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Japan's regional banks: Neglected
troubles
By Scott B MacDonald
Discussions about Japan's bank problems usually
focus on the country's large city banks, which hold the
bulk of bank business in the Pacific nation. Despite
this focus, Japan's regional banks represent another
dimension of the national banking crisis. Many of the
regional banks are plagued by poor asset quality, large
loan losses and weak capital. Since the late 1990s, a
number have failed. Moreover, most prefectures have
economies that are either struggling to stay afloat or
are depressed. If Japan is ever to have a sustainable
economic recovery, the banking system in all its parts,
not just the city banks, must be reformed.
According to research from UBS Warburg, Japan's
regional banks account for 20 percent of all loans in
Japan, while smaller cooperatives and trust banks have a
further 30 percent of outstanding loans. Each prefecture
has a bank, with its focus on that particular
geographical unit. To generalize, the importance of the
regional banks is that they control large shares of the
local deposit and lending markets and usually are the
major financial clearing institution in their respective
area. This central financial intermediary role has
actually become more significant in recent years as many
of the city banks have closed regional branches or
otherwise retreated.
In contrast to their city
bank counterparts, the regional banks have not been as
hard hit by plunging equity prices that have recently
roiled the Nikkei. This is because the quantity of
cross-sharing holdings held by regional banks is
considerably smaller than their city bank counterparts.
In addition, the regional bank exposure to the list of
30 major zombie companies - defined as companies
technically bankrupt but kept alive by their banks with
the support of the government - is substantially lower.
Considering that regional banks make most of their loans
to small and medium sized businesses, a bankruptcy is
usually a much smaller and manageable affair.
Indeed, not all regional banks are in dire
shape. Earlier this year Shizuoka Bank, won the praise
of the rating agency Fitch, which noted its "overall
performance and strength indicators are superior to any
of the major Japanese banks". Other Japanese regional
banks also maintain strongly investment grade ratings,
as with Chiba Bank and Joyo Bank.
However, there
can be no denying that the regional banks are having
their set of difficulties. The problems confronting the
regional banking sector include difficult economic
conditions, related corporate bankruptcies, the
departure of manufacturing firms to lower cost locations
such as China, a slowness to embrace tighter credit
standards, and over-banking. Reflecting the difficult
economic conditions in Japan's regional economies, a
Nihon Keizai Shimbum survey conducted in August 2002,
indicated that 41 percent of the regional banks polled
could not predict when their problems concerning
non-performing loans would end. In the same survey, only
19 percent believed that their bad-debt problems were
over, leaving 34 percent thinking that such problems
would likely be resolved within two years. Although
there was economic growth over the past two quarters,
unemployment has remained high and land prices are still
falling in the regions (reducing the value of the banks'
collateral). More importantly, the expectation is that
the Japanese economy could well slip back into another
round of recession. If the same bank survey were held
today, it is likely that sentiment would largely be the
same, perhaps even more negative considering the ongoing
bit of deflation.
Some regional economies are
clearly in dire straits. In Hokkaido in the north,
economic growth is virtually nonexistent, unemployment
is close to 6 percent (one of the highest in the
country), and consumer spending is thought to be
negative for this year. The local economy is dependent
on public works, though the efforts of Prime Minister
Junichiro Koizumi's government to curtail public
spending leaves a question as to when the economy will
emerge from the recession. Hokkaido is hardly alone. As
regional economies seek to find an equilibrium in a more
globalized economy, there are obvious implications, many
of them negative, for Japan's regional banks.
What's next for Japan's regional banks? Three
major trends are evident. First and foremost, there is a
growing separation between the banks that are
restructuring and those that are not. Banks such as
Chiba, Bank of Yokohama and Shizuoka are seeking to
clean up their operations, enhance cost-efficiencies,
and improve their lending practices. These banks are
likely to survive and grow once the economy recovers.
Others are still adrift and run the risk of becoming
even bigger drags on the regional as well as the
national economies. And some could threaten to fail.
The second trend is a push toward mergers.
Although there has not been a lot of activity in this
area, the Koizumi government favors this path. A number
of financial incentives to promote regional mergers are
being prepared, including the financing of the
integration of computer systems. Despite regional
resistance to surrendering independence of local banks,
pressure is mounting for consolidation across prefecture
boundaries to occur at a more rapid pace.
The
third trend is that the regional banks are not lending.
Indeed, most loan books at the regional banks are
getting smaller. The reason for this is simple - many
companies are themselves undergoing restructurings and
seeking to reduce debt. The companies that want more
loans, however, are usually already heavily indebted and
many are not likely to survive. Consequently, there is
not a strong interest in growing loan portfolios in the
current economic environment. Instead, many regional
banks have opted to put their deposit-generated funds to
work via low-yielding, but ever abundant government
bonds.
Banks are supposed to function as
financial intermediaries between those with credit and
those in need of credit. Japanese regional banks are not
fulfilling their role. They operate in local economies
which are struggling and threatening to get worse. As
Japan focuses on bank reform, it clearly needs to
include reforming the regional banks. This means taking
difficult decisions to close some banks and merge
others. Without that, any national bank reform with the
main focus on the city banks will only be half-baked.
(©2002 Asia Times Online Co, Ltd. All rights
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