World Banking Systems 1

Running Head: WORLD BANKING SYSTEMS

World Banking Systems

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World Banking Systems

Comparing the Banking Systems of the United States of America, Germany and Japan.

One of the most notable differences among developed countries is the wide variation in the

form of their banking systems. Cross-country differences in banking systems and economic

performance raise a multitude of interesting questions. What are the advantages of bank-

based systems and what are the advantages of having sophisticated financial markets? Did

Germany, Japan, and France succeed because of their bank-based systems or regardless of

them?

Comparing the Banking Systems of the United States of America and Germany.

There are currently two dominant models of banking used globally. In the "German model,"

banks and other intermediaries predominate. In the "U.S. model," financial markets play the

predominate role. The theoretical analysis is divided into two parts - the household side of the

market, and the firm side.

Household Perspective - From the house-hold side, the disparity between the U.S. and

German systems could be epitomized by saying that usually German banks tends to take short

term deposits and ultimately convert them into holding(s) of corporate securities, whereas

U.S. banks tends to leave the investment in corporate securities to other institution(s) and

ultimately convert short term deposits into other instruments like mortgages, consumer loans

and business loans. Therefore, assets held by German banks look primarily riskier than their

U.S. counterparts.

Firm Perspective - From the firm side, German firms would appear to be at a substantial

disadvantage in making investment and entry decisions because firms lack the extent of

information available to U.S. investors. It could be argued that the German system permits

alternate mechanisms, as the banks have a plethora of information about the profitability of
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firms. However, absence of an active stock market, deciding on appropriate risk adjusted

discount rates may present serious problems. In Germany, an active market for corporate

control is not in place. Concentration of ownership may be the most important reason that

makes it complicated for outsiders to takeover control and thwart a proper market from

emerging. Nonetheless, given banks' broad inside knowledge of firms, their analysis is

presumably weighted heavily in board rooms. Bank-based systems such as Germany's are

much more apt for traditional industries where there is agreement on operating requirements,

and financial market based systems are more suitable for dynamic industries where there is

not wide consensus.

Comparing the Banking Systems of the United States of America and Japan.

In his recent bestseller, "The State We're In," Will Hutton, an English writer and former

editor-in-chief for The Observer, London, has given a few suggestions to realign England's

banking system on Japanese practices. Hutton scrutinized British banks for having a passive

investor mentality since the times of Foxwell. Japan revolutionized its economy from the late

1930s till the 1980s by rallying its savings to support its industry. They used their widespread

post office network to collect long-term savings from all over the country and the large public

investment banks loaned it to finance industries. Their financial system is regulated and

regarded as one of the least market-based, conservative and above all highly devoted to its

customers.

Shareholdings represent long-term commitments to companies, not mere vehicles for short-

term trading profits. Japan's banks are linked to the rest of the financial system by a system of

cross-shareholdings. Some of the biggest banks of Japan like Mitsubishi, Sumitomo, Mitsui,

Sanwa, Fuyo, and Daiichi Kangyo Bank are each big City banks have a trust bank, a life

insurance company and a trading company tailing along with. The banks operate as heads of
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every group, directing long-term lending, taking part in negotiations over joint ventures and

frequently sharing information and business advice. As a result of this intricate network of

cross-shareholdings the relational market represents nearly 70% of Japanese stocks which

constitutes a system of joint enduring pledges; this also provides them a cushion against

hostile takeovers. Corporate/Executive share option is a trend unheard of in Japan unlike their

Anglo-Saxon equivalents. Remarkably in case of bankruptcy the Japanese banks rank

themselves after the company employees and subcontractors while claiming on the

company's assets. This allows Japan's banks to save their customers from insolvency rather

than retreating back when business conditions turn soar.

In the United States the three facets of the link are between banking, government, and the real

estate sector. Manufacturing gets less preference as over 70 percent of loans to businesses are

real estate loans. Thus, new credit creation is based mainly on mortgage banking. This blows

up the real estate bubble without funding new direct industrial investment. This prejudice is

reinforced by a fiscal system that taxes capital gains at much lower rates than earned income.

Therefore, American investors prefer capital gains over industrial earnings.

The Best System

Preferring one of the systems over others is matter of opinion. Each system has its innate

loopholes with integral pros and cons. Japan’s banking philosophy of standing beside a client

in his/her time of distress sounds very novel. At the same time the decision a German client

takes solely (and blindly) on the basis of the in depth knowledge, about a particular company,

which his bank posses is also commendable. Whereas, US clause of demanding adequate

disclosure from the companies presents the banks’ clients with a chance to monitor and

approve each and every small thing to a microscopic extent, which is certainly laudable.