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FRBSF

WEEKLY LETTEA

Number 93-36, October 22, 1993

-

."".

.......

,..

..

UITTlcUlt limeS tor Japanese Agencies
and Hranches

.

.

During the second half of the 1980s, the Japanese
economy prospered. A rise in the japanese stock
market added to the so-called hidden reserves of
Japanese financial institutions, giving them an
abundance of capital. As Japanese individuals
and institutions invested heavily in the U.s., Japanese banks built a major presence here, increasing their market share substantially. This was
notably true in California, where Japanese banks
have long been active.
The sustained decline in the Japanese stock market that began in late 1989 severely affected the
capital of Japanese banks. As growth in the japanese and u.s. economies faltered, Japanese
banks also faced increasingly serious asset quality problems, especially in their real estate loan
portfolios. This Letter examines the rapid expansion of Japanese-owned banking institutions in
the United States since 1985 and analyzes the
impact of problems in real estate markets on
the condition of japanese-owned banking institutions, with an emphasis on California.

Rapid growth
In the late 1980s, the growth of japanese banking
institutions in the u.s. was dramatic. Between
1985 and the peak in 1990, Japanese-owned
banking institutions' assets rose from $180 billion
to almost $436 billion, and their market share of
U.S. banking assets nearly doubled, from 6.5 percent to 11.8 percent. The change in market share
was even more striking in California, where Japanese institutions went from 16 percent of the
market in 1985 to 27.5 percent at the end of 1990.
The totals for Japanese banks in the United States
reflect two distinct groups of Japanese-owned
banking institutions: (1) agencies and branches
and (2) subsidiaries. A branch of a foreign bank
has full banking powers and can accept deposits;

WESTERn BAnKinG

an agency of a foreign bank offers limited banking services, and cannot accept domestic deposits. At year-end 1992, Japanese-owned banks
operated 121 agencies and branches in the U.s.
with combined assets of over $344 billion, about
85 percent of the U.S. total for Japanese banking
institutions; 32 of these agencies and branches
were in California, with combined assets of $59
billion. (Most of the others were in New York.)
These entities traditionally have been oriented
toward wholesale banking, including tradefinancing and money-market services, so they
are relative newcomers to real estate lending in
the United States. Unlike commercial banks,
which generally make a mix of both commercial
and residential loans, the real estate loans of foreign agencies and branches are almost all for
commercial real estate or construction.
Subsidiaries of japanese banks are U.S. banks,
chartered and regulated by u.s. banking agencies, but at least 25 percent owned by a Japanese
bank. At year-end 1992 Japanese banks had 21
U.s. subsidiaries with assets of $63 billion. Japanese subsidiaries are generally full service banks,
offering a wide array of wholesale and retail
banking services, including residential and commercial real estate loans, consumer loans and
middle market business loans. Nowhere is this
more true than in California, where the combined assets of the ten japanese-owned subsidiaries were about $40 billion at the end of 1992,
and four of them ranked among the state's ten
largest commercial banks. Many of these subsidiary banks have long been active real estate
lenders, mostly for residential rather than commercial mortgages.
Between 1985 and 1991, real estate lending in the
u.s. surged, especially for Japanese-owned agencies and branches: For U.S. domestic banks real

Western Banking is a quarterly review of banking
developments in the Twelfth Federal Reserve District. It is published in the Weekly Letter on the fourth
Friday of january, April, July, and October.

FRBSF
estate loans doubled; for Japanese-owned subsidiaries they quadrupled, peaking at $18.4 billion;
and for japanese-owned agencies and branches,
which lent largely for commercial real estate,
they rose from $250 million to $40.5 billion,
about one-ninth of the total assets of these offices. This activity resulted in a tremendous shift
in market share in the United States. japaneseowned banking institutions held only 1 percent
of outstanding bank real estate loans in the
United States in 1985. In six years that figure
went to 6.7 percent.
Part of the surge in real estate lending may have
been related to the well-documented rise in
japanese investment in U.s. real estate. Foreign
customers often prefer dealing with a bank rooted
in their home country, because they have established customer relationships with tnese banks
and are familiar with the language, customs, and
banking practices. The bulk of japanese real
estate investment was in office buildings and
hotels, corresponding to the rise in real estate
lending by the agencies and branches with their
traditional commercial orientation.

Loan problems
As the Japanese banking institutions added to
their real estate portfolios, many U.s. real estate
markets began to show signs of stress. These
market developments are reflected in the loan
portfolios of the japanese institutions, particularly
the agencies and branches. A customary measure of problem loans is the ratio of non accrual
loans plus loans 30 day or more past due divided
by total loans of that type outstanding. Over the
last two years the aggregate problem real estate
loan ratio for California banks has risen from
5.8 percent to 8.5 percent, reflecting the market
downturn. The trend of problem loan ratios at
japanese-owned subsidiaries in California has
been similar, although the level has been higher.
The pattern of problem loans at japanese agencies and branches has differed notably. Problem
real estate loan ratios rose much more sharply,
from 2.3 percent at the beginning of 1991 to
9.4 percent at the end of 1992. Such a change
was significant, since real estate loans were
about one-third of the total lending of these
agencies and branches. The problems have not
been limited to California; japanese agencies

and branches in New York fared even worse.

Like Califoinia, real estate markets in ~~evv York
have been hit hard since 1990. At year-end 1992,

the problem rea! estate loan ratio for Japanese
agencies and branches in New York stood at
15.5 percent.
Thus, japanese agencies and branches have paid
a heavy price for their recent deep involvement
in real estate. The deterioration in loan portfolios
has affected the profitability of japanese operations in California, where the California State
Banking Department tracks income for statelicensed agencies and branches. Although income figures for individual offices should be
interpreted with caution, the state data show that
many japanese offices lost money in 1992; the 23
state-licensed japanese agencies and branches
had a weighted-average return on assets (ROA) of
- 0.45 percent for the year. In contrast, California banks as a whole posted an average ROA
of 0.58 percent despite facing similar market
conditions.

What next?
japanese banks have been hit hard by economic
conditions. At home, real estate woes and a sluggish economy put pressure on parent banks.
Similar problems in California, and in the nation
as a whole, took a further toll. The difficulties
have been particularly pronounced at Japanese
agencies and branches, the group that recorded
the most rapid increases in commercial real estate lending after 1985. They faced high levels of
problem loans, reduced property and collateral
values, and commercial real estate markets with
clouded prospects for near-term recovery.
Japanese banks have taken significant steps to
recover from these recent difficulties, through
write-offs, loan loss provisions, and additions to
capital; they currently meet relevant international
capital standards. The most recently available
data also suggest the beginning of a shrinkage
by Japanese agencies and branches in California.
In view of the prominent role they have played
in California lending in recent years, a sustained
cutback would be a significant change of the
banking tides.

Gary C. Zimmerman
Economist

REGIONAL BANK DATA
oIUNE3O,' ....

(NOT SEASONALLY ADJUSTED, PRELIMINARY DATA)
DISTRICT

FOREIGN
DOMESTIC

ALASKA

ARIZ

CALIF.

HAWAII

IDAHO

NEVADA OREGON

UTAH

WASH.

0
10,426

0
16,636

0
25,739

61
14,344

20
40,380

7,206
0

781
0

9,610
0
9,610
2,374
793
8,259
13
0

17,917
0
17,917
7,612
4,569
3,680
431
0

8,464
0
9,464
3,886
1,833
2,414
156
0

30,136
18
30,118
13,026
8,004
8,855
1,108
1

5,206
2,740
1,954
514

1,902
447
762
873

4,320
1,673
2,160
488

4,335
1,377
2,138
820

3,437
787
1,849
1,001

4,218
1,418
1,354
1,444

296,692
286,942

20,477
18.301

9,646
8,646

14,286
14,286

23,458
23,458

13,134
13,073

36,837
36,816

29,447
0
29,447
6,5n
3,297
10,8n
7,259
1,436

266,472
25,486
240,987
65,490
23,971
92,927
37,657
20,749

14,260
1,893
12,387
2,434
1,462
4,967
2,039
1,481

7,847
0
7,847
1,493
1,004
2,609
2,166
575

9,796
0
9,796
2,683
1,330
3,953
1,006
839

20,567
0
20,567
4,375
3,265
6,679
5,371
889

10,814
81
10,753
2,484
1,488
3,512
2,567
701

33,260
88
33,192
8,280
4,452
11,889
8,761
1,652

753
645
42

2,533
3,514
555

12,465
27,302
7,365

5,325
1,698
238

1,599
n8
110

3,398
2,352
483

2,201
2,281
448

1,976
1,270
200

2,470
3,764
613

194,960
17,651

605
32

29,553
144

107,803
16,759

7,001
139

3,203
24

12,656
100

11,257
223

6,657
83

16,224
170

0.098
0.127
0.079

0.211
0.223
0.129

0.137
0.152
0.084

0.089
0.124
0.075

0.103
0.123
0.071

0.097
0.113
0.072

0.169
0.183
0.130

0.102
0.120
0.081

0.130
0.147
0.090

0.093
0.116
0.082

11,000
8,324
754

68
6

568
57

5,276
501

365
12

'66
15

430
17

456
48

243
22

711
75

8,839
2,631
2,293
797
3,118

75
24
25
3
23

594
183
156
12
244

5,729
1,683
1,573
562
1,911

327
145
87
18
77

162
89
31
6
56

570
100
51
130
268

476
138
137
18
'83

234

84
54
6
90

670
223
179
23
245

TAXES
NET INCOME

686
1,308

10
22

57
96

529
640

37
67

20
39

67
125

55
100

26
49

65
171

ROA (% ANNUALIZED)
ROE (% ANNUALIZED)
NET INTEREST MARGIN (% ANNUALIZED)

1.07
12.00
4.88

1.76
13.46
5.18

1.08
10.93
4.34

0.80
9.37
4.50

1.20
15.72
3.96

1.51
20.16
4.50

3.18
21.23
8.39

1.57
17,56
4.98

1.40
15.39
4.53

1.71
18.14
4.89

NETCHARGEOFFS, TOTAL
REAL ESTATE
COMMERCIAL
CONSUMER
AGRICULTURAL

1.07
0.94
0.72
2.81
-0.05

0.08
-0.09
-0.02
0.29
0.00

0.31
0.17
-3.15
1.91
0.98

1.24
1.26
1.11
3.11
-0.55

0.58
0.10
1.64
0.81
2.28

0.20
0.09
-0.07
0.51
0.32

4.91
1.04
-1.11
6.90
-0.04

0.42
0.13
-0.02
1.55
0.78

-0.29
0.00
-1.66
0.72
0.09

0.33
0.08
0.11
1.10
0.40

PAST DUE & NON·ACCRUAL, TOTAL
REAL ESTATE
CONSTRUCTION
COMMERCIAL
FARM
HOME EQUITY LINES
MORTGAGES
MULTI-FAMILY
COMMERCIAL
CONSUMER
AGRICULTURAL

4.69
6.58
18.34
7.00
7.71
1.11
3.19
7.59
4.56
2.97
3.93

2.59
2.69
1.10
4.10
0.00
1.30
1.38
0.60
2.47
2.34
0.00

3.83
6.05
17.31
10.94
17.68
0.56
2.26
10.36
5.71
2.44
5.35

5.n
7.68
21.05
8.30
8.38
1.15
3.62
9.26
5.14
3.23
4.30

2.62
2.89
10.55
1.68
9.04
1.01
2.65
1.34
3.65
2.39
19.05

1.76
2.25
5.64
3.37
1.82
0.45
1.13
0.00
1.49
1.39
2.15

6.65
8.19
22.96
6.11
0.00
0.77
3.72
26.32
10.29
5.97
1.73

2.18
2.60
6.87
3.54
5.21
1.37
0.97
0.16
1.60
1.37
4.90

2.24
2.99
5.83
4.23
14.05
0.54
1.07
0.81
2.30
1.30
2.42

2.69
3.65
13.18
2.11
2.44
2.00
1.18
1.32
2.89
1.56
2.76

728
243,000

8
2,759

38
19,228

440
156,953

17
8,788

20
4,667

19
6,290

47
16,284

49
7,414

90
20,617

30,008
464,785

1
5,017

0
36,000

27,751
296,244

2,176
19,998

TOTAL
FOREIGN
DOMESTIC
REAL ESTATE
COMMERCIAL
CONSUMER
AGRICULTURAL
INTERNATIONAL

327,592
26,756
298,838
157,525
61,556
53,674
5,830
125

2,544
5
2,538
1,232
793
372
4
0

20.242
0
20,242
7,462
2,886
8,453
314
8

217,625
27,315
190,310
112,475
38,402
24,382
2,979
"8

13,646
',418
12,4.30
7,373
3,117
1,070
41
0

SECURITIES

TOTAL
U.S. TREASURIES
U.S. AGENCIES
OTHER SEC.

n,372
24,367
40,172
12,634

'.914
8n
567
470

9,314
2,838
5,394
1,084

42,725
12,212
24,174
8,340

LIABILITIES

TOTAL
DOMESTIC

451,189
42',181

4,372
4,372

32,486
32,486

DEPOSITS

TOTAL
FOREIGN
DOMESTIC
DEMAND
NOW
MMDA & SAVINGS
SMALL TIME
LARGE TIME

396,085
27,508
368.577
94,889
40,598
138,727
65,259
28,798

3,562
1
3,562
',094
329
1,213
434
476

OTHER BORROWINGS
EaUITY CAPITAL
LOAN LOSS RESERVE

32,741
43,602
10,054

LOAN COMMITTMENTS
LOANS SOLD
TlERl CAPITAL RATIO
TOTAL CAPITAL RATIO
LEVERAGE RATIO

LOANS

INCOME
INTEREST
FEES & CHARGES
EXPENSES

TOTAL
INTEREST
SALARIES
LOAN LOSS PROVISION
OTHER

NUMBER OF BANKS
NUMBER OF EMPLOYEES

7,208
2,267
1,562
2,181

Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor or to the author.•.. Free copies of Federal Reserve publications can be
obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 974-2246, Fax (415) 974-3341.

~

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DEPOSITORY INSTIfUTIONS REQUIRED TO HOtD RESERVES WITH THE FEDERAL RESERVE ON A WEEKlV BASIS
PERCENT OF COMBINED MARKEr TOTAL FOR AUGUST 1993. BY REGION

DISTRICT
DEPOSITTVPE

CB

TOTAL OEPosrrs

5538 7
90 6
64 28 8
61 30 9
31 65
4346 10

Sl CU

•

DEMAND

NOW
SAVINGS & MMDAS

SMALLTIME
LARGE TIME

•

CB

Sl CU

CB

72

•

2.

92

1

96

35
40
17
3

89
90
95
91

99

0
6

60
56
75 8
96 1

•

CB", COMMERCIAL BANKS;

CALIF

ARIZONA

ALASKA

SL CU

7

•
"
•
•

10

CB

Sl CU

4846 6
89 7
5836 7
5736 7
22 7. 3
3652 '2

•

~
CB Sl CU
65
91
65
59
53
7.

29

•

31
34
45
19

~

~

CB

SL CU

CB

91

5

n

96

0

97
79
79
46
86

92
92
88
90

•

•

"
6

SL '" SAVINGS & LOANS AND SAVING BANKS; CU _ CReDIT UNIONS;

Sl CU
20
3
15
16
51

Sl CU

81 10 9
95 1
84 8 9
77 10
n 17 6
72

•

,.
,. ,.

,.

UTAH

OREGON

CB

CB

~

Sl CU

79 6
89 5
83 2
73 3
80 12
67 12

16
6
16
2.
8
21

CB Sl CU
5634 9
85 13 2
6623
56 27 17
3956 5
4354 2

"

MAY NOT SUM TO lc()% cuero ROUNDING

AUG
1991

TYPE OF RETAIL DEPOSIT ACCOUNT OR LOAN

NOV
1991

FEB
1992

MAY
1992

AUG
1992

NOV
1992

FEB
1993

MAY
1993

AUG
1993

SAVINGS AC.COUNTS AND MMDAS

U.S
DISTRICT

5.12
5.25

4.64
4.68

3.78
3.81

3.57
3.67

3.14
3.29

2.90
3.06

2.80
2.96

2.65
2.78.

2.55
2.67

9210182 DAYSCERIIFICATES

U.S
DISTRICT

5.61
5.57

4.89
4.76

4.00
3.85

3.82
3.76

3.36
3.34

3.14
3.14

3.08
3.01

2.98
2.88

2.96
2.85

2-1/2 YEARS AND OVER CERTIFICATES

U.S
DISTRICT

6.79
6.53

6.02
5.71

5.36
5.03

5.45
5.17

4.87
4.75

4.70
4.49

4.59
4.41

4.45
4.27

4.40
4.19

COMMERCIAL SHORT TERM FIXED

U.S
DISTRICT

7.13
7.33

6.09
7.01

5.18
6.50

4.87
6.26

4.42
4.86

4.17
5.35

4.16
5.21

3.91
4.84

4.02
4.78

COMMERCIAL SHORT TERM FLOAliNG

U.S
DISTRICT

8.62
8.03

7.83
9.08

6.47
7.66

6.56
7.34

5.95
8.37

5.91
7.23

5.85
8.26

5.58
8.09

5.53
8.54

COMMERCIAL LONG TERM FIXED

U.S
DISTRiCT

8.53
10.20

7.82
10.10

6.33
7.70

7.27
8.58

6.28
8.28

5.97
6.44

6.43
9.19

6.02
10.86

6.21
8.05

COMMERCIAL LONG TERM FlOA liNG

U.S
DISTRICT

9.47
9.50

8.14
8.89

6.95
8.10

7.06
7.38

6.50
7.63

6.53
B.ll

6.38
8.43

6.47
8.55

6.05
8.77

CONSUMER. AUTOMOBILE

U.S
DISTRICT

11.06
N/A

10.61
10.80

9.89
9.90

9.52
9.67

9.15
9.39

8.60
8.76

8.57
8.98

8.17
8.23

7.98
8.09

CONSUMER. PERSONAL

U.S
DISTRICT

15.24

N/A

14.88
13.59

14.39
13.64

14.28
13.80

13.94
13.58

13.55
12.83

13.57
12.67

12.00
13.87

13.45
12.69

U.S
DiSTRICT

18.24
N/A

18.19
18.41

18.09
18.51

17.97
18.52

17.66
18.46

17.38
18.29

17.26
17.76

17.15
17.60

16.59
17.58

CONSUMER. CREDIT CARD

SOURCES: MONTHLY SURVEY OF SELECTED DEPOSITS. SURVEY OF TERMS OF BANK LENDING. AND TERMS OF CONSUMER CREDIT
MOST COMMON INTEREST RATES ON RETAIL DEPOSITS. WEIGHTED AVERAGE INTEREST RATE ON LOANS. ANNUAL RATES.