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Resona move resonates through
Japan
By Richard Hanson
TOKYO
- "Heizo Takenaka will be happy." That is how one senior
banker, whose very large and virtually insolvent bank is
about to be rescued by a 2 trillion yen capital infusion
from Japanese government public funds, describes the
mood of Prime Minister Junichiro Koizumi's economic and
financial czar this week.
In fact, since the
prime minister and his advisors last Saturday revealed
the intention to bail out the nation's fifth-largest
banking group and its holding company Resona Holding
Inc, the wide mood swings appear to be growing more
positive.
There is little in the way of hard
evidence that the government can revitalize Japan's
moribund economy, and with it the troubled banking
system. Nor is there any instant resolution of a
cumulative crisis among banks with huge exposures to bad
debts, known as non-performing loans and estimated to
total more than US$50 trillion and rising.
What
does lurk is the prospect that something is changing.
On the one hand, Japan's prime minister appears
to have settled down after a roller-coaster-like first
two years in office. His latest standing in the
popularity polls show support rates of nearly 50
percent. There is new management, selected by Koizumi,
at the Bank of Japan (BOJ) that appears more proactive
under the new veteran central banker governor Toshihiko
Fukui (who was not Financial Services Minister
Takenaka's favorite, but caught the eye of Koizumi as a
trusty man).
This week the BOJ's Policy Board
upped the target for pumping money into the moribund
economy to about 27 trillion to 30 trillion yen from the
present 22 trillion to 27 trillion yen. That is to keep
financial markets from getting antsy now that the
government has decided in effect to nationalize Resona
Holdings Inc, whose Resona Bank's capital adequacy ratio
slipped below the 4 percent line to 2-3 percent.
But the real positive signs are coming from
within the government, which stumbled in its early
efforts to get things moving on the banking side after
Koizumi's first cabinet reshuffle late last September
(he marked his second year in office in April).
Initially, the government set up a special task force to
produce bold measures to force banks to move on such key
matters boosting their capital ratios by counting
heavily future tax assets. Last year, the banks balked
at that, and sought protection from other politician for
their wobbly interests against Koizumi and his broad
plans to reform the economy, and the banking sector with
it.
Resona has become the guinea pig, after a
tense standoff.
Takenaka finally bushwhacked the
bank with by using the integrity of the bank's own
auditors. Nihon Keizai Shimbun reported the blow-by-blow
story of how Resona Holdings Inc was forced to ask for a
public fund injection because of a rigorous audit
conducted in accordance with the government's
financial-sector revival plan.
The story was
told by the outgoing president of Resona, Yasuhisa
Katsuta, who at a news conference on Saturday gave some
of the detail of a heated clash between the bank and its
independent auditor, Shin Nihon & Co, that is eerily
similar to the audit scandals that are raging through
the United States.
Back in October and November
last year, Takenaka had to abandon his battle to
pressure banks to reduce Japanese banks' addiction to
what are called deferred tax assets (DTAs), which are
tax credits that the bank expects on loan-loss
provisions. Takenaka set off a revolt among the banks
when he asked them to reduce over the next couple years
the ratio of such DTAs to 10 percent of a bank's capital
(on average, banks are counting them for as much as 40
percent of capital).
Resona had a 70-80 percent
ratio. In reality, there are only certain conditions in
which the DTAs actually become real assets (such as the
borrower is bankrupt and the bank has to have a taxable
profit). The bank wanted to count about 700 billion yen
in DTAs. The auditors allowed 435 billion yen, which
meant a sharp drop in its capital adequacy ratio.
As a result, the ratio would fall below the 4
percent line needed to function as a domestic bank.
Resona bitterly opposed the auditor - shades of Enron in
the US - which is supposed to be independent in its
decisions. According to one account, Resona opposed the
auditor's decision and asked it to reconsider. The
auditor objected, though it did consider a compromise at
one point if Resona agreed to carry out a five-year
business plan without fail.
Resona's case
collapsed when Takenaka held a meeting of his task force
on the banking problems, at which a senior Financial
Services Agency (FSA) official is reported to have
strongly supported the independence of the auditor's
opinion. That was May 12, five days before Resona
finally sought a government infusion of capital. The
bank revealed at the same time that it was expecting a
whopping loss of 838 billion yen for fiscal 2002-03,
almost three its previous forecast. (The four biggest
Japanese bank groups apparently do not have as severe a
problem with their capital ratios, in part as a result
of pressure from Takenaka.)
So Resona is no
longer just a bad bank; it is now a household name.
Among the almost all-new bank names - as a result of
failures and mergers - that now line the main commercial
streets in Japan, the Resona bank group's "brand" will
at least have name recognition. If the numbers are
right, the government will use some 2 trillion yen in
funds from various public sources to buy enough shares
in the Resona banking group to keep it from going out of
business on account of insolvency. This will be the
third time the government has done that, after the
defunct Long-Term Credit Bank of Japan and the Nippon
Credit Bank in 1998.
To avoid spooking the
public, the authorities waited for a Saturday before
revealing their plans to infuse capital into the bank.
Last week, Koizumi agreed with his financial advisors
that Resona Holding Inc and Resona Bank (which along
with Saitama Resona Bank and some smaller banks make up
the core of the Resona Group) had to be kept alive
ostensibly just because it is the country's
fifth-largest banking group.
So last Saturday,
while financial markets were closed - one advantage to
being the land of the rising sun - Koizumi's financial
storm troopers launched the banking-system equivalent of
shock and awe.
Secrecy is one of Koizumi's
penchants, so there were no major leaks to the press.
This also suited the financial advisors he has come to
trust, including those in the Ministry of Finance (MOF)
and BOJ.
The bailout spotlight was on Financial
Services Minister Heizo Takenaka and the FSA, which is
responsible for inspecting and monitoring the banking
system. In fact, many key officials in the FSA are
borrowed or permanently assigned from the MOF, which was
stripped of its direct control over financial markets
and institutions that it had long held until the late
1990s.
That is when the MOF was severely
punished for its role in managing the financial sector,
and subsequently witnessing from the inside the sequence
of events that led to the collapse of the old postwar
"no bank can fail" regimen.
By the mid-1990s,
after a series of scandals, the financial regulatory
world too came under what amounted to purge by its
political bosses, most notably former prime minister
Ryutaro Hashimoto, who had also served as finance
minister as the 1980s asset bubble burst. He blamed MOF
for bad economic advice. In a final act of spite, he
even stripped MOF of its 1869-vintage name, the once
esteemed Okurasho, while transferring its powers to the
FSA (in Japanese MOF is now called the more pedestrian
Zaimusho).
Back in those days the Resona name
did not exist. It was created in 2001 as the name of the
holding company around which the Daiwa Bank group merged
with the Asahi Bank group (originally the Saitama Bank).
The Daiwa Bank name was used until this
February, when it was changed to Resona Bank. Daiwa Bank
was created in 1948 to take over the banking business of
Nomura Trust Co, which was spun off of the Nomura group,
which still includes the largest securities house in
Japan. The word Resona is from the Latin word that is
the root of "to resonate", with some specious pretense
to sounding like the Japanese for "ideal".
The
Daiwa Bank name, for the old MOF hands, will forever be
linked to the start of the Finance Ministry's worst
nightmare since the end of the Occupation, which was to
bring about the purge of the Finance Ministry and
creation of a new regulatory body under the cabinet
office. That too involved news that was revealed early
on a Saturday morning, in this case in mid-October 1995.
That was the day (a Friday in America) that the
district attorney in the Southern District of New York,
Mary Jo White, revealed that Daiwa Bank had lied to the
Federal Reserve Board of New York in the case of a
senior officer who lost more than $1 billion in bond
trading. Daiwa was stripped of its license to operate.
MOF was also at fault. The Banking Bureau
director general knew of the case before it was
revealed. He too did not report this to the US
authorities. In the next few months, Japan's banking
regulation was turned on its ear. Banks were already,
for the first time in the postwar era, closing their
doors because of insolvency. Daiwa Bank was forced to
withdraw from its international business, but did not go
out of business.
This is one reason that the
trip-wire for Resona Bank's fall below the insolvency
line was a plunge in its capital-adequacy ratio below
the domestic standard of 4 percent (to between 2 and 3
percent), rather than the higher international standard.
The Daiwa Bank case was extraordinary by any
standards, but it was also symbolic of how poorly
equipped and negligent Japanese bankers, regulators and
the political leadership were in facing up to the crisis
facing the nation. The crisis is ongoing, but there are
some signs that the banking system will evolve in a
healthier direction.
The decision by the
government to recapitalize Resona is in accordance with
the Deposit Insurance Law, which was created reluctantly
in the 1970s when the MOF balked at the suggestion that
any bank might go bust in the rigidly regulated
environment of that time.
According to Fitch,
the bank rating agency, Resona will become the first
bank to be subject to the Japanese government's "Special
Support" framework, in accordance with which the BOJ
will extend unlimited liquidity support, the FSA will
dispatch resident inspectors and the bank will institute
various restructuring measures, including the
resignation of its top management.
In an
additional move, it has been announced that the bank's
good assets will be segregated into a "new" account,
while impaired assets will be held in a "restructuring"
account. Restructuring assets are to be reviewed for
possible transfer to the recently formed Industrial
Revitalization Corp, a new agency created by the MOF
(see Follow the yen, Part 2: Koizumi's policy squad, March 12).
Fitch says the "possible upside from Resona's
rescue is if it proves to be a turning point for Japan's
overall economic policies, upon which the banking
problem acts as a serious constraint ...The sooner such
support can be carried out and the banks returned to
health, the quicker other pressing economic problems can
be dealt with."
On the other hand, there is also
a more skeptical view, that the government may be doing
little more than throwing good money after bad.
(©2003 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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