The evolution of foreign bank regulation in Japan and Korea : an application of three analytic paradigms
Creators: name: Thibault, François
Publisher: name: University of British Columbia
Year: 2010

description: The purpose of this thesis is to explain the evolution of foreign bank regulation using a multi-paradigm methodology, which is applied to two case studies: Japan and Korea. Three analytic paradigms, or models, adapted from those developed by Graham T. Allison, are applied to each country. Each model consists of an alternative framework of explanation. The first model, the Rational Model, views the Japanese government and the Korean government as rational, unitary decision-makers who take decisions on foreign bank regulation (and financial liberalization in general) based on a set of objectives and strategic problems, in order, to serve the national interest in the best possible way. The second model, the Organizational Process Model, views governmental actions as organizational outputs, rather than as rational acts and choices. Regulations governing foreign banking activities are explained as outputs of the decision-making processes of the financial authorities. The third model, the Political Model, focuses upon the strategic interaction of multiple stakeholders. This model views governmental actions neither as choices nor as outputs, but rather as the resultants of various bargaining games among players. The evolution of foreign bank regulation and the process of financial liberalization raise some important questions which the models attempt to answer. The three models are applied in turn to each case study. The purpose is not to select the "best model" but rather to provide alternative explanations and gain additional insights into the subject of foreign bank regulation. In Japan, the analysis using the Rational Model explains the liberalization process and the evolution of foreign bank regulation as the result of the country's mature domestic economy, high trade surpluses, expansion of its financial industries abroad, and foreign pressure. The Rational Model fails, however, to answer why financial markets in Japan are still more regulated than financial markets in other developed countries, and why foreign banks are not provided national treatment. In Korea, the analysis using the Rational Model explains the highly restrictive measures governing foreign banking activities as necessary considering the poorly-developed state of the domestic banking sector. However, the Rational Model fails to answer why government intervention in the banking sector has remained so strong, even though the size and complexity of the Korean economy calls for the introduction of a free and competitive financial sector. Applied to Japan, the Organizational Process Model explains the slower pace of financial liberalization and the regulation of foreign banks as the result of the Ministry 'of Finance's organizational process. The process is characterized by the strong parochial objectives of the bureaus within the Ministry, the growth-and protection-oriented priorities of regulators, and the use of inflexible standard operating procedures. The Organizational Process Model applied to Korea explains the poorly-developed state of the banking sector as the result of the government's use of a centralized and autonomous policy-making process, which is outdated and in contradiction with the objective of financial liberalization. The Political Model offers alternative explanations. In Japan, the numerous, bargaining games among the powerful private interest groups and financial authorities have influenced the implementation of regulatory policy. Applied to Korea, the Political Model suggests that liberalization of the banking sector was never considered a viable option because of the government's involvement in several power struggles to retain its control over the financial sector. The models can be seen to complement each other. Separating the analysis into three alternative frameworks of explanation has facilitated the generation of hypotheses and has highlighted features that might have otherwise been overlooked.