit Insurance,” the objectives of this system were to reduce losses for CGCs and improve the soundness of their assets.
- This “Guarantee Insurance” was directly managed by the national government.
In 1958, Small Business Credit Insurance Corporation (now Japan Finance Corporation) was established. Since that time, credit insurance has been managed by JFC.
14
I. Subrogated payments
II. Insurance payments
3) Risk Sharing in Credit Supplementation System
JFC, CGCs and financial institutions share risks.
Subrogation and Insurance Money Payment
The percentage of risk sharing (In the case of guarantee coverage ratio 80% and insurance coverage ratio 80%)
FinancialInstitutions CGCs JFC
20% 16% 64%
SMEs
CGCs(Credit Guarantee
Corporations)
FinancialInstitutions
1. Default
2. Request for subrogation
3. Subrogated payment (Coverage ratio: 80% in principle)
4. Insurance claim
5. Insurance money(Coverage ratio: 70 - 90%)
(Average coverage ratio in FY14 : 78%)
JFC(Japan FinanceCorporation)
15
The balance of insurance account remained deeply in the red and there are a large number guaranteed SMEs in need of rescheduling. System improvements, including continued enhancements of the financial base, are needed.
4) Enhancing Financial Base for Insurance (Obtaining Contributions)
Large contributions from the national government were received after the Global Financial Crisis in anticipation of deterioration in the balance of insurance accounts.
JFC estimates future anticipated losses and requests contributions from the national government based on these estimates.
▲ 5,678
▲ 1,602
▲ 6,000
▲ 4,000
▲ 2,000
0
Balance of Insurance Account
20,516 10,409
0
2,000
4,000
6,000
8,000
10,000
12,00021,000 (100 million JPY)
Contributionsfrom goverment
04 05 06 07 08 09 10 11 12 13 14(FY)
(100 million JPY)
2004
16
6) Analyzing Information, Providing Information to CGCs
- JFC endeavors to understand and analyze the insurance underwriting risks of various CGCs, balances of insurance accounts, and lending by private sector financial institutions to SMEs. It then provides the results of such analyses to CGCs.
Contributes to sustainability and sound management of overall system.
Guaranteeagreements
Provision of information, etc.
Provision of information, etc.CGCs
(Credit Guarantee Corporations)
Bureaus of Economy,Trade and Industry,
Financial Bureau
Supervision, inspection,guidance
Local Governments
Contribution,supervision
FinancialInstitutions
PartnershipsSMEsand
micro businesses
Guarantees /management support
Insurance contracts
Guarantees /management support
Supervision, inspection, guidance
JFC(Japan FinanceCorporation)
17
1) Enhancing Financial Base
Enriching basic assets is important so that CGCs can conduct sound management and maintain external credit.
Contributions (A) Contributions from local governments etc.
Subsidies (B) Subsidies from national government to CGCs
Reserves (C) Accumulated amount of accepted basic assets from CGCs account surpluses each year
In addition to the basic assets(A+B+C), CGCs hold reserves for changes in balance differences (D).
Assets (A+B)
Reserves (C)
Basic Assets (A+B+C)
Reserves for changes in balance
differences (D)
506 1,244 1,750 618
(Unit: billion yen; FY14)
(2) Approaches for Improving and Maintaining Soundness of CGCs (Credit Guarantee Corporations)
18
2) Indicator-based CGCs (Credit Guarantee Corporations) Management
Basic asset ratio : Guaranteed Liabilities / Basic Assets
- Each CGC sets allowable limits from the perspective of sound management.
- 60X is the maximum ratio in national guidelines.
- In managing its assets, CGCs utilize the liquid asset ownership ratio (Liquid Assets / Outstanding Guaranteed Liabilities) and other indicators from the perspective of maintaining reserve requirement assets.
Maximum amount of guarantees provided to one SME
- Indicator for maintaining soundness of CGCs’ financial conditions
- Analysis of subrogated payment ratio by financial institution groups and SME business types as “Emergency Guarantee Program” results.
Subrogated payment ratio : Subrogated Payments for particular year / Outstanding Guaranteed Liabilities for same year
19
3) Management Support by CGC (Credit Guarantee Corporation)
Example 1 Business consulting for firms with deteriorating earnings
- Discuss conditions of a firm with a main bank
- Visit the firm, provide management advice
- Propose problem resolution measures after several visits
Example 2 Subsidy for dispatching experts
- Send SME consultants and other experts to companies- Related expenses subsidized by CGCs
Example 3 Promote utilization of SME support networks
- Networks of local governments, chambers of commerce, CGCs, and SME support organizations working together for smoother SME support- Provide business expertise guidance and financial support utilizing the functions of each member in the network
Management support
Improved SME management
Reduced risk of bankruptcy
Improved CGC soundness
Risk Curtailment through Management Support
20
I. The credit supplementation system played major roles in helping overcome the economic crises resulting from the Global Financial Crisis and the Great East Japan Earthquake. Meanwhile, the following approaches have been adopted to maintain the soundness of our systems.
(1) Risk Sharing through two-tiered System 1) Covering risk by utilizing credit insurance system 2) Enhancement of financial bases (obtain government contributions in
proportion to risk) 3) Insurance risk management (sharing risk analysis and risk information)
(2) CGC Approaches 1) Enhancement of financial bases (obtain local government contributions,
book reserves) 2) Risk management (utilization of basic asset ratio, subrogated payment
ratio) 3) Management support (consulting for SMEs)
II. JFC will make an effort to improve the soundness of Credit Supplementation System to continue promoting smooth financing for SMEs.
3 Summary
21
References
Small Business Credit Insurance Corporation. (1989). Small business
credit insurance corporation thirty years’ history.
Japan Federation of Credit Guarantee Corporations. (2005). Credit guarantee
the 3rd edition. Eguchi, K. (Ed.).
Japan Federation of Credit Guarantee Corporations. (2011, 2014, 2013). Credit
guarantee, No.120, No.121, No.122, No.125.
Small and Medium Enterprise Agency. (2012). White Paper on Small and
Medium Enterprises in Japan.