State Rescue For Japanese Megabank

May 19, 2003
From Leo Lewis in Tokyo

RESONA, one of Japan’s big five “megabanks”, has effectively been nationalised to save it from total financial collapse.

The struggling bank, crippled by non-performing loans, applied on Saturday for an £11 billion injection of public funds. The Japanese Government agreed after an emergency meeting chaired by the Prime Minister, Junichiro Koizumi. The Bank of Japan will also extend an unlimited amount of loans without security.

The central bank said it would also supply funds to the money markets if there is any run on other banks or if there is a sharp fall in share prices.

Mr Koizumi assured Japanese depositors and taxpayers that the injection should prevent a financial crisis, but analysts and political observers said that it showed how close the country was to a major banking collapse.

Resona — the recent creation of a merger between Asahi and Daiwa banks — has been regularly touted as the most vulnerable of the sector. However, its chief rivals, including UFJ, Sumitomo Mitsui and even Mizuho, the world’s largest bank by assets, are not seen as being in significantly better shape. The threat of nationalisation is looming ever darker over the industry.

Although Resona deposits are guaranteed by the Government, the entire banking sector is mulling over plans to raise levels of cash to cope with a possible run on the cash machines.

The nationalisation has sent shockwaves through Japan’s business and political communities, which had hoped that the worst of the country’s banking crisis was behind them. The event has also split opinion over whether it would have been better to allow Resona to fail naturally under the weight of market forces.

Resona’s call for a capital injection was triggered by a new set of rules introduced in April. The Financial Services Agency, headed by Heizo Takenaka, laid out a series of tests that, if not met, would effectively force a bank into state hands.

Under the key capital adequacy test, banks had to have a margin of 4 per cent to absorb risks, against the 8 per cent international standard set by the Basle Accord. However, the test was applied much more rigorously than before.

Six months ago Resona had a capital adequacy ratio of about 7.9 per cent, but this crashed to just 3.78 per cent. The capital injection will bring the level back to 10 per cent.

Part of the problem has been created by the tumbling Japanese stock market, in which the Nikkei 225 index has spent the past three months skirting 20-year lows. Resona has also suffered particularly from the deepening economic downturn since 78 per cent of its corporate loans were to small companies that have not weathered the storm well.

As part of the Government’s financial services revival plan, Resona underwent an audit that applied much stricter rules to capital generated by deferred tax accounting.

http://www.timesonline.co.uk/article/0,,5-684866,00.html