Portal de Periódicos da CAPES

Explaining cosmetic compliance with international regulatory regimes: The implementation of the Basle Accord in Japan, 1998–2003

2006; Taylor & Francis; Volume: 11; Issue: 2 Linguagem: Inglês

10.1080/13563460600655664

1469-9923

Hyoung‐kyu Chey,

Global Financial Regulation and Crises

Click to increase image sizeClick to decrease image size I wish to thank Andrew Walter, the editors of New Political Economy and two anonymous reviewers for helpful comments on earlier versions of this article. I am also indebted to the 16 Japanese bank regulators, government advisers, academics and analysts in credit rating companies who participated in interviews. Research was conducted primarily while on a Japan Foundation Fellowship, during which time I was a visiting research scholar in the Institute of Social Science at the University of Tokyo. Notes 1. It should be noted that the real targets of a growing number of regulatory regimes in areas such as accounting, environment, finance, health and labour are private firms, although the majority of such regimes were established by national governments. See Tanja Börzel, 'Private Actors on the Rise? The Role of Non-State Actors in Compliance with International Institutions', MPI Collective Goods Preprint no. 2000/14, Max Planck Institute for Research on Collective Goods, Bonn, July 2000, http://papers.ssrn.com/sol3/papers.cfm? abstract_id = 267733 (accessed 20 February 2002), pp. 2–3. 2. Jonas Tallberg argues that enforcement and management are more effective when combined. See Jonas Tallberg, 'Paths to Compliance: Enforcement, Management, and the Europan Union', International Organization, Vol. 56, No. 3 (2002), pp. 609–43. 3. There are a few studies that highlight domestic politics in explaining compliance. Yet most of those studies either stress that the existence of domestic advocates for international regimes is important for the compliance, or focus on analysing how domestic support for international regimes arises. See, for example, Arild Underdal & Kenneth Hanf (eds), International Environmental Agreements and Domestic Politics: The Case of Acid Rain (Ashgate, 2000); Jeffrey T. Checkel, 'Why Comply? Social Learning and European Identity Change', International Organization, Vol. 55, No. 3 (2001), pp. 553–88; and Xinyuan Dai, 'Why Comply? The Domestic Constituency Mechanism', International Organization, Vol. 59, No. 2 (2005), pp. 363–98. 4. The narrow conceptualisation of compliance/non-compliance was suggested by Oran R. Young in his groundbreaking research on compliance with international public authority. See Oran R. Young, Compliance and Public Authority: A Theory with International Applications (Johns Hopkins Press, 1979), p. 3. 5. A notable exception that addresses compliance in a broader sense is Edith Brown Weiss & Harold K. Jacobson (eds), Engaging Countries: Strengthening Compliance with International Environmental Accords (The MIT Press, 1998). 6. See Weiss & Jacobson (eds), Engaging Countries; Andrew Walter, 'Implementation in East Asia', in Benu Schneider (eds), The Road to International Financial Stability: Are Key Financial Standards the Answer? (Palgrave, 2003), pp. 110–41; and International Monetary Fund, 'Financial Sector Regulation: Issues and Gaps', 4 August 2004, http://www.imf.org/external/np/mfd/2004/eng/080404.pdf (accessed 20 August 2005). 7. The 1988 Basle Accord was amended in 1996 to cover market risks and it will be replaced by the new capital adequacy framework, which is commonly known as Basle II, from 2006. 8. Indeed, much research argues that global levels of compliance with the BIS standard have been high globally. See Charles K. Whitehead, 'What's Your Sign?: International Norms, Signals, and Compliance', 1 August 2005, http://papers.ssrn.com/sol3/papers.cfm?abstract_id = 777684 (accessed 7 August 2005), p. 39. 9. Beth A. Simmons, 'The International Politics of Harmonization: The Case of Capital Market Regulation', International Organization, Vol. 55, No. 3 (2001), pp. 601–2. 10. See Financial Stability Forum, 'Report of the Follow-Up Group on Incentives to Foster Implementation of Standards', 31 August 2000, http://www.fsforum.org/publications/publication_22_10.html (accessed 12 August 2002), p. 20. 11. See 'Japanese efforts to grow in US said to be hindered back home', The American Banker, 12 March 1987; Ethan B. Kapstein, Governing the Global Economy: International Finance and the State (Harvard University Press, 1994); and Thomas Oatley & Robert Nabors, 'Redistributive Cooperation: Market Failure, Wealth Transfer, and the Basle Accord', International Organization, Vol. 52, No. 1 (1998), pp. 35–54. Kentaro Tamura argues that Japan's bank regulatory authority used this foreign pressure in order to strengthen the country's bank capital regulations. See Kentaro Tamura, 'A Regulator's Dilemma and Two-level Games: Japan in the Politics of International Banking Regulation', Social Science Japan Journal, Vol. 6, No. 2 (2003), pp. 221–40. 12. See Joe Peek & Eric S. Rosengren, 'Determinants of the Japan Premium: Actions Speak Louder than Words', Journal of International Economics, Vol. 53, No. 2 (2001), pp. 285–305. The Japan premium was a premium paid for inter-bank borrowing by Japanese banks relative to their major competitors in the USA and Europe. 13. See, for example, Kenneth A. Oye (ed.), Cooperation Under Anarchy (Princeton University Press, 1986); George W. Downs, David M. Rocke & Peter N. Barsoom, 'Is the Good News about Compliance Good News about Cooperation?', International Organization, Vol. 50, No. 3 (1996), pp. 379–406; and A. Walter Dorn & Andrew Fulton, 'Securing Compliance with Disarmament Treaties: Carrots, Sticks, and the Case of North Korea', Global Governance, Vol. 3, No. 1 (1997), pp. 17–40. 14. Arthur A. Stein, 'Coordination and Collaboration: Regimes in an Anarchic World', International Organization, Vol. 36, No. 2 (1982), pp. 299–324. 15. Downs et al., 'Is the Good News about Compliance Good News about Cooperation?', p. 386. 16. See Robert Axelrod & Robert O. Keohane, 'Achieving Cooperation Under Anarchy: Strategies and Institutions', in Oye (ed.), Cooperation Under Anarchy, pp. 235–6. 17. See, for example, Kapstein, Governing the Global Economy; Oatley & Nabors, 'Redistributive Cooperation'; and Simmons, 'The International Politics of Harmonization'. 18. See, for example, Financial Stability Forum, 'Report of the Follow-Up Group on Incentives to Foster Implementation of Standards'; Financial Stability Forum, 'Final Report of the Follow-Up Group on Incentives to Foster Implementation of Standards', 21 August 2001, http://www.fsforum.org/Reports/Incentives.pdf (accessed 12 August 2002). 19. Simmons, 'The International Politics of Harmonization', p. 602. 20. See Susmita Dasgupta, Benoit Laplante & Nlandu Mamingi, Capital Market Responses to Environmental Performance in Developing Countries, Research Working Paper No. 1909, The World Bank Development Research Group, World Bank, Washington DC, 1998. 21. Bank for International Settlements, Report on International Developments in Banking Supervision, Report No. 8, Basle, 1992, p. 20; Simmons, 'The International Politics of Harmonization', pp. 601–5; Daniel E. Ho, 'Compliance and International Soft Law: Why Do Countries Implement the Basle Accord?', Journal of International Economic Law, Vol. 5, No. 3 (2002), pp. 647–88; and David A. Singer, 'Capital Rules: The Domestic Politics of International Regulatory Harmonization', International Organization, Vol. 58, No. 3 (2004), p. 563. 22. See, for example, Abram Chayes & Antonia Handler Chayes, 'On Compliance', International Organization, Vol. 47, No. 2 (1993), pp. 175–205; Abram Chayes & Antonia Handler Chayes, The New Sovereignty: Compliance with International Regulatory Agreements (Harvard University Press, 1995); and Abram Chayes, Antonia Handler Chayes & Ronald B. Mitchell, 'Managing Compliance: A Comparative Perspective', in Weiss & Jacobson (eds), Engaging Countries, pp. 39–62. 23. Chayes & Chayes, The New Sovereignty, p. 32. 24. Chayes & Chayes, 'On Compliance', p. 176. 25. Ibid., pp. 187–97. 26. Chayes & Chayes, The New Sovereignty. 27. The problem of ambiguity and indeterminacy of rules is a general characteristic of a number of international regimes. See Chayes & Chayes, 'On Compliance', pp. 188–92. 28. See David Vogel & Timothy Kessler, 'How Compliance Happens and Doesn't Happen Domestically', in Weiss & Jacobson, Engaging Countries, pp. 19–37. 29. Although the Japanese regulatory authority did exercise forbearance in regulating banks during the pre-PCA period, the regulatory forbearance was not directly related to the capital adequacy regulations. 30. Author's interview with Hitoshi Horikawa (Deputy Director of the Supervisory Bureau, Financial Services Agency), Tokyo, 2 April 2004. 31. See Mitsuhiro Fukao, 'Financial Sector Profitability and Double-Gearing', in Magus Blomstrom, Jennifer Corbert, Fumio Hayashi & Anil Kashyap (eds), Structural Impediments to Growth in Japan (University of Chicago Press, 2003), pp. 9–35; and International Monetary Fund, Japan: Financial System Stability Assessment and Supplementary Information, Country Report No. 03/287, Washington DC, 2003, p. 19. 32. See 'Japan battling to hold off implosion', The Banker, July 2002. 33. The practice ended when mark-to-market accounting was introduced in fiscal year 2001. 34. DTAs were credits against taxes on future taxable income. 35. International Monetary Fund, Japan, p. 18; Misuhiro Fukao, 'Weakening Market and Regulatory Discipline in Japanese Financial System', paper presented to the conference Market Discipline: The Evidence across Countries and Industries, co-sponsored by the Bank for International Settlements and the Federal Reserve Bank of Chicago, Chicago, IL, 30 October–1 November 2003, pp. 17–18. 36. Cabinet Office, Keizai Zaimu Hakshyo: Kaikaku Nakushite Nashi III [Annual Report on the Japanese Economy and Public Finance: No Gains Without Reforms III] (Government of Japan, 2003), p. 110. 37. 'Equity: the banks say they have healthy amounts of capital', Asahi Shimbun, 12 October 2002. 38. 'Most regional banks opt for BIS capital ratio', Jiji Press, 15 February 1989. 39. Author's interview with Takatoshi Ito (Deputy Vice Minister for International Affairs, Ministry of Finance, 1999–2001), Tokyo, 1 March 2004. 40. 'Takenaka cedes deferred tax plan', The Nikkei Weekly, 5 November 2002. 41. For the supervision of the capital adequacy of foreign banks in major countries, see Michael Gruson & Ralph Reisner (eds), Regulation of Foreign Banks: United States and International (LEXIS Publishing, 2000). 42. Kapstein, Governing the Global Economy; Oatley & Nabors, 'Redistributive Cooperation'. 43. 'Review loan risk weighting rules under accords, supervisors urged', Thomson's International Banking Regulator, 25 October 1991; Cem Karacadag & Michael W. Taylor, The New Capital Adequacy Framework: Institutional Constraints and Incentive Structures, IMF Working Paper (WP/00/93), International Monetary Fund, Washington DC, 2000, p. 5. 44. Karacadag & Taylor, The New Capital Adequacy Framework, pp. 5–7. 45. See Japan Center for International Finance, 'Characteristics and Appraisal of Major Rating Companies', 1999, 2001, http://www.jcif.or.jp/e/report/rating.html (accessed 13 December 2003); and Japan Center for International Finance, 'Characteristics and Appraisal of Major Rating Agencies', 2000, http://www.jcif. or.jp/e/report/rating.html (accessed 13 December 2003). According to an estimate, an 'AAA' bank could issue debt offering interest of between 0.1 and 0.6 per cent less than an 'AA' bank. See 'Banks owe a debt to the exclusive AAA club', The Times, 5 March 1991. 46. There is no official definition of economic capital, but the underlying logic is that a bank's true economic capital should be permanent and readily available to compensate for massive losses before general creditors would be affected in any way. See Moody's Investors Service, 'Rating Methodology: Bank Credit Risk (An Analytical Framework for Banks Developed Markets)', April 1999, http://www.moodys.com/moodys/cust/research/venus/Publication/Rating%20Methodology/noncategorized_number/44246.pdf (accessed 1 October 2003), p. 37. 47. The three major CRCs' bank ratings methodologies are available from their websites: http://www. fitchratings.com, http://www.moodys.com, and http://www2.standardandpoors.com. 48. Moody's Investors Service, 'Rating Methodology: Bank Credit Risk (An Analytical Framework)', p. 36. 49. Moody's Investors Service, 'Rating Methodology: Bank Credit Risk in Emerging Markets (An Analytical Framework)', July 1999, http://www.moodys.com/moodys/cust/research/MDCdocs/18/2000400000301534.pdf (accessed 1 October 2003), p. 32. Emphasis added. 50. Author's interview with an analyst at Standard & Poor's, email correspondence, 11 August 2004. 51. Fitch Ratings, 'Are Credit Ratings Correlated With Regulatory Capital?', 26 November 2003, http://www.fitchratings.com/corporate/reports/report.cfm?.rpt_id = 190744§or_flag = 3&marketsector = 1&detail = (accessed 19 June 2004). 52. See 'Fitch downgrades Japanese banks', FT Investor, 30 January 2003; 'Moody's to review ratings of 4 banks for possible downgrades', Japan Economic Newswire, 12 June 2003; and Fitch Ratings, 'Most Major Japanese Bank Ratings Lowered due to Weakening Financial Condition & Declining Sovereign Rating', 31 January 2003, http://www.fitchratings.com (accessed 2 January 2004). 53. See Japan Center for International Finance, 'Characteristics and Appraisal of Major Rating Companies', 2001, pp. 9–10. 54. Takatoshi Ito & Kimie Harada, Market Evaluations of Banking Fragility in Japan: Japan Premium, Stock Prices, and Credit Derivatives, NBER Working Paper (No. 9589), National Bureau of Economic Research, Cambridge, MA, March 2003. 55. Moody's Investors Service, 'Rating Methodology: Bank Credit Risk in Emerging Markets (An Analytical Framework)', p. 37. 56. The Financial Restructuring Commission also operated from December 1998 to January 2001 as a temporary body to deal with failed financial institutions. 57. Jennifer Amyx, 'A New Face for Japanese Finance?: Assessing the Impact of Recent Reforms', in Gil Latz & Koide Izumi (eds), Challenges for Japan: Democracy, Finance, International Relations, Gender (The International House of Japan, 2003), pp. 50–2; and International Monetary Fund, Japan, p. 76. Indeed, some Japanese scholars pointed out the lack of communication between the new regulatory authority and banks as a new problem hindering effective banking supervision (author's interview with Professor Shinsaku Iwahara, University of Tokyo, Tokyo, 26 January 2004). On the informal network between the MoF and banks (namely, amakudari, mofutan or ama-agari) and its effects on the Japanese banking regulation, see Jennifer Amyx, 'The Banking Crisis in Japan: Policy Paralysis in the Network State', paper presented to the 44th Convention of the International Studies Association, Portland, OR, 25 February–1 March 2003; and Adrian Van Rixtel, Informality and Monetary Policy in Japan: Political Economy of Bank Performance (Cambridge University Press, 2002). 58. See Deposit Insurance Corporation of Japan, 'Outline of Funding Program for FY2003 by Account', 2003, http://www.dic.go.jp/english/e_katsudou/e_katsudou6-2.pdf (accessed 22 March 2004); and Tim Callen & Martin Muhleisen, 'Current Issues Facing the Financial Sector', in Tim Callen & Jonathan D. Ostry (eds), Japan's Lost Decade: Policies for Economic Survival (International Monetary Fund, 2003), p. 33. 59. Author's interview with Yoshimasa Nishimura (former Director-General of Banking Bureau, Ministry of Finance, 1994–6), Tokyo, 5 March 2004. 60. See David Woo, In Search of 'Capital Crunch': Supply Factors Behind the Slowdown in Japan, IMF Working Paper (WP/99/3), International Monetary Found, Washington DC, January 1999, p. 8. 61. Ibid. 62. 'Gov't to ease new banking supervision rules', Japan Economic Newswire, 22 December 1997. 63. The ratio of bank debt to total debt for SMEs was over 80 per cent. See Giovannit Dell'Ariccia, 'Banks and Credit in Japan', in Callen & Ostry, Japan's Lost Decade, p. 48. 64. Cabinet Office, Keizai Zaimu Hakshyo, pp. 97–100. 65. Until the financial crisis, the Japanese bank regulatory authority – the MoF – had, to a large extent, maintained independence from politicians. See Amyx, 'The Banking Crisis in Japan'. 66. Furukawa Motohisa, 'The Financial Diet of 1998', in Gerald L. Curtis (ed.), Policymaking in Japan (Japan Center for International Exchange, 2002), pp. 42–61; Nemoto Takumi, 'The Successful Handling of the Financial Crisis', in Curtis, Policymaking in Japan, pp. 18–41. 67. International Monetary Fund, Japan, pp. 30, 37–8, 75–6. 68. See Hugh T. Patrick & Thomas P. Rohlen, 'Small-Scale Family Enterprises', in Kozo Yamamura & Yasukichi Yasuba (eds), The Political Economy of Japan, Vol. I: The Domestic Transformation (Stanford University Press, 1987), pp. 366–72. 69. Gary D. Allison, 'Citizenship, Fragmentation, and the Negotiated Polity', in Gary D. Allison (ed.), Political Dynamics in Contemporary Japan (Cornell University Press, 1993), p. 44; T. J. Pempel, Regime Shift: Comparative Dynamics of the Japanese Political Economy (Cornell University Press, 1998), p. 165. 70. Author's confidential interview with a senior official of the Bank of Japan, Tokyo, 20 February 2004. 71. The dominance by the coalition of opposition parties in the Upper House in mid-1998 made for a few progressive measures in banking regulation. 72. Author's interview with Shinsaku Iwahara (Chair of the Work Group on Financial Inspection Manual), Tokyo, 16 February 2004. 73. 'Lending squeeze vexes Japanese govt', Asia Pulse, 24 December 1997; 'MoF to relax capital-adequacy rule for domestic banks', Japan Economic Newswire, 24 December 1997. 74. See Financial Services Agency, 'Shyuyoginni taisuru tokubetsu kensano kekkani tsuite ['Results of the Special Inspections on Major Banks'], 12 April 2002, http://www.fsa.go.jp/news/newsj/13/ginkou/f-20020412–4.html (accessed 5 February 2004). 75. See 'Controversy builds over lenders' health', The Nikkei Weekly, 3 June 2002. 76. The President of Sumitomo Mitsui Banking Corporation (a major Japanese bank) told the Minister for Financial Services, Heizo Takenaka, in a meeting: 'If you're going to change the rules overnight, I'm afraid it's very likely there'll be an extensive credit crunch'. See 'Critics say Takenaka's plan won't rid banks of bad loans', Asahi Shimbum, 26 October 2002. 77. The FSA postponed announcing the PFR, citing 'political reasons', after Minister Takenaka had a meeting with LDP members. See 'LDP members attack Koizumi strategy', Financial Times, 23 October 2002. 78. Author's interview with Mitsuhiro Fukao (member of the Working Group on Banks' Capital Adequacy Ratios for the Programme for Financial Revival), Tokyo, 9 March 2004; and author's interview with Yuri Okina (member of the Working Group), Tokyo, 24 March 2004. 79. 'Caution over Japanese funds scheme', Financial Times, 18 February 1998; 'Gov't to step up warnings to banks to recapitalize', Japan Economic Newswire, 15 October 1998. 80. See 'Public funds to go to Tokyo-Mitsubishi', Asahi Shimbum, 14 January 1998; 'Financial stabilization plan inching ahead', The Nikkei Weekly, 23 February 1998; 'FSA to get tougher in evaluating LTCB', Mainichi Daily News, 16 October 1998; 'Tough love for banks', Asiaweek, 7 May 1999; Financial Restructuring Commission, 'The Viewpoint on the Write-Offs and Allowances in Association with the Capital Injection', 25 January 1999, http://www.fsa.go.jp/frc/newse/ne002.html (accessed 10 December 2003); and Financial Restructuring Commission, 'Basic Viewpoints and Results of the Examination with Regard to the Capital Injection for the Applicant Banks', 12 March 1999, http://www.fsa.go.jp/frc/newse/ne004a.html (accessed 10 December 2003). The government also relaxed tough conditions on management responsibility and restructuring. 81. The International Monetary Fund recently reported that the BIS standard was loosely applied in a number of countries. See International Monetary Fund 'Financial Sector Regulation', p. 21. 82. Ibid., pp. 12, 21. 83. Vogel & Kessler, 'How Compliance Happens and Doesn't Happen Domestically', p. 35. 84. See, for example, Harold K. Jacobson & Edith Brown Weiss, 'Assessing the Record and Designing Strategies to Engage Countries', in Weiss & Jacobson, Engaging Countries, p. 553; and International Monetary Fund 'Financial Sector Regulation', p. 12.