JEI's Spin on the News

Transparency Still Elusive For Japanese Banks

Tuesday, November 24, 1998

Although Japanese banks have been pledging for years to come clean regarding financial disclosure recent Japanese press reports suggest they still have some distance to travel to meet this objective.

The nine largest city banks announced in mid-November that they would write off ¥5.1 trillion ($37.6 billion at ¥135=$1.00) in bad loans during the course of the fiscal year ending March 31. This impressive sounding number needs to be put in perspective, however. Based on data from Nihon Keizai Shimbun, the Japanese daily, the nine banks also have ¥13.6 trillion in disclosed bad loans as of September 30, but have taken provisions for only ¥4.7 trillion, leaving ¥8.9 trillion still to write off even if no additional debts turn sour. Given expected writeoffs of no more than ¥5.1 trillion this fiscal year, the banks will be left at the end of FY 1988 with trillions of bad loans that they acknowledge, but choose not to reflect on their balance sheet or income statement.

The same nine banks also are letting it be known that the infusion of an estimated ¥3.8 trillion in public funds will lift their capital adequacy ratios well above the 8 percent threshold needed to do business internationally. Daiwa Bank, Ltd., which ironically is withdrawing from international business, has the highest expected ratio of 12.7 percent according to Nikkei. By coincidence or not, Daiwa is also expected to be the least forthcoming on its financial statements of the nine in reflecting its acknowledged bad loans.

Daiwa would not be the first bank to be simultaneously the healthiest bank on paper and the least transparent regarding the extent of its bad loans. Three months before it went bankrupt in 1997, Hokkaido Takushoku Bank, Ltd. reported the highest capital ratio among the large Japanese city banks, but the least provisioning on financial statements for bad loans.

The problems of Japanese banks go far beyond those involving the disclosed bad loans of the nine largest institutions, of course. Against the ¥13.6 trillion in disclosed soar loans of the nine that form the basis of the above argument, Japanese depository institutions of all types are estimated by the Financial Supervisory Agency to have had ¥87.5 trillion of lending likely to go bad or in need of monitoring as of March 31, 1998. The broader question of the health of Japanese financial institutions is treated at length in JEI Report No. 25A, July 3, 1998, "Japan's Banks And The Bad Loan Problem: The Nightmare Continues".

"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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