Toward Strengthening the Foundations for Economic Growth: … · Toward Strengthening the Foundations for Economic Growth:Toward Strengthening the Foundations for Economic Growth:

Toward Strengthening the Foundations for Economic Growth:Toward Strengthening the Foundations for Economic Growth: Efforts of Financial Institutions and the Bank of Japan

Speech at Symposium 2010 on“Cooperation among Finance, Industry, Academia, and Government”Cooperation among Finance, Industry, Academia, and Government

organized by the Kanto Bureau of Economy, Trade and Industry

December 2, 2010

Kiyohiko NishimuraDeputy Governor of Bank of Japan

1. Introduction

Returning to sustainable growth path with price stability (a cyclical problem)

Challenges faced by the Japanese economy

Enhancing growth potential over the medium and long term (a structural problem)

It is essential that companies, financial institutions, and li k j i f d k t d ff t

The Bank of Japan’s fund-provisioning measure to support strengthening of the foundations for economic growth

policymakers join forces and make concerted efforts

foundations for economic growth

(hereafter, Growth Foundation Strengthening Facility)

Introduced in June this year

A i l f l b k An unconventional measure for a central bank

Supporting financial institutions’ efforts to strengthen the productivity and competitiveness of their customer firms

D i d t t t l t i d i h ff t

The framework is to broadly support financial institutions’ various efforts

Designed to act as a catalyst inducing such efforts

1

The framework is to broadly support financial institutions various efforts

BOJ provides funds for a relatively long term , up to a maximum four years.

1. Introduction

Today’s Agenda

1. Introduction

2. Corporate Finance: Current Situation

3. Strengthening of Customer-companies’ Growth Potential:g g p

The Role of Financial Institutions

4 G th F d ti St th i F ilit (F d i i i M t S t4. Growth Foundation Strengthening Facility (Fund-provisioning Measure to Support

Strengthening the Foundations for Economic Growth) : Outline

5. Efforts of financial institutions to support strengthening the foundation for growth

6 Conclusion6. Conclusion

2


3


<Three Perspectives>

Trend of private bank loans

Situation of corporate finance from the viewpoint of Situation of corporate finance from the viewpoint of

companies

Stance toward lending operations from the

viewpoint of banksviewpoint of banks

4

2. Corporate Finance: Current Situation (Three Perspectives)

(1) Private bank’s lending activities(1) Private bank s lending activities

-- Increased after the failure of Lehman Brothers

-- Continued decreased compared to the previous year’s level since the beginning of 2010

(Figure 1) Bank Loans and discounts

5 (y/y, %)

3

4 •Stabilization of growth in precautionary demand for funds•Improved environment for fund-raising from capital markets

1

2 •Increased demand for bank loans due to tightening ofcorporate funding

•Ample liquidity on hand•Weak demand for operating funds/funds for capital investment

-1

0

capital investment

-2

08/1 3 5 7 9 11 09/1 3 5 7 9 11 10/1 3 5 7 9

Month

5

Note: Based on average balance adjusted for special items

Source: Principal Figures of Financial Institutions, Bank of Japan


(2) Corporate finance: Borrowers’ view

-- Initially strict position by financial institutions; the situation is gradually improving.

-- The situation for small and medium companies is also generally improving.

(Figure 2) Current condition of Corporate Finance: Borrowers’ View

L di Attit d f Fi i l I tit ti Fi i l P iti٠Lending Attitude of Financial Institutions ٠Financial Position

20

30(D.I. % points)

20

30(D.I. % points)

0

10

↑Easy0

10

↑Accommodative

-10

0

↓Tight

-10

0

↓Severe

-30

-20Large enterprisesMedium-sized enterprisesSmall enterprises

-30

-20Large enterprisesMedium-sized enterprisesSmall enterprises

6Note: For all businesses

Source: Tankan Survey on Business Sentiment, Bank of Japan

∟ 02 ∟ 03 ∟ 04 ∟ 05 ∟ 06 ∟ 07 ∟ 08 ∟ 09 ∟ 10∟ 02 ∟ 03 ∟ 04 ∟ 05 ∟ 06 ∟ 07 ∟ 08 ∟ 09 ∟ 10


(3) St t f b k l di li i B k ’ i

(Fi 3) St t f b k l di li i B k’ i

(3) Status of bank lending policies: Banks’ view-- In late 2008, banks became more cautious about extending credit, but a more active stance and gradual improvement since then.

(Figure 3) Status of bank lending policies: Bank’s view

60

Large firms

(D.I. % point)

Eas

ed 40

50Large firmsMedium-sized firmsSmall firmsHouseholds

E

20

30

10

20

-10

0

7Source: Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks, Bank of Japan

00/4 02/4 04/4 06/4 08/4 10/4


(Figure 4) Interest Rates on Loans and Discounts

(3) Status of bank lending policies: Banks’ view (cont’d)

-- Banks’ loan rates have fallen significantly since FY2009

(Figure 4) Interest Rates on Loans and Discounts

٠Short Term ٠Long Term2.0

(%)2.2

(%)

1.8 2.0

1.4

1.6

1.6

1.8

1.2

New Loans and Discounts

C t t d L d Di t

1.4

0.8

1.0 Contracted Loans and Discounts

1.0

1.2 New Loans and Discounts

Contracted Loans and Discounts

8Source: Average contracted Rates on Loans and Discounts, Bank of Japan

└ 04 └ 05 └ 06 └ 07 └ 08 └ 09 └ 10 └ 04 └ 05 └ 06 └ 07 └ 08 └ 09 └ 10


Analysis of changes in the amount of loans

To grasp the real condition of corporate finance

Data on both borrowers and lenders

Trend of lending rates

Corporate finance: Current situation

⇒⇒ Necessary to observe and analyze various indicators comprehensivelyNecessary to observe and analyze various indicators comprehensively

Corporate finance: Current situation

Although small companies’ financial position and their views on the banks’

lending stance toward them is still strict, the situation of corporate finance haslending stance toward them is still strict, the situation of corporate finance has

become more accommodative in general

<Actions to enhance growth potential>

A financial function that enables positive and forward- looking activities among

companies has been fully realized?

9⇒⇒What is the expected What is the expected “role of financial institutions”“role of financial institutions” toward toward

strengthening the growth potential of the Japanese economy?strengthening the growth potential of the Japanese economy?

3. Strengthening of Customer-companies’ Growth Potential:

Th R l f Fi i l I tit tiThe Role of Financial Institutions

10

3. Strengthening of Customer-companies’ Growth Potential:The Role of Financial Institutions

Financial strength of companies

Improved significantly over the last year or two

⇒ Companies have ample liquidity (a persistent defensive stance)

Strengthening of product

Some companies are taking a more proactive stance

◦ Capturing demand in emerging countries, Strengthening of product development ability

M&A of foreign companies

p g g g ,particularly in Asia◦ Needs of a new age, with an eye to the world’s most rapidly aging population, and the need for future environmental responsivenessneed for future environmental responsiveness

In order to enhance the growth potential of the Japanese economy, it is important to

provide financial support to those companies that aspire to grow in response to newprovide financial support to those companies that aspire to grow in response to new

business environments

＝ Importance of the role of financial institutions

11

Explore these points focusing on the lending practice of financial institutions


Return to Basics: Sharpening the “Expert Eye”

Characteristics of the indirect financial system (during the highCharacteristics of the indirect financial system (during the high--speed growth era)speed growth era)

Banks’ ability to produce information ＝ using an “expert eye” Banks ability to produce information using an expert eye

⇒ Responded to strong demand for funds

At the same time, they started to focus on credit protection measures, h i i ll i h f f l ll l d l

Lower growth expectationsDecline in earning power of

financial institutions

characteristically in the form of real estate collateral and personal guarantees

⇒ The expert eye is weakened and more focus is placed on preservation

Might weaken the ability to monitor business cash flow

Lending method that relies heavily on real estate collateral and personal guaranteesLending method that relies heavily on real estate collateral and personal guarantees

12

g y

Might make it difficult to provide funds for new companies and new business areas


Review of lending practice

（（aa）） Use of covenants (contract provisions)Use of covenants (contract provisions)A loan contract, agreed between a bank and a borrower

Not relying excessively on collateral or guarantee

Improve the Bank’s ability to monitor the borrower companyImprove the Bank s ability to monitor the borrower company

（（bb）） AssetAsset--based lending (ABL)based lending (ABL)（（bb）） AssetAsset--based lending (ABL)based lending (ABL)A loan secured by the receivables and movable properties held by the borrower company

A method which finds value in corporate activities on their own terms

⇒ Enables companies that do not own enough real assets to raise substantial

fi i l M b d f b i ifinancial resources . May be used for business succession.

Great potential for further expansion 13


(Figure 5) Asset-based Lending Markets in the US and Japan

━ The Japanese ABL market has great potential for further expansion

◌ Outstanding Balance in the ABL Market in Japan and the US ◌ Distribution of Secured Loans in the US by type of collateral

60010（Yen in trillions） (Dollars in billions)

60(%)

500

600

8

10

（44 trillion yen）

40

50

60

Corresponding to ABL

300

400

4

6

20

30

100

200

2

443.6 billion yen

0

10

nd

vabl

e

nt o

r es ri

ties

ts ness

st

ate

nal

stat

e

sset

s

the r

Note: Figures as of the end of March 2009 for Japan/as of the end of December 2009 for the US

00

Japan US

y

Inve

ntor

y an

acco

unts

rec

eiv

Equ

ipm

enve

hicl

e

Bus

ines

s se

cur

or

depo

sit

Bus

inre

al e

s

Pers

onre

al e

s

Oth

er

pers

onal

as

O

14

December 2009 for the US

Source: “Survey Research on Penetration and Use of ABL” Ministry of Economy, Trade and Industry

“Annual Asset-Based Lending and Factoring Surveys, 2009” Commercial Finance Association

Source: “1998 Survey of Small Business Finance” FRB

a


Tools that contribute to re-strengthening of banks’ “expert eye”

Use of covenants/ABLexpert eye

Improving the ability to provide financial support to strengthenthe growth potential of Japanese companiesthe growth potential of Japanese companies

⇒ Ingenious practices and manager’s will are essential

<Loans to small companies> Policymakers’ concernsPolicymakers’ concerns

Measures taken by the Federal Reserve System (Figure 6)US

<Loans to small companies> Policymakers concernsPolicymakers concerns

Discussions on the issues facing small business finance and solutions to such issues

JapanMeasures taken by the Bank of Japan

Growth Foundation Strengthening Facility (GFSF)

⇒ Introduced in June 2010

Japan

Strengthening the growth foundation through improvement of

the financial intermediary function 15

(Figure 6) Measures toward improving Small business finance in the US

3. Strengthening of Customer-companies’ Growth Potential:The Role of Financial Institutions(Figure 6) Measures toward improving Small business finance in the US

━ Discussions at “Addressing the Financing Needs of Small Businesses,” a forum organized by the FRB

○ Proposals for improvement offered at the forum<Proposals for the government (regulation and legislation, etc.)>

・ Need for Improved dialogue between financial institutions and regulators.

― Need for continued use of guidance that includes real-world examples and establishment of a means through which institutions can report concerns about or appeal an examiner’s decision to the regulatory agency through a neutral intermediary such as an ombudsman, etc.

・Better tax breaks to promote investments in small and medium companies

― New Markets Tax Credit program more supportive of small business lending by establishing a safe-harbor provision

・Improvement of the guarantee system provided by the Small Business Agency

― SBA enhancements that increase guarantee limit and simplification of the process

<Proposals for banks><Proposals for banks>

・Financial institutions’ use of “second look”

― to help ensure that viable applicants are not overlooked

・Financial institutions’ need to receive complete and accurate documentation from small business loan applicants

― Items such as reliable financial statements and accurate tax identification numbers necessary so that loan decisions can be made in a timely manner

・Collaboration between banks and regional development organizations

― Banks and CDFIs set up more effective and consistent processes for banks to refer small business applicants whose credit needs they cannot

meet to CDFIsmeet to CDFIs

<Proposals for small and medium companies>

・Utilization of managerial skill assistance for small companies

― Increased use of the SBA Service Corps of Retired Executives (SCORE)

16

<Other>

・Need for research and data related to small business lending and .

― More frequent data collection, such as on a quarterly basis, etc.

4 G th F d ti St th i F ilit4. Growth Foundation Strengthening Facility

(Fund-provisioning Measure to Support Strengthening the ( p g pp g g

Foundations for Economic Growth) : Outline

17

4. Growth Foundation Strengthening Facility: Outline

(Figure 7) Growth Foundation Strengthening Facility (GFSF): Outlines

Measure to provide long-term funds at lower rates to financial institutions that endeavor to strengthen the

foundations for economic growthfoundations for economic growth

・Users of the scheme: Broad range of financial institutions, including regional financial institutions・Duration: Four years maximum (one year in principle, which can be rolled over up to three times)y ( y p p , p )・Loan rates: the policy interest rate, which is 0.1% at the moment・Total amount of loans: the maximum total amount of the loan is three trillion yen, maximum amount for each eligible borrower is 150 billion yen)・ Application deadline: end of March 2012

L /i t t

・ The Bank of Japan expects the GFSF to act as a catalyst inducing financial institutions’ efforts toward economic growth.

・The Bank of Japan does not provide any guidance or instruction on allocation of funds to specific industries or companies.

Provision of funds (loans)

Loans/investments

GrowFinancial Institution

A

Company

wth

areas/busine

Bank of Japan

ACompany

Company

i i l i i

Collateral

18

esses

Company

Financial Institution B


(Figure 8) Submission of a Plan for the Efforts and Record of Individual Loan/Investment Transactions

Financial institutions that apply to use this GFSF shall formulate a “plan” concerning loans and investments to strengthen the growth platform and the individual loans and investmentsand investments to strengthen the growth platform and the individual loans and investments under the plan, which is confirmed by the Bank of Japan for certain conditions established by the Bank as shown below.

(Use of funds)

1) Research and development11) Business in the content creation industry

12) Tourism business2) Setting up a new business

3) Business reorganization

4) Investment and business deployment in Asian and other countries

5) Science and technology research at universities and research

12) Tourism business

13) Regional and urban revitalization business

14) Agriculture, forestry, and fisheries business;

Business linking agriculture, commerce, and industry5) Science and technology research at universities and research

institutions

6) Development and upgrading of social infrastructure

7) Environment and energy business

15) Business that supports the creation of housing stoc

16) Disaster prevention business

17) Employment support and human resource ) gy

8) Business for securing and developing natural resources

9) Medical, nursing care, and other health-related business

10) Business serving the needs of senior citizens

development business

18) Childcare service business

19- Funds may also be used in areas not listed above as long as their use supports strengthening of the foundations of economic growth.


(Borrower/Investee)

Domestic residents and foreign corporations with a business establishment in Japan

and conducting business in the areas identified as contributing to strengthening the

foundations of economic growthfoundations of economic growth

(Maturity of lending or investment)

One year or more

(Others)

The Bank of Japan shall be under no obligation to provide funds where,

for whatever reasons, it considers this to be inappropriate.

20

4. Growth Foundation Strengthening Facility :Outlines

━ The number of eligible financial institutions increased significantly, particularly regional financial institutions

(Figure 9) Number of Eligible Financial Institutions by Business Category (1st round ⇒as of the end of November)

(Number of Institutions)

Newly SelectedInstitutions

Institutions Selected forthe 1st Round

Total

Major banks (12) 12 - 12

Regional banks (63) 33 27 60g ( )

Second-tier regional banks (42)

8 29 37

Shinkin Banks (263) 6 19 25Shinkin Banks (263) 6 19 25

Others 7 2 9

Total 66 77 143

21Note: The figures in brackets are the total number of institutions by business category.

Total 66 77 143

5. Efforts of financial institutions to support strengthening the

foundation for growth

22


Across a wide variety of areas including “medical and nursing care,” “environment and energy,”

(Figure 10) Distribution of Eligible Growth Areas Listed in the Plans

and “business serving the needs of senior citizens.”

━ In addition, in areas other than the 18 areas listed by the Bank of Japan.

(Figure 10) Distribution of Eligible Growth Areas Listed in the Plans

Number of financial institutions identified as eligible based on the plan:127

140(Companies)

100

1201st Disbursement 2nd Disbursement

40

60

80

0

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23Note: Arranged in descending order of the number of eligible financial institutions for the growth area for the 1st and 2nd disbursement (accumulated total)

Ide

p de

(Figure 11) Actual Individual Investment and Loans Confirmed by the Bank of Japan


( g ) y p

● First disbursement: 1,340 transactions / 478.6 billion yen● Second disbursement: 4,313 transactions / 1056.4 billion yen

(Figure 12) Distribution of the amount per loans and investments (based on the number of transactions)

● , y

━ The average amount of individual investment / loan became slightly smaller.

(Figure 12) Distribution of the amount per loans and investments (based on the number of transactions)

0% 20% 40% 60% 80% 100%

1 t934 272 118 16

1st Disbursement

2nd

Total 1,340 transationsAverage 360 million yen

Total 4 313 transactions2,898

3 832

1,047

1 319

329

447

39

55

2nd Disbursement

Total

Total 4,313 transactionsAverage 240 million yen

Total 5,653 transactions3,832 1,319 447 55Total

10 million - 100 million yen 100 million - 500 million yen

500 illi 5 000 illi M th 5 000 illi

Average 240 million yen

24

500 million - 5,000 million yen More than 5,000 million yen


(Figure 13) Distribution of Individual Loans and Investments maturities (based on the number of transactions)

━ The average maturity of individual investment/loan transactions was shortened

0% 20% 40% 60% 80% 100%

204 804 274 581st

DisbursementTotal 1,340 transations

Average 8.2 years

1,224 2,658 344 872nd

DisbursementTotal 4,313 transactions

Average 5.8 years

1,428 3,462 618 145Total Total 5,653 transactionsAverage 6.4 years

1-4 years 4-10 years 10-20 years More than 20 years

25

-- The “environment/energy business” area accounts for the largest percentage in terms of amount


-- Notable increase in the “investment and business deployment in Asian countries” area in addition to “development and upgrading of social infrastructure” and “medical and nursing care.” A stable increase in the “other” area selected independently by financial institutions.

(Figure 14) Distribution of Individual Loans and Investments by Growth Area

4,500

5,000

1st Disbursement

(Companies)(Companies)

2 000

2,500

3,000

3,500

4,0001st Disbursement

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26（注）第1回および第2回資金供給（累計）で対象とする個別投融資金額が多い成長分野順に表記。Note: Arranged in descending order of the number of eligible financial institutions for the amount of the individual investment and loan transactions for the 1st and 2nd rounds (accumulated total)

In

(Fi 15) E l f Eff t


(Figure 15) Examples of Efforts

Key growth area Examples

Setting up a new business ・Support for setting up a new business using venture capitalg p pp g p g p

・Assistance with the establishment of new service businesses including hotels and restaurants

・Funds provided to a transport company to start the manufacturing operation and launch of new productsof new products

Business reorganization ・Company acquisition to expand the scale with a view to survival in the industry

・Management buyout of a subsidiary to respond smoothly to changes in the market

・Funds required for reconstruction of business facilities for consolidation of locations, etc.

Investment and business deployment in Asian countries

・Enterprise funds for strengthening production and expansion of distribution channels in China and other Asian countries (construction of a new/additional plant, establishment of a subsidiary, etc.)

・Funds for establishment/acquisition of a joint venture for business expansion, e.g., a partnership with a local company, etc.

Development and upgrading of social infrastructure

・Funds for installation of telecommunications cables and expansion of areas in which telecommunications service is provided ・Funds for creation, reconstruction, and repair of the regional transportation network・Funds for refurbishment/installation of gas and other supply systems

Environment/

Energy

・Equipment funds for electricity and oil development

・Equipment funds to improve energy conservation at the plant

27

gy q p p gy p

・Funds for construction of waste-recycling facilities

・Funds for replacing cars with environmental friendly vehicles such as eco-cars


（ (Figure 15 <cont’d>) Examples of Efforts

Key growth area Examples

/Medical/Nursing care

・Funds for constructing new medical and welfare institutions

・Funds to purchase advanced medical equipment (CT scanners, MRI equipment, etc.)

Business for senior ・Funds for construction of new private nursing homes, day care centers, etc. and for citizens

g yimprovement of services

Tourism ・Funds for new construction, upgrading, or refurbishment of facilities with a view to effectively using the tourism resources in the region (scenic areas, hot springs, etc.)

・Funds for refurbishment of restaurants/shops at traffic facilitiesFunds for refurbishment of restaurants/shops at traffic facilities

・Funds for refurbishment of Japanese-style inns and hotels to increase the number of tourists and improve convenience

Regional and urban revitalization

・Funds to open new shops and distribution centers to create new jobs/demand in the regionrevitalization region

・Urban area redevelopment funds by a securitization scheme to facilitate fund-raising

・Funds to open stores using vacant outlets /spaces in the central district that has become hollowed out

Others ・Equipment funds for food-processing companies using local products with a view to improving productivity

・Funds for equipment and operation to strengthen the platform for local basic industries (manufacturing, retail, etc.)

28


More proactive efforts than ever by financial institutions

Establishment of new facilities and investment/loan programs

Information gathering on growth areas and growing companies

⇒ Use of such information to support branches in promoting their business

Strengthening of group-wide collaboration

Re-examination of credit risk management

Encouraging moves, all leading to a sharpening of the “expert eye”

More proactive and forward-looking actions by financial institutions

29＝ Exactly what we expect from the GFSF as a catalyst inducing

financial institutions’ efforts toward economic growth.

6. Conclusion

30

Companies

6. ConclusionCompanies

・Efforts to enhance corporate values

Strategic Strategic

p

thinkingthinking

Ad i i t ti b diAdministrative bodiesEconomic organizations

Financial institutions

・Improvement of the financial I di t t f i ’ d・Improvement of the financial intermediary function・Proper rate setting in accordance with the risk

・ Indirect support for companies’ and financial institutions’ proactive efforts

・Provision of proper incentives・ Use of “expert eye” ability

p p

31The Bank of Japan’s Growth Foundation Strengthening Facility

Documents

Toward Strengthening the Foundations for Economic Growth: … · Toward Strengthening the Foundations for Economic Growth:Toward Strengthening the Foundations for Economic Growth: