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Japan Warns Banks With Broken Business Models To Adapt

Banks Business

EDITOR NOTE: Imagine being handed a losing condition as your normal operating baseline and then being forced to thrive in that condition under threat of punitive action. That’s essentially what’s happening in Japan between the country’s top regulator and the banks under its jurisdiction. With a decades-long backdrop of rock-bottom interest rates, stagnating local economies--both of which were policy-driven--and now, a slowdown due to COVID-19, what we’re seeing is the legislative ‘normalization’ of abnormal circumstances. Come to think of it, our policies in the US are beginning to look not so different from what’s been going on for years in Japan.

Japan’s financial regulator is running out of patience with regional banks that are struggling to adapt to an increasingly grim business environment.

The Financial Services Agency has targeted some local lenders for “intensive dialogue,” which could lead to regulatory action if they fail to convince it of their viability, Commissioner Toshihide Endo said. He hinted at the need for management changes at banks that don’t change their strategies.

“There has been no innovation,” Endo, 61, said in an interview in Tokyo. The old practice of making money by simply taking deposits and lending them out at a higher rate “has been completely shattered. Banks should be thinking about a business model to survive. But are they?”

The discussions reflect the FSA’s growing frustration with regional banks whose profitability has long been eroding due to rock-bottom interest rates and stagnating local economies. Now concerns are mounting that some are too weak to withstand the coronavirus-fueled recession and may eventually need to be rescued or delisted.

The pandemic has “shortened the time frame” for banks to tackle their problems since it will only worsen the predicament of local businesses, Endo said. He urged them to help corporate clients adapt, not just by lending money but also by giving strategic advice.

Japan has more than 100 regional banks. Endo didn’t identify or disclose the number under scrutiny but said the FSA started talks with them even before the outbreak struck. The conversations stem from regulatory changes last year that enable the agency to take action against banks deemed lacking sustainable business models even when they meet capital requirements or other narrow measures of financial soundness.

Failure to convince the FSA of their long-term viability could lead it to impose business improvement orders, a tool that carries a heavy stigma in Japan and is normally reserved for rule violations. Nomura Holdings Inc., for example, received one last year for an information leak and lost underwriting deals as a result.

Endo questioned whether some local bank managers have the ability to push through the needed changes. Most bank executives have risen through the ranks, and while some have come to realize the challenges, others may need to step aside in favor of external managers, he said.

“It’s impossible for them to change the business model,” he said. “So the question is whether they can see that they aren’t cut out for it and bring in outside talent.”

Endo’s sense of urgency can be traced back to his early career as a Finance Ministry official during Japan’s financial crisis in the late 1990s, when the government was forced to spend trillions of yen bailing out lenders. He has said the meltdown could have been less dire if there had been more frank exchanges during the asset-price bubble that led to it.

Asked whether smaller banks should remain publicly traded when their declining profits could be used for capital rather than dividends, Endo said the agency isn’t in a position to tell banks to delist.

“But if top management seriously consider the implications of staying listed, I think there will be many questions,” he said. In the past, going public itself could have been a goal, but that’s no longer the case, he said. “It also costs money to stay listed.”

Endo has spent two years as commissioner, a typical length of service. He is set to be succeeded by Ryozo Himino soon, Kyodo reported on Tuesday. An FSA official declined to comment.

Separately, Endo expressed support for efforts to boost Tokyo’s standing as a global financial hub, but said the idea faces challenges. The ruling Liberal Democratic Party recently began debating a proposal to attract financial firms and workers that may be looking at alternatives to Hong Kong following China’s clampdown there.

Endo said that while Japan’s relatively high taxes are an issue, a bigger question is whether the country presents enough of an opportunity to generate profits.

“I hope Tokyo becomes a city with a big presence in finance,” he said. “But for that to happen it needs to become a place where people want to do business even if taxes are high and English isn’t spoken.”

Originally posted on Japan Times

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