Contacts: -Takeo Hoshi, associate professor, IR/PS, 858/534-5018 (phone/w), (858) 538-3817 (phone/h) thoshi@ucsd.edu -Anne Middleton, communications director, IR/PS, 858/534-2777, amiddleton@ucsd.edu

UC SAN DIEGO PACIFIC RIM ECONOMIST AVAILABLE TO COMMENT ON PROPOSED MEGA-MERGER OF THREE JAPANESE BANKS

Takeo Hoshi, associate professor at UC San Diego's Graduate School of International Relations and Pacific Studies (IR/PS) and an expert on Japan's financial system, is available to provide commentary on the proposed merger of three of Japan's largest banks, which was announced today.

Fuji Bank Ltd., Dai-Ichi Kangyo Bank Ltd. and the Industrial Bank of Japan Ltd. (Fuji-DKB-IBJ) announced their plan to join forces under a single financial holding company that would be created in the fall of 2000. The planned merger would create a banking conglomerate with more than $1.26 trillion in assets, surpassing Deutsche Bank AG, currently the world's largest bank.

"The merger, if it happens, is just the first step toward the formation of a more comprehensive financial holding company, such as Citigroup," Hoshi said. "Fuji, Dai-Ichi Kangyo and Industrial Bank already have ties to firms in the securities and insurance industries, but a more formalized structure is likely to follow." 

"Mere mergers, however, are not the answers to curing Japan's ailing banking system," he adds. "As I argue in my forthcoming paper, 'The Japanese Banking Crisis: Where Did It Come From and How Will It End?' Japan is overbanked and must dispose of its bad assets. In order for that to happen, the exit of weak banks is inevitable."

The paper, co-authored with Anil Kashyup (University of Chicago, Graduate School of Business), shows that deregulation allowed large Japanese firms to quickly switch from bank financing to capital market financing and that large Japanese borrowers are already almost as independent of banks as comparable U.S. firms, Hoshi said. The paper argues that medium and small borrowers will also start shifting their financing away from banks into capital markets and predicts a massive contraction of the Japanese banking sector. The paper is forthcoming in NBER Macroeconomic Annual 1999.

The success of the proposed Fuji-DKB-IBJ merger will greatly depend upon the consolidation of the three banks' resources and the elimination of duplicate facilities, Hoshi added. "Japanese banks have not been known for massive restructuring after mergers," he said. "The formation of a financial holding company would ease the restructuring process, but that organizational form alone will not guarantee positive results." 

Hoshi, who obtained a Ph.D. in economics from the Massachusetts Institute of Technology, has been a faculty member of IR/PS since 1988. He is currently co-authoring a book, tentatively titled Keiretsu Financing (with Anil Kashyap). Hoshi is editor-in-chief of the Journal of the Japanese and International Economies. He is also a founding member of Shadow Financial Regulatory Committee of Japan, which has been publishing policy statements on Japanese bank regulations.