Coming Challenges to Financial Supervision

During the 1990s the complexion of world banking has changed. At the beginning of the decade Japanese banks dominated the league table of the largest banks (Table 3.1), while as the decade progressed American banks grew rapidly in size. This pattern of relative decline and growth is in part explicable by the differing performance of the two economies. Between 1990 and 1999 US GDP Table 3.1 Banking league table (ranked by tier 1 capital) grew by 27 per cent in real terms while that of Japan grew by only 12 per cent. The Japanese difficulties impacted particularly strongly on the financial sector, with the decline in asset prices and profitability of major companies resulting in substantial retrenchment, similar to the problems of debt-deflation (King, 1994). Substantial attempts to reflate the economy both through monetary policy with interest rates of virtually zero in nominal terms and through fiscal policy had not had a strong effect by the end of the decade. On the other hand, the recovery in the United States had been aided by regulatory change with the opening of cross-state banking permitting the formation of even larger conglomerates.