Resona bailout sparks fears in financial sector

  • Business
  • Tuesday, 20 May 2003

TOKYO: Anxiety about the health of Japan's banks gnawed at confidence in financial markets yesterday after the government agreed to rescue fifth-ranked Resona Bank but analysts played down the likelihood of a financial system crisis for now. 

The government said after an emergency meeting on Saturday that it would throw a life-line to Resona Holdings Inc after the strict application of accounting rules by auditors showed it did not have enough capital to stay in business. 

Resona Holdings Inc said director Kenji Kawada would become president of the company effective May 20, succeeding Yasuhisa Katsuta. Current chairman Takashi Kaiho, vice-president Yukio Yanase, and Katsuta will resign from the company on June 10. 

The HQ of Resona Bank, Japan's fifth largest bank, in Tokyo.

The company's executive corporate officer, Masaaki Nomura, will become president of Resona Bank. 

Hideki Goto, vice-president at Goldman Sachs Japan's credit research section, said: “The market ... doesn't see this (bailout) leading to a serious systematic problem.” 

Views differed widely, though, on whether the government had taken a step in the right direction. 

Financial Services Minister Heizo Takenaka, closely associated with Prime Minister Junichiro Koizumi's agenda of painful economic reform, came under fire for a hard-line approach that critics said had aggravated Resona's troubles. 

But others applauded the rescue – which could cost 2 trillion yen – as a sign reforms were on track. 

“We welcome this development as a great success of the Takenaka reform plan and as a milestone in financial sector reform,” wrote Ryoji Musha, strategist at Deutsche Bank Group. 

Others argued the bail out was instead an old-style soft-landing that could serve as a model for other big banks. 

“It's not going bust, they are getting 2 trillion yen from the government ... and they are maintaining it as a listed entity so they don't have to go through the stress of nationalising and selling to an American vulture fund,” said Peter Tasker, a consultant strategist at Dresdner Kleinwort Wasserstein. 

“It's a way of keeping the show on the road. Who is inconvenienced? Not very many. It doesn't mean a radical change, in fact, far from it, in terms of relations with borrowers.” 

News of the rescue hit Tokyo's key Nikkei share average, which closed down 0.96% at 8,039.13 after falling as low as 7,974.17, the lowest intra-day level since May 2. 

The fall in share prices was more bad news for the banks, which hold huge stock portfolios and are struggling to dispose of a mountain of problem loans estimated by the government at 40 trillion yen. 

Stock traders said that selling was less aggressive than some had expected because the bail-out scheme erased some concerns about the banking sector and was seen as progress – albeit small – towards solving the bad-loan problem. 

Resona shares ended the day down 17.24% at 48 yen. 

The news also hit shares in Japan's other major banks. Mizuho Financial Group, the world's largest banking group by assets, closed down 7.96% at 68,200 yen. 

The stricter assessment by auditors of Resona's treatment of deferred tax assets as core capital was cited as the main reason for the sudden erosion of its capital that prompted the bail out. 

DTAs are expected tax credits on loan-loss provisions, but they materialise as real assets only when the troubled borrowers are legally bankrupt and the bank itself has taxable profit. 

Analysts said Japan's four megabanks were unlikely to suffer a similar fate – at least for now – since they depend far less on such such tax breaks. Concerns, however, persist. – Reuters  

  • Another perspective from The Yomiuri Shimbun, a partner of Asia News Network. 

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