Citibank in Japan: Crime and
punishment By Richard
Hanson
TOKYO - Take a huge US bank with a knack
for dominating markets, put it in a market not inclined
to be dominated and, you guessed it, someone ends up
breaking the rules.
Pundits saw the potential
for trouble with Citibank N A in Japan, from circa 1990,
when what is now the largest bank in the world embarked
on a major campaign to get a slice of the second-largest
retail commercial banking market in the world.
So some were not surprised when in the middle of
September, Japan's Financial Services Agency (FSA), the
bank regulator, told the commercial banking subsidiary
of Citigroup Inc to suspend operations for a year at
four of its offices in Japan, after which they would be
shut down.
Bank regulators swooped down on the
Citibank's operations after an inspection found
fundamental problems in the bank's internal controls.
The Securities and Exchange and Surveillance Commission
(SESC) found its private bank division and some of its
employees had violated laws and regulations.
Citibank's private banking is not for the
secretive Swiss mogul types - the services included
loans, real estate, credit cards and securities.
According to Citibank, this was carried out with a
relatively small branch network of 25 retail branches,
with sub branches, call centers and other channels.
The lurid stories described by FSA officials and
the press include charging exorbitant commission fees on
50-year structured bonds. In the most heinous cases,
there were tales of lending money to clients to buy
securities while using them as collateral to take out
new loans.
The underlying story is that Citibank
was offering pricey products in a market that is not
teeming with the very rich. The bank tried to
nickel-and-dime customers to enhance profitability at
any cost. This can be traced back to the latter part of
the 1980s, at a time when Japanese banks were on a roll,
which turned into the great stock market and property
bubble crash of 1990s. The very peak of the bubble
period turned out to be December 29, 1989, the final day
of stock market trading for the year.
Citibank
in Tokyo had just mapped out a bold strategy to enter
the retail banking market, aiming at a Japanese market
that had grown paper-rich almost overnight. Many got
rich, and many more lost as stock market and land prices
collapsed over most of the next decade.
In 1990,
Citibank's basic problem was that it had grown too large
- still around 1,300 employees, for example - to make
money. Cutting staff and streamlining was the name of
the game. Smaller desks were installed. Walls between
backroom staff and bank officers were torn down. This
was at the time curiously dubbed "paradising". Citibank
became the first foreign entity to join the Japanese
banking Automatic Teller Machine (ATM) network, named
BANCS.
This is not to say that Citibank's latest
fiasco is a direct hand-me-down from the early 1990s.
But the notion of targeting rich individuals was
certainly put in place at that time. Part of the same
strategy was more or less adopted in 2000 when a former
Citibank executive took over as chief executive of a
failed, and then re-born, Shinsei Bank in Tokyo,
considered a major success by most observers.
So
what really went wrong at Citibank? One Japanese central
banker suggests that an obvious weakness was the
strategy to become a bigger bank in a market where the
customer is still reeling from the greatest
restructuring of the Japanese banking industry since the
late 1920s and 30s.
The central banker also
points to shortcomings by the banking authorities
themselves. The FSA came into being in 2000 under the
purge of the old bank regulation system, which was under
the control of the ministry of finance. The Bank of
Japan, the central bank, also has little in the way of
direct influence over foreign banks, with which it was
more in touch a decade ago.
The FSA ordered
operations be suspended at Citibank's Marunouchi branch
and three "satellite offices" in Nagoya, Osaka and
Fukuoka for one year from September 29. It will then
revoke their authorization on September 30, 2005.
Japanese regulators also ordered Citibank to refrain
from accepting foreign currency deposits from new
customers for one month from September 29.
The
FSA said they decided on the sanctions after finding a
large number of "severe legal violations" and "extremely
inappropriate transactions" being conducted by the four
offices. Authorities judged that "it would be
inappropriate for operations to continue" at these four
units and thus decided on steps to shut them down.
Article 27 of Japan's Banking Law allows the government
to revoke banking licenses when a financial institution
acts in a manner that is detrimental to public interest.
It also said that internal controls regarding Citibank's
foreign currency deposit operations required
improvements.
Citibank said in a statement that
the FSA's sanctions "will require the private bank
division of Citibank Japan to suspend all new
transactions with its customers beginning September 29".
The bank will work with existing customers on the
transfer of their accounts, it said. The US bank also
said it accepts the FSA's ruling and will comply with
the regulator's directives. That statement raised some
eyebrows - as if the bank had any choice.
"Citibank Japan sincerely apologizes for the
problems identified in the FSA orders and is earnestly
addressing the issues raised and working to prevent
their recurrence," Citibank said in a lame reaction.
Richard Hanson, veteran correspondent
and expert on Japanese economy, finance and politics is
the author of Money Lords: The Pride and Folly of
Japan's Finance Ministry Elites.
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