JAPAN'S BANK CRISIS Part 3: Being a real banker


	March 30, 2002	atimes.com

Japan

JAPAN'S BANK CRISIS
Part 3: Being a real banker
By Richard Hanson

Part 1: Bank buck once stopped here

Part 2: Where's the beef?

TOKYO - You know the true nature of being a banker the first time you lose a customer's money. That is standard wisdom imparted to new entrants to banks everywhere. By that measure, Japan definitely has a multitude of true bankers.

As financial books closed for the end-of-March accounting year - by far the worst year on record in a horrible past few years - across the board Japanese banks were poorer, and fewer in number as the weakest failed. They have lost much money on behalf of their customers. For the foreseeable future, the prospect as the numbers are tallied is for a grim further rise in unrecoverable bad loans (about 36 trillion yen - US$271 billion - at the end of last September). With growing losses, there will be even fewer banks.

Stoic Japanese bank customers are adjusting to the new and sometimes confusing bank names that now line main streets all over Japan as the country restructures its banking industry. Mizuho will be latest to be officially posted on Monday, April 1. Merging three very large banks created the Mizuho Financial Group: Dai-Ichi Kangyo Bank, Fuji Bank and the Industrial Bank of Japan. All three were world-class banks in their heyday. Mizuho will have the distinction of being the largest bank in the world, sitting on top of the most troubled banking market among the Group of Seven economic powers.

The new groupings reflect mergers, amalgamations, and, in some cases, just a desire to break with the horrible past decade. This generation of bank customers, while getting used to the new bank names, is also slipping easily into the habit of staying out of traditional banks if possible. Many people easily get used to conducting many of their bank-like business chores at bank and non-bank automatic teller machines located in convenience stores. These are now ubiquitous beacons in the night (often open 24 hours) where you can pay the gas bill and buy a midnight snack at the same time.

There are no recent statistics, but the encroachment of new vendors may even be cutting into the business of Japan's equally ubiquitous Postal Savings System, the world's largest. With some 2,500 outlets, it is Japan's biggest bank. The lessons for the nitty gritty bank business of dealing with bad loans and stiff competition for new loan business are sobering. If you lose someone's money by bending rules on your own it can mean jail time; Do it as a bank, you get a stiff lecture in risk management and restructuring.

The basics of Japan's banking crisis are now simple. As long ago as 1990 the bank problem seemed destined to escalate into a government problem. No fault implied. It was easy to forget that what goes up in value - which created the 1980s speculative bubbles - can go down.

Historians tend to treat those caught in the collapse of a bubble rather sympathetically. The words of John Kenneth Galbraith on the "Great Crash of 1929" ring true when applied to Tokyo as values collapsed from the peak of its bubble in late 1989. "No one was responsible for the great Wall Street crash. No one engineered the speculation that preceded it," Galbraith wrote. "Both were the product of free choice and decisions of thousands of individuals. They were impelled to it by the seminal lunacy which has always seized people who are seized in turn with the notion that they can become very rich."

When it's too late, and the damage done, only the governments have the power to get money from the pockets of the people (taxpayers) whose money was lost while in the hands of the banks. Rather than directly risk the wrath of taxpayers, who vote, the government got the money in large part by issuing government bonds far beyond the ability of any future government to repay. A large chunk of this government debt is sold to domestic banks (and counted as an asset). This is why some smart widows bury money in the back yard rather than trust a bank or the government. They remember how the government borrowed money from banks to fight World War II. There wasn't any other money and no return on investment.

The government did not perform well as the warning signs of the bank problems began to show in the early half of the 1990s. In fairness, responsible though largely powerless people in government saw clearly that Japan was heading toward a bank disaster. They worked within international forums to come up with guidelines for handling the forces that were pointing toward bank problems. That Japan was to be hit the hardest among the advanced industrial states was not clear at the time.

As far back as 1996, 13 countries were gathering to issue reports in the name of the Basel Committee on Banking Supervision (Basel Committee, for short). The committee continues to issue documents outlining principles for supervisors of banking, securities and insurance. What alarmed some in Japan during this early period was the degree to which deregulation around the globe had thoroughly blurred distinct boundaries between the three financial sectors. National boundaries meant little to emerging financial conglomerates.

What the Basel Committee wanted was common sense: adequate risk management for these conglomerates; monitoring risk concentrations before it was too late to do anything about them; encouraging public disclosure of risk concentrations and intra-group transactions and exposures; and doing something about them when regulated institutions were threatened.

Liaison was important internationally. At times, though, simple communication within governments was difficult, let alone coordinating around the world. One time a US deputy treasury secretary in Washington, DC, on an urgent matter concerning Japan, tried to telephone his Tokyo financial attache. He couldn't get through. The attache's international phone had been cut off after treasury accountants failed to remit the expense money to pay the Tokyo international phone bill. A true story of how parochial global links can be.

In Japan, the communication problem is not a matter of distance. It is to do with a constant battle to focus political attention on pressing economic matters. Japanese political parties are more concerned with jockeying for advantage within the Diet (parliament) than with doing their sums on such difficult matters as banking.

That is natural. The political scene has been tumultuous since January, with the reformist-minded Prime Minister Junichiro Koizumi embroiled in scandals involving prominent members of his ruling Liberal Democratic Party (LDP). Koizumi has fired a popular foreign minister and fended off attacks from within his party and from opposition parties. His efforts have produced some progress on the economic front, with measures (and promises) to battle a debilitating deflation-led recession. At the same time, he is coping piecemeal with the problem of bad loans and the banking industry. Pressure was strong to take firm action quickly from the US, especially during an official visit by President George W Bush in February.

Meanwhile, two disgraced members of the LDP resigned from the party over scandals. One was a onetime prime minister hopeful, Koichi Kato. He is preparing to leave his seat in the Diet. Another opposition party Diet member has resigned her parliamentary seat in a separate scandal. This is one reason that efforts dating back to last summer to move on basic fiscal and economic problems have been slow. The Council on Economic and Fiscal Policy issued the first policy resolution on financial sector problems on June 21, 2001. This called for a "drastic resolution of non-performing loans".

The main points were that major banks were expected to dispose of their bad loans on a clear time schedule. That schedule is already a year out of date. There is to be a precise disclosure of the volume and progress on the bad loans.

The public so far has to be satisfied with a verbal report this week that the major banks are all within the standards for capital adequacy that are set by the Financial Services Agency.

What eventually will happen is that unrecoverable loans that linger on bank books will be sold to the government's Resolution and Collection Corp in the next two or three years. This generation of real Japanese bankers will be fortunate if they are the last to have so painfully earned the name.

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