JEI's Spin on the News

Takugin's Long Goodbye

Friday, November 20, 1998

When Hokkaido Takushoku Bank failed in November 1997, American analysts without more detailed knowledge probably assumed that the bank operated normally until its collapse one Friday afternoon and then reopened under a different name — most likely reflecting an acquisition by an existing institution —the following Monday morning. Indeed, exactly that often happens with American banks that fail.

Takugin, as it was called, did go through this process — except that the Friday and Monday were separated by a year. For a year, until Friday November 13 of this year, Takugin remained open as an example of the walking dead while its eventual fate was debated. Then, on Monday November 16 the branches reopened as parts of either North Pacific Bank or Chuo Trust and Banking. North Pacific assumed most of the assets and employees of Takugin's operations in its Hokkaido base, while Chuo took those on the big island of Honshu. The government took a big chunk of particularly dicey loans.

By all accounts, the transfer went smoothly. American analysts are likely to be interested in what happened to Takugin during its unusual year in limbo. Apparently, its already huge bad debts multiplied, perhaps because employees' hearts just were no longer in the business of running the bank efficiently. Deposits, which might have been expected to flee a dying bank, apparently stayed because customers came to believe that a workout plan existed for Takugin that would preserve their capital. In contrast, the fate of money deposited with scores of other struggling banks may have been seen as less certain. Finally, the bank apparently cut off borrowers by the score to the point that the credit crunch now said to be afflicting much of the country is believed to have started with Takugin's unwillingness or inability to lend to its customers in Hokkaido, where the bank dominated. Indeed, policymakers in Tokyo now are looking for ways to provide special economic relief for Hokkaido. Some of this dislocation might have been avoidable if North Pacific, for example, had been allowed to take over loan portfolios faster, thereby potentially at least being able to take over lending where Takugin had abandoned.

On balance, the delay seemed to raise the cost of the eventual bailout as well as the economic dislocation to the economy, although these are highly tentative judgments. At this juncture it does not appear that Takugin's management used the year-long interval to place "double or nothing" bets in an effort to revive the bank — a possibly much dreaded by American regulators. Nonetheless, the damage was bad enough and sufficient to explain the American regulators' preference for speedy resolutions of such banking messes.

"JEI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.

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