Japan watcher Richard Katz on the decision to bail-out Resona. Perhaps the most significant thing is that this is happening at all. As Katz says, the ripple effect is just begining. Remember the rice pile!
Theories about Tokyo's decision to inject $17bn into the Resona banking group are polarised. Some see it as yet another bailout of a mismanaged bank and its borrowers. Others predict that banking minister Heizo Takenaka will compel Resona to rid itself of non- performing loans (NPLs), thereby creating a model for other banks. Both poles focus too narrowly on the immediate outcome. Yes, there is a danger of a bailout with only limited action against "zombie" borrowers. It is disturbing that the stock prices of some of Resona's worst-off borrowers are now rebounding sharply. However, if Mr Takenaka intended nothing more than a bailout, why not simply hide Resona's financial rot, as in the past?
What matters in this episode is the process that brought it about. It began with a private struggle among the auditors - so intense that one of the chief auditors took his own life rather than aid a cover-up. Meanwhile, some officials at the Financial Services Agency defied Mr Takenaka's orders not to interfere in the audit. On May 10, according to a transcript prepared by Resona, and obtained by The Oriental Economist Report, Masanori Suzuki, FSA banking division chief, promised Akiyoshi Otani, Resona's managing director, that he would get his superiors "to persuade the auditing firm right away" to show more leniency.There's nothing new in cover-ups. What's new is that it failed. A parliamentary investigation is under way.
This reflects the increasing pluralisation of Japanese policymaking. No longer can a few bureaucrats, bankers, accountants and politicians hatch a private deal. Increasingly, each player has its own interests and aims. Reform has a growing constituency. The contradictory outcome reflects the conflicting pressures. No one is in complete control. The old regime is breaking down. Recent reforms in rules and enforcement now make it risky for auditors to make two plus two look like five. Asahi and Shin Nihon, Resona's main accounting firms, have already run foul of regulators and shareholders for aiding deceptive bookkeeping at failed banks. Neither wants to be Japan's Arthur Andersen.
Resona's claims of sufficient capital hinged on five years' worth of "deferred tax assets" (DTAs), a dubious form of capital based on inflated claims. Without the DTAs, Resona would be bankrupt. Mr Takenaka has been trying to limit excessive reliance on DTAs, which comprise 40 per cent to 60 per cent of core capital at the leading banks. This is Mr Takenaka's big opportunity and test case. The FSA now has unprecedented leverage over a bank. In effect it owns two thirds of the voting shares. It has ousted the bank president, nine top executives and 142 directors of Resona and associated firms. The new president is a Resona insider but the chairman and seven of the 10 directors are outsiders. The FSA has created its own management oversight committee.
Will this leverage be used for reform or stabilisation? The critical test is treatment of bad borrowers. Officially, about 10 per cent of Resona's assets are considered NPLs. It is said the majority will be hived off into a separate division, and then may be sold to government agencies in charge of NPL disposal. However, unless the borrowers are restructured or liquidated, the economy will perform no better - even if Resona's books look better. That is a recipe for creating new NPLs. There are some disturbing signs. The FSA is giving Resona a quota on lending to small and medium-sized borrowers. That, in effect, is an order to keep extending loans to the zombies. Moreover, despite strong urging of reformers, the FSA is not re-examining Resona's assets to see if it has more bad debts than it claims - as is likely. Mr Takenaka wants to take a tough stance on borrowers but he lacks political and legal support. He hopes that each step forwards will create pressure for further moves. But if the balance of power allows him only half-hearted measures, he could end up as an unwitting "enabler" for the continued protection of Resona's zombie borrowers. Fujita Construction - yet another recipient of debt waivers - has announced insolvency after its auditor downgraded its DTA claims. Questions are being asked about reliance on DTAs at other big banks. The ripple effect is just beginning.
Source: Financial Times