Approaches for Improving and
Maintaining Soundness of
Credit Supplementation System
November 17 , 2015
Motohide Hashimoto
Executive Director
Problem Awareness
 Over the past ten years the Japanese economy was hit by two major
crises, namely the Global Financial Crisis and the Great East Japan
Earthquake.
 Credit Supplementation System played significant roles in overcoming
these two major crises.
 However, as Credit Supplementation System played major roles, the
system held huge risks.
 How can we maintain the soundness of Credit Supplementation
System while dealing with these two major crises ?
2
1. The Global Financial Crisis, the Great East Japan Earthquake, and Credit
Supplementation System
(1) Damage to Japanese Economy from the Global Financial Crisis and
the Great East Japan Earthquake
(FY10= 100)
1) Trends in Industrial Production
117.3(Aug.2007)
124.0(Jun.2001)
120.0
110.0
100.0
90.0
94.5(Mar.2008)
80.0
76.6(Feb.2009)
70.0
01
2001
02
03
04
05
06
Ressionary phase
07
85.8(Mar.2011)
Great East
Japan Earthquake
Global
Financial Crisis
08
09
Production index
10
11
12
13
14
Inventory index
(Source) Ministry of Economy,Trade and Industry. "Indices of Industrial Production".
3
Trends in Unemployment rate and Job-openings to appicants ratio
(%)
6.0
(Times)
1.4
Unemployment rate
5.5(Jul.2009)
Job-openings to applicants ratio
5.5
1.2
5.0
1.0
1.08(Jul.2006)
4.5
0.8
4.0
0.6
3.5
0.4
3.6(Jul.2007) Global
Financial Crisis
3.0
01
2001
(Source)
(Source)
0.42(Aug.2008)
02
03
04
05
06
07
08
09
10
0.2
11
12
13
14
Ministry of Internal Affairs and Communications. "Labor Force Survey".
Ministry of Health, Labour and Welfare. "Employment Referrals for General Workers".
4
(2) Massive Damage from the Great East Japan Earthquake (March 11, 2011)
1) The impact on Japan’s society and economy were enormous with 18,465
people killed or missing and with the industrial production index falling sharply.
Boat swept into the center of
Miyako City, Iwate Prefecture
Shopping district buried under rubble
in Ishinomaki City, Miyagi Prefecture
(Source) White Paper on Small and Medium Enterprises in Japan 2011
5
(FY10= 100)
Trends in Industrial Production
(All Japan/Affected regions : Iwate pref., Miyagi pref., Fukushima pref.)
140.0
130.0
All Japan
120.0
Iwate pref.
Miyagi pref.
Fukushima pref.
110.0
100.0
90.0
80.0
70.0
60.0
48.6(Mar.2011)
50.0
Great East Japan
Earthquake
40.0
2008
08
(Source)
09
10
11
12
13
14
Ministry of Economy, Trade and Industry. "Indices of Industrial Production".
6
(3) Credit Supplementation System to Overcome the Global Financial Crisis and
the Great East Japan Earthquake
1) Establishment of Credit Guarantee Programs, Expansion of Special Treatment of Insurance
[ Credit Guarantee Corporations (CGCs) ]
I. Establishment of “Emergency Guarantee Program” and “Great East Japan Earthquake
Recovery Emergency Guarantee Program”
II.
Supporting demand for capital due to weakened fund raising capabilities, business
reconstruction, and business stabilization
[ Japan Finance Corporation (JFC) ]
- Expansion of Special Treatment of Insurance for the above credit guarantee programs
Type of Insurable
Funds
Max Amount of
Insurance
Insurance
Coverage
Ratio
Insurance
Premium Rate
(p.a.)
Guarantee
Coverage
Ratio
80%
Ordinary/
No-collateral
0.41%
100%
100%
80%
Special Treatment of Insurance Related to
Business Stability
Great East Japan
Earthquake Recovery
Emergency
Guarantees
Business
stabilization funds
Additional ceiling of 280 million JPY
is set
Fund for
reconstruction,
other business
stabilization
Additional ceiling is set:
400 million JPY for Ordinary
Insurance
160 million JPY for No-collateral
Insurance
90%
Ordinary/
No-collateral
0.41%
Business funds
200 million JPY
70%
0.25% - 1.69%
General Insurance
Ordinary Insurance
7
2) Actions Taken by CGCs (Credit Guarantee Corporations)
I.
Extended operating hours on weekdays, established weekend consultation
desk to better respond to customer needs for financial advice.
II. Significantly increased guarantee screening officers
 Credit Guarantees related to the Great East Japan Earthquake
The amount of Insurance Acceptance (as of 2014)
Affected regions : Iwate pref., Miyagi pref., Fukushima pref.
(Billion JPY)
500
65.8%
400
40.9%
300
70%
The ratio of the amount of insurance acceptance(affected
3 pref. ) related to “Great East Japan Earthquake Recovery
Emergency Guarantees” to the total amount of insurance
acceptance(affected 3 pref.)
60%
50%
38.4%
40%
32.0%
200
30%
423
20%
100
114
101
10%
124
0
0%
2011
11
12
13
14
(FY)
8
(4) Credit Guarantee Results (guarantees accepted)
1) Amount of Guarantees Accepted
Amount of guarantee acceptance increases during times of economic crisis.
Thus, Credit Supplementation System plays a significant role.
25
(Trillion JPY)
Safety-net guarantees
Emergency Guarantee
Program
General guarantees
20
Great East Japan Earthquake Recovery
Emergency Guarantee Program
15
10
5
0
04
2004
05
06
07
08
09
Global Financial Crisis
10
11
12
13
14
(FY)
Great East Japan Earthquake
9
2) Effects of Guarantee Program
 Bankruptcies avoided through emergency guarantee program (estimate)
FY
Expected
Bankruptcies
A
Actual
Bankruptcies
B
Avoided
Bankruptcies
C=A-B
2008
10,178
8,283
1,895
2009
23,706
14,732
8,974
2010
18,317
13,065
5,252
Total
52,201
36,080
16,121
10
(5) Credit Guarantee Results
Outstanding Guaranteed Liabilities (stock)
The amount of Outstanding Guaranteed Liabilities increases during times of economic crisis.
Outstanding Guaranteed Liabilities underscore the important role filled by Credit Supplementation
System.
This means that risks increase as the amount of Outstanding Guaranteed Liabilities increases.
(Trillion JPY)
45
40
Outstanding Guaranteed Liabilities
Emergency Guarantee
Program
Great East Japan Earthquake Recovery
Emergency Guarantee Program
35
30
25
20
15
10
5
0
2005
05
06
07
08
09
Global Financial Crisis
10
11
12
13
Great East Japan Earthquake
14
(FY)
11
2. Approaches for Maintaining / Improving Soundness of Credit Supplementation
System
(1) Risk Sharing through Two-tiered System
1) Schematic of Credit Supplementation System
National
Government
Loss Compensation
Supervision
Contributions
Contribution
Supervision
Guarantee Contract
Contributions
Insurance Contract
JFC
(Japan Finance
Corporation)
Local
Governments
CGCs
(Credit
Guarantee Subrogated Payment
Corporations)
Insurance Money
Insurance Premium
Guarantee Fee
Payment of
Recovered Money
Recovery
Credit Insurance System
Financial
Institutions
Loans
SMEs
Credit Guarantee System
12
2) Historic Context behind Establishment of Credit Insurance System
 From the 1930s into the 1950s, many Credit Guarantee Corporations were
established in regions across Japan (51 CGCs as of 1952).
 A “Guarantee Insurance” system was established in 1952 to cover the risks
held by CGCs.
- With functions similar to the current “Credit Insurance,” the objectives of this
system were to reduce losses for CGCs and improve the soundness of their
assets.
- This “Guarantee Insurance” was directly managed by the national
government.
 In 1958, Small Business Credit Insurance Corporation (now Japan
Finance Corporation) was established. Since that time, credit insurance has
been managed by JFC.
13
3) Risk Sharing in Credit Supplementation System
I.
Subrogated payments
II. Insurance payments
JFC, CGCs and financial institutions share risks.
Subrogation and Insurance Money Payment
4. Insurance claim
CGCs
(Credit Guarantee
Corporations)
SMEs
5. Insurance money
(Coverage ratio: 70 - 90%)
JFC
(Japan Finance
Corporation)
(Average coverage ratio in FY14 : 78%)
2. Request for
subrogation
1. Default
3. Subrogated payment
(Coverage ratio: 80% in principle)
Financial
Institutions
The percentage of risk sharing (In the case of guarantee coverage ratio 80% and insurance coverage ratio 80%)
Financial
Institutions
CGCs
JFC
20%
16%
64%
14
4) Enhancing Financial Base for Insurance (Obtaining Contributions)
 Large contributions from the national government were received after the Global Financial
Crisis in anticipation of deterioration in the balance of insurance accounts.
JFC estimates future anticipated losses and requests contributions from the national
government based on these estimates.
12,000
21,000
(100 million JPY)
10,000
Contributions
from goverment
8,000
6,000
10,409
20,516
4,000
2,000
0
2004
04
05
06
07
08
09
0
10
11
12
13
14 (FY)
▲ 1,602
▲ 2,000
▲ 4,000
▲ 6,000
Balance of
Insurance Account
▲ 5,678
(100 million JPY)
 The balance of insurance account remained deeply in the red and there are a large number
guaranteed SMEs in need of rescheduling. System improvements, including continued
enhancements of the financial base, are needed.
15
6) Analyzing Information, Providing Information to CGCs
- JFC endeavors to understand and analyze the insurance underwriting risks of various
CGCs, balances of insurance accounts, and lending by private sector financial
institutions to SMEs. It then provides the results of such analyses to CGCs.
Contributes to sustainability and sound management of overall system.
Bureaus of Economy,
Trade and Industry,
Financial Bureau
Local
Governments
Supervision, inspection,
guidance
JFC
(Japan Finance
Corporation) Provision of information, etc.
Supervision, inspection, guidance
Contribution,
supervision
CGCs
(Credit Guarantee Corporations)
Guarantees /
management support
Insurance contracts
Partnerships
Financial
Institutions
Guarantee
agreements
SMEs
and
micro businesses
Guarantees /
management support
16
(2) Approaches for Improving and Maintaining Soundness of CGCs (Credit
Guarantee Corporations)
1) Enhancing Financial Base
Enriching basic assets is important so that CGCs can conduct sound management and
maintain external credit.
 Contributions (A)
Contributions from local governments etc.
 Subsidies (B)
Subsidies from national government to CGCs
 Reserves (C)
Accumulated amount of accepted basic assets from CGCs account
surpluses each year
In addition to the basic assets(A+B+C), CGCs hold reserves for changes in balance differences (D).
(Unit: billion yen; FY14)
Assets
(A+B)
Reserves
(C)
Basic Assets
(A+B+C)
Reserves for
changes in balance
differences (D)
506
1,244
1,750
618
17
2) Indicator-based CGCs (Credit Guarantee Corporations) Management
 Basic asset ratio :
Guaranteed Liabilities / Basic Assets
- Each CGC sets allowable limits from the perspective of sound management.
- 60X is the maximum ratio in national guidelines.
- In managing its assets, CGCs utilize the liquid asset ownership ratio (Liquid
Assets / Outstanding Guaranteed Liabilities) and other indicators from the
perspective of maintaining reserve requirement assets.
 Maximum amount of guarantees provided to one SME
- Indicator for maintaining soundness of CGCs’ financial conditions
 Subrogated payment ratio
:
Subrogated Payments for particular year / Outstanding
Guaranteed Liabilities for same year
- Analysis of subrogated payment ratio by financial institution groups and SME
business types as “Emergency Guarantee Program” results.
18
3) Management Support by CGC (Credit Guarantee Corporation)
 Risk Curtailment through Management Support
Management
support
Example 1
Improved SME
management
Reduced risk of
bankruptcy
Improved CGC
soundness
Business consulting for firms with deteriorating earnings
- Discuss conditions of a firm with a main bank
- Visit the firm, provide management advice
- Propose problem resolution measures after several visits
Example 2
Subsidy for dispatching experts
- Send SME consultants and other experts to companies
- Related expenses subsidized by CGCs
Example 3 Promote utilization of SME support networks
- Networks of local governments, chambers of commerce, CGCs, and SME
support organizations working together for smoother SME support
- Provide business expertise guidance and financial support utilizing the
functions of each member in the network
19
3 Summary
I.
The credit supplementation system played major roles in helping overcome the
economic crises resulting from the Global Financial Crisis and the Great East
Japan Earthquake. Meanwhile, the following approaches have been adopted to
maintain the soundness of our systems.
(1) Risk Sharing through two-tiered System
1) Covering risk by utilizing credit insurance system
2) Enhancement of financial bases (obtain government contributions in
proportion to risk)
3) Insurance risk management (sharing risk analysis and risk information)
(2) CGC Approaches
1) Enhancement of financial bases (obtain local government contributions,
book reserves)
2) Risk management (utilization of basic asset ratio, subrogated payment ratio)
3) Management support (consulting for SMEs)
II.
JFC will make an effort to improve the soundness of Credit Supplementation
System to continue promoting smooth financing for SMEs.
20
References
Small Business Credit Insurance Corporation. (1989). Small business
credit insurance corporation thirty years’ history.
Japan Federation of Credit Guarantee Corporations. (2005). Credit guarantee
the 3rd edition. Eguchi, K. (Ed.).
Japan Federation of Credit Guarantee Corporations. (2011, 2014, 2013). Credit
guarantee, No.120, No.121, No.122, No.125.
Small and Medium Enterprise Agency. (2012). White Paper on Small and
Medium Enterprises in Japan.
21