Bank of Tokyo
24 Pages Posted: 21 Oct 2008
Abstract
In October 1990, the president of this bank (the 9th largest in Japan and 15th largest in the world) must design a financing plan with which to bring the bank into compliance with the new worldwide Bank for International Settlements' (BIS) capital-adequacy standards. The alternatives include (1) slowing the growth of the bank, (2) issuing equity, and (3) issuing convertible subordinated debentures. The tasks of the student are to compare and contrast the equity and convertibles tactics and to recommend a possible price or coupon rate for the convertible issue.
Excerpt
UVA-F-1018
BANK OF TOKYO
In October 1990, Tasuku Takagaki, recently appointed president of the Bank of Tokyo (BOT), wrestled with the first major challenge of his presidency: achieving a capital structure for the bank that would meet the capital-adequacy standards set by the Bank for International Settlements. The BIS required that all banks engaged in international banking maintain a 7.25% capital/asset ratio by the end of the fiscal year 1991. The standards were imposed on all banks by governmental agreement in 1988 and would be in effect at the end of BOT's current fiscal year, March 1991. Failure to meet the standards would trigger restrictions in BOT's ability to engage in international banking activities. The massive paper losses incurred by the Bank of Tokyo, however, primarily a result of the downturn in the stock market, had dropped its ratio from a solid 8% in March 1990 to 6.8% by the semiannual book closing in September 1990.
To conform to the BIS standards, Takagaki could respond in one or more of the following ways:
Limit asset growth: the denominator of the capital/assets ratio, by restraining lending activity. Takagaki preferred increasing BOT's capital, the numerator, through a new issue so as not to restrain growth.
Issue JPY60 billion of common stock: Common stock was the purest form of capital from the BIS's standpoint and would contribute significantly to the perception of solidity. However, Takagaki questioned whether the time was right to sell shares. The year 1990 had been characterized as the year of the “bursting of the bubble economy” in the Japanese financial industry. By October 1990, the Nikkei 225 Index (leading shares on the Tokyo stock exchange) had plunged 48% from its all-time high reached on the last day of 1989. At its current share price of (Japanese yen) JPY1,050, BOT would need to sell 57.142 million shares. With 1,993,933,000 shares outstanding, the old shareholders' interest in BOT would be diluted 2.8%.
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Keywords: bank management bonds capital markets commercial banking diverse protagonist, Asian, option pricing, international case, diversity case, valuation, international
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