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Tue, May 20, 2003 - Page 12 News List

Rain falls on financial system

FEARS OF A MELTDOWN Analysts say Japan's bailout of Resona Bank, the country's fifth largest, underlines the depth of the problems in the nation's banking system


A businessman walks past a signboard of Resona Bank in Tokyo yesterday. Anxiety about the health of Japan's banks eroded Tokyo share prices yesterday after the government announced a bail-out of Resona.


A government bailout at Japan's fifth biggest bank is fanning fears of another financial crisis and raising serious doubts about how truthful even bigger banks are being with their books.

The pumping of what will likely be trillions of yen (billions of dollars) of public money into Resona Bank follows massive injections of government money into the banks in 1998 and 1999. It underlines the depth of Japan's banking problems.

The government has not said how much money will go into Osaka-based Resona Bank, which announced over the weekend its capital had dwindled so dangerously low it must ask for public money. Japanese media reports say the amount is likely to be about Japanese Yen 2 trillion (US$17 billion).

What stunned many was that the bank had been doctoring its books to inflate profits for years. Over the weekend, the bank revised its losses under stricter accounting rules to Japanese Yen 838 billion (US$7.3 billion) for this fiscal year, nearly triple its earlier estimates.

"The situation at Resona is like pumping water into a bucket with a hole in the bottom," said Masaaki Kanno, chief Japan economist at JP Morgan in Tokyo. "It's only a matter of time before the nation's big four banks will face similar problems."

Kanno said the top four banks -- which have shored up their capital recently by accepting investments, including those from foreign brokerages -- will likely ride out the fiscal year just ended but face the risk of needing public bailouts in the months ahead.

The banks are scheduled to release their earnings for fiscal 2002 next Monday.

The Tokyo stock market plunged yesterday, sending its main index tumbling nearly 2 percent in morning trading as bank shares led the decline.

The Bank of Japan injected Japanese Yen 1 trillion (US$8.7 billion) into the money market yesterday to reassure stability in financial markets.

Government officials insisted the other banks are safe and denied Japan faces a worst-case scenario of a domino-like collapse of banks, insurers and other companies.

"This is not what we will call a crisis," said government spokesman Yasuo Fukuda, adding that Resona will be rebuilt under government guidance. "This is a move to avoid a crisis."

The government has faced stiff resistance from the old guard in trying to clean up bad debts at the banks to get the faltering economy back on a growth path.

Bad debt at banks is estimated by the government at ?40 trillion (US$347 billion), but private analysts say that could be bigger. Despite write-offs of bad debts every year, the bad debts have not gone away.

The problem with Japan's banks is simple -- they have not been profitable for years and are badly stumbling in trying to manage lending to match risks.

A big fear is that the banks have not been telling the truth.

Before the major lender Long-Term Credit Bank collapsed in 1998, it had assured the public repeatedly that its capital was solidly above required levels.

When top banks received public money in the late 1990s, no one in the leadership was forced to step down to take responsibility for bad management. This time, five top Resona executives have resigned.

People's savings deposits at Resona have been guaranteed by the government, and there has been no rush by depositors for their money.

Some analysts say the government should gain the authority to force injections of public money into banks. Otherwise, they say, the banks will refuse to acknowledge the truth until it's too late. Now, the banks must first ask for public money.

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