[Nasional-e] Staving off banking disaster

Thu Nov 28 10:00:29 2002

EDITORIAL

Staving off banking disaster

The latest financial reports from Japan's major commercial banks tell more
of the same story: The huge overhang of nonperforming loans continues to
block a return to health. To be sure, banks made a profit in their main
lines of business in the first six months of fiscal 2002, as they did in
previous periods. However, that was mainly the result of rock-bottom
interest rates. The business profit is paltry compared to the mountain of
bad loans.

Now the banks are getting more serious about addressing their bad-debt woes.
With the government pushing for faster debt cleanup, it is likely that the
rules for loan and capital assessment will be tightened. Banks will likely
receive less tax credit for their capital than they do now. They will have
to put aside more loan-loss reserves. Certainly, all this will increase the
pressure for bank reform.

To clear these new hurdles, the banks must restructure their operations and
find new business opportunities. They would do well to emulate manufacturers
who have been doing essentially the same thing over the years -- getting
leaner while tapping new demand. Of course, banks are different from
manufacturers, but they cannot restore the confidence of investors and
depositors unless they, too, make serious efforts to survive.

That is the message of the interim reports. The message itself is not new:
Bankers have stressed the need for reform time and again. What is new is
that they are now trying to match their rhetoric with action. In fact, all
four banking groups are now poised to take new steps to improve their
conditions. The impression is that bankers are changing their "elitist
mentality" -- the notion that banks are "special" -- and coming down to
earth.

Symbolic of that change are moves by the Mizuho Financial Group to cut basic
pay across the board, not just overtime and bonuses. That is something new.
Bank employees are said to be the most highly paid of Japanese workers, yet
banks have long resisted public pressure for pay cuts. One dubious
explanation for this has been that extensive wage cuts would create a
perception that banks are in trouble and undermine their credit standing.
The high wage level was also defended on the grounds that banks must bear
risks in the market economy, such as debt defaults.

One executive was once quoted as saying that public cries for pay cuts
stemmed from "jealousy" in a society where uniformity is respected. The
remark seemed to reflect a sense of privilege among top bankers. That
self-righteous feeling, it can be said, dulled their sense of crisis. If the
Mizuho initiative is followed by other groups, it will be a strong sign that
the banks share a real understanding of the gravity of their situation.

In another sign of voluntary reform, UFJ Holdings Inc. is planning to
transfer about 1 trillion yen in bad loans to a separate company that will
help rehabilitate heavily indebted but potentially viable small clients. The
idea is twofold: improving the group's financial status and concentrating
survival expertise and knowhow in a specialized entity.

If this formula succeeds, it will not only open new vistas of possibility
for distressed clients but also help promote consulting as part of the
bank's business. However, the program will be regarded as a flop if it ends
up as a convenient device for cutting off delinquent borrowers. The
important thing is to return to the basics of banking by getting rid of bad
debts as soon as possible.

Bolstering capital bases is essential for bad-debt disposal. However, if
experience is any guide, measures being considered by a number of banks are
not likely to provide a fundamental solution. One wonders whether bankers
are again looking to economic stimulus measures -- an extra spending budget
is now in the works -- as the way out of the bad-debt quagmire. Such a
dependent attitude will further erode confidence in the banks.

Initiative is the key word for the debt-burdened banks. Basically, they need
to improve profitability to dispel the gloom surrounding them. Profit can be
increased, for example, by developing new loan demand, including from
consumers. Charging higher fees on transactions looks like an expediency in
view of the near-zero interest rates.

Bankers face two nightmares: a continuing fall in bank shares and the
possibility of bank nationalization. If they want to stave off these
disasters, they must solve their problems for themselves in ways that
convince investors and depositors. Without such efforts, bank stocks may
well remain in a deep freeze, while the specter of nationalization will
continue to haunt weak banks.