Double-Gearing Between Japanese banks and Insurance Companies: Reasons and Future Prospects

It is a common practice in Japan for groups of firms to exchange their equity, this is called 'cross-shareholding'. However, recently a cross-shareholding phenomenon called 'double-gearing' has emerged, characterized by the relationship between Japanese banks and life insurance companies where, in addition to holding each others' shares, they hold each others' subordinated debt and surplus notes. This sort of gimmickry is clearly contrary to the spirit of the Bank for International Settlements (BIS) because it cannot assist in bolstering real capital strength, as the BIS requires. Indeed, the Bank for International Settlements' 2001 Annual Report strongly criticized this practice. However, Japanese government policymakers do not seem to recognize these risks. Therefore, researching this new system of institutional arrangements among Japan's keiretsu is necessary in order to try to avoid the unexpected risks and losses which, as a result, may be being brought to the whole financial system. This paper points out some reasons, besides that of raising capital, that lead to double-gearing between Japanese banks and insurance companies. In addition, it briefly discusses some risks related to double-gearing and looks at the future prospects for such relationships. The paper is organized as follows: Section 2 describes the facts of double-gearing in Japan. Section 3 analyzes the reasons for double-gearing. Section 4 discusses the risks of double-gearing. The future prospects of double-gearing and conclusions are given in Section 5.