U.S.-led Japan bank chided by authorities

By SHIHOKO GOTO, Senior Business Correspondent  |  Oct. 4, 2001 at 12:57 PM
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WASHINGTON, Oct. 4 (UPI) -- There could be stricter rules implemented before Japanese banks would qualify for public funding as the government tightens its standards to keep the banking system afloat. On Thursday, Shinsei Bank was publicly warned by the Financial Services Agency, Japan's financial regulator to keep up its end of the deal if it is to continue having access to government funds.

The agency pointed out that one key condition for Shinsei to receive public funding was to bolster lending to smaller- and mid-sized companies. Instead, the bank had "substantially reduced" loans to smaller companies, the agency stated.

In the latest fiscal year ending March 2001, Shinsei Bank received 240 billion yen ($1.98 billion) from the government. One condition for the injection of public funds was that it would increase loans to smaller-sized companies by 20 billion yen ($165.78 million).

Instead, the bank actually decreased its lending to smaller companies by 340 billion yen ($2.82 billion), or 13 percent.

The official warning from the Financial Services Agency is the first one to be made to a bank that is financially sound, and the institution stressed its concern about Shinsei Bank's "unclear" plans to boost loans to smaller companies. The bank will be required to present a proposal to the agency on just how it will increase lending within the next four weeks.

It's no secret that the vast majority of Japanese banks continue to struggle with non-performing loans on their books, having lent aggressively with real estate as collateral during the economic heydays of the late 1980s. But with land prices plunging since then, and financial markets shedding nearly 75 percent of their worth in the past decade, many of them have been receiving taxpayers' money to keep afloat.

Since the burst of the bubble economy, Japanese banks have stayed away from lending to less than blue-chip companies for fear of default, and further weighing down their books. The credit crunch has, however, fed a vicious circle of decreased capital expenditure, lower growth, and more unemployment.

Shinsei Bank is no exception in depending on public funds to keep credit flowing.

Established in 1999, the bank metamorphasized from the Long-Term Credit Bank of Japan, which had effectively filed for bankruptcy due to its unsustainable mountain of debt. It was subsequently been bought out by a U.S.-led financial consortium headed by Ripplewood Holdings, and became the first Japanese bank to be owned by a foreign company.

There is, however, growing opposition to using public funds to keep the banking system afloat as is, and many lawmakers are calling for the government to be prepared to shut down some banks once and for all. Indeed, that idea has been a rallying cry for Japanese Prime Minister Junichiro Koizumi since his appointment in April. It may, however, prove even more difficult to force some banks into bankruptcy, given the precarious state of the global economy and the subsequent increased risk of a downright recession in Japan.

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