Fueled by a high saving rate, active exporting firms, and a booming stock market, Japanese banks expanded aggressively worldwide during the 1980s. By 1988, all of the 10 largest banks in the world were Japanese, with a significant presence in Southeast Asia, Europe, Latin America, and the United States. In the 1990s, however, the tide turned. Japanese banks experienced a significant diminution of capital as a result of sharp declines in the Japanese stock market and substantial increases in nonperforming loans. Increasingly constrained by international capital requirements, Japanese banks began to shrink their international operations while insulating their domestic lending operations.

This article examines factors affecting the Japanese banking presence in the United States. In particular, the authors examine the role that capital requirements played in the decisions by Japanese banks to reduce their lending here. Because U.S. banking markets have been unusually open by international standards, and because of the large penetration by Japanese banks, the experience here provides useful insights into how globally active banks may react in the future to problems in their domestic markets.