The Star Malaysia - StarBiz

Banks with old business models warned by Japan’s FSA

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TOKYO: 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 (FSA) 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 realise the challenges, others may need to step aside in favor of external managers, hesaid.

“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 considers the implicatio­ns of staying listed, I think there will be many questions,” he said. “In the past, going public itself was a goal.”

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