Thomas F. Cargill

CAMEL ratings and the CD market

This article investigates the relationship between CD rates as a measure of bank risk and the confidential CAMEL scores assigned to a bank as a result of an onsite examination. CAMEL ratings determine whether a bank is placed on the “problem list” and expresses the examiners belief that the bank should be subjected to enhanced surveillance. In the view of regulators, CAMEL ratings are based on inside information and hence should be confidential. The empirical results in this article suggest that CAMEL ratings are primarily proxies for available market information about the quality of a bank.

What Caused Japan’s Banking Crisis?

The banking and financial crisis that started with the collapse of asset prices in 1990 and 1991 and dominated the 1990s stands in stark contrast to Japan’s previous postwar record of economic growth, financial stability, and progress toward financial liberalization.

A Critical Assessment of Measures of Central Bank Independence

The methodology of measuring central bank independence suggested by Bade and Parkin three decades ago and inverse correlations between the measures and inflation have been widely accepted. The measurement literature has made important contributions identifying elements of institutional design that establish the relationship between the central bank and the government and the measurements from an ordinal perspective provide some useful insights about the major institutional redesigns of central banks during the past several decades. At the same time, the measurement literature is problematic. First, a dummy variable bifurcating central banks into groups of independent and less independent central banks can duplicate the standard correlations suggesting the information content of the specific measures is limited; second, the correlations between inflation and measures of independence are not as stable as claimed; and most important, the measurements are subject to classification problems that have not been fully appreciated. Review of the institutional design and history of the Bank of Korea, Bank of Japan, and the Federal Reserve provide evidence the classification problems are important. The measures of independence are more appropriately regarded as ordinal rankings of central bank independence rather than considered cardinal measures suitable for econometric modeling.

The Postal Savings System, Fiscal Investment and Loan Program, and Modernization of Japan’s Financial System

The postal savings system and the Ministry of Finance’s Fiscal Investment and Loan Program (FILP) represent an extensive involvement of government financial intermediation in Japan’s flow of funds. As such, they constitute important parts of Japan’s financial system, but they are little known and little discussed outside of Japan.

Asian finance and the role of bankruptcy: a model of the transition costs of financial liberalization

Abstract The degree to which bankruptcy is permitted to play a role in the allocation of capital is a key distinction of the state-directed financial regime of Japan, South Korea, and many other Asian economies. Focusing on the development and characteristics of the Japanese main-bank system and comparing it to the Anglo-American approach, this paper discusses the two approaches to finance and argues that a major problem with the bank-finance model used in many Asian countries is its minimization of bankruptcy risks. A three-sector development model is described and simulated to compare the outcomes of the two approaches separately and then to evaluate the transition costs of switching from a state-directed to a market-directed financial regime. The simulation results suggest that the market approach results in a higher long-run growth path because it eliminates inefficient firms through bankruptcy. The results also suggest that switching from a state-directed to a market-directed model can be very costly to the economy. These transition costs can be lowered by a phased-in liberalization but are increased by delay. We then discuss the policy implications.

FINANCIAL LIBERALIZATION IN CHINA - Limitations and lessons of the Japanese regime

China has reformed old socialist banking institutions, using the Japanese financial regime as a model. We explain why this regime can perform well in the short run but will ultimately lead to serious economic problems, as exemplified by the recent Asian financial crisis, and we explain the problems and consequences of financial liberalization. We conclude with a summary of lessons Chinas reformers should learn from the recent financial experiences of their Asian neighbors.

Wages, Prices and Unemployment: Distributed Lag Estimates

Abstract This article investigates methodological issues in the estimation of wage equations that become particularly important with distributed lag models. Both analytical and empirical results illustrate the seriousness of these issues. In particular, empirical results for 1950–70 and two subperiods indicate that the results are sensitive to specification, i.e., variables smoothed versus unsmoothed and variables regarded as endogenous versus exogenous, and that there is marked instability in the wage equation under any specification considered.

Competition and the transition of finance in Japan and the United States

Abstract Financial liberalization since the mid-1970s has increased the role of competitive forces in both the Japanese and U.S. financial systems. This article assesses the role of competition as an explicit objective of the financial liberalization process and, in particular, focuses on recent arguments made about the relative degree of competition between the two financial systems. The article argues that enhanced competition has never been a major objective of financial reform and that the U.S. financial system has been and remains more competitive even after extensive liberalization in Japan.

The Response of the Bank of Japan to Macroeconomic and Financial Change

The Japanese economy has undergone significant structural changes over the past two decades and has been exposed to numerous domestic and external macroeconomic shocks. These changes have posed a strong challenge to the traditional approach to monetary policy in Japan.

Economic and Financial Reform: Alternatives for North Korea

IntroductionMore than 50 years after the signing of the cease-fire at Panmunjon, North Korea stands virtually alone as one of the last of the classical command economies. Like its other centrally managed counterparts, the North Korean economy was able to achieve reasonably rapid rates of growth through forced savings and high rates of investment, at least through the i970s. By the i980s, however, the economy began to stagnate and during the 1990s, as the political legitimacy of other command economies collapsed and trade relations deteriorated, the North Korean economy began a sustained decline exacerbated by bad weather and critical shortages of energy. According to estimates from the Bank of Korea (BoK, 2004), North Koreas per capita income in 1998 was only half of what it was in 1990.Reforms initiated in 2002, combined with some signs of interest in further reform from leaders in Pyongyang, have given a number of outside observers hope that North Korea is now seriously pondering more radical reforms that may finally lead to a significant and sustainable improvement in the standard of living for its 22 million citizens. There are many issues to be decided should North Korea embark on a reform process; however, reforms directed toward the financial system are fundamental to both extensive and intensive growth. Rapid extensive growth results from the combination of generating a high savings rate and investing these savings in projects with higher social returns. Classical socialist (i.e., command or centrally planned) economies are usually able to accomplish the former through administrative control over prices and limited production of consumer goods. The state is able to control how these savings are allocated through the state banks monopoly over the financial sector; however, the institutions of the centrally planned economy have di[double dagger]culty ranking projects according to their social return. Intensive growth requires continued improvements in labor productivity, and though command economies can be successful at increasing the availability of education, they perform poorly at providing the incentives for such sustained improvement in productivity. In particular, a major source of productivity improvement is in the continuous selection of better technologies and production arrangements, a process requiring that ine[double dagger]cient operations be regularly shut down and resources shifted to other, more successful ventures.Financial sector reform is fundamental to supporting sustained extensive and intensive development because the financial system institutionalizes the saving and investment process, provides a system to evaluate and monitor credit risk, and imposes penalties for ine[double dagger]cient uses of capital. How financial reform is pursued in the development process determines the overall path of development.The rest of the paper is organized as follows. First, we review North Koreas macroeconomic performance and recent reforms to improve e[double dagger]ciency. This review relies heavily on Ahn (2003), Babson (2004), and Dwor-Frecaut (2004). Second, we review the general transformation of economic systems during the past three decades, from state-directed to market-directed regimes, in socialist and non-socialist economies, and note that the financial system is usually the first sector to liberalize. Third, we discuss the reform process in China as it shifted toward more marketdirect structures, and we suggest that China o∂ers the most useful lessons for North Korea; however, we also emphasize the policy errors that China has made with regard to financial sector reform that can potentially limit the outcome of the overall reform process. The specific problems with China reflect a more general problem that even less state-directed financial regimes such as Japan and South Korea have experienced. Fourth, we discuss the role of bankruptcy in the financial regimes of China, Japan, and South Korea. …