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Japan to crack down on struggling regional banks

Many lenders that serve localities have scant prospects of improvement

The FSA will incorporate measures of future viability when assessing the regional banks.   © Reuters

TOKYO -- Regional banks in Japan that are barely getting by will soon face even greater pressure from the government to overhaul operations in an effort to grapple with a sector battered by shrinking populations in the countryside and years of ultra-low interest rates.

The Financial Services Agency, the state watchdog, plans to reform its early intervention regime governing regional banks. Currently, problems with current capital adequacy ratios, mainly due to bad debts, trigger FSA action. But that scope will expand to include future profitability, an approach that address the broader chronic issues that have plagued the sector.

These changes will address weak finances of regional banks. Several banks that hang on to capital adequacy ratios above the 4% minimum still lose money at core businesses. The FSA seeks to remedy the problem and stabilize the financial system before an economic downturn makes the problem worse.

Under the new guidelines, the FSA will conduct stress tests of banks nationwide, perhaps by this summer. Lenders not making the cut will be requested to implement plans to boost their profitability. The measures will include closing down branches and staff reassignments as well as restraints on dividend payments.

Banks that are slow to carry out reforms will face official improvement orders backed by law. If it is determined that the earnings crunch stems from poor governance at the top, the order may include the call to "clarify management responsibilities." The phrase essentially means there should be a change in the executive team.

Up until now, such enforcement actions have been imposed on banks for misconduct. Now financial authorities will have that option to beef up oversight of regional banks that have found themselves in tough earnings situations.

During the previous fiscal year ended March 2018, 54 out of 106 regional banks were in the red when it came to lending, financial instrument sales and other core businesses. Among them, 23 banks have turned in losses for five consecutive years or more.

Some struggling banks have managed to stay in the black by selling off equity and bond holdings and curbing expenses tied to disposing of nonperforming debt as bankruptcies declined. But Musashino Bank, Tochigi Bank and Suruga Bank, which had employed such methods to stay above water, still posted net losses for the three quarters through December 2018.

In the coming months, banks will also face greater scrutiny if they pay out dividends that do not match business conditions or put off booking paper losses on securities in a way that produces misleading financial reports. Since 2016, the FSA has performed similar crackdowns on banks on a limited scope.

Last year, the agency ordered Fukushima Bank to improve business operations. The bank shut down unprofitable branches and the president stepped down.

During an earlier debt crisis, the FSA rolled out between 1998 and 2002 a framework of prompt corrective action and an early warning program designed to prevent bank failures. Now the system is being reworked to tackle the unsustainable contractions of local markets. The FSA identified last year 23 prefectures that would be unprofitable for banks, even if the lenders commanded virtual monopolies there.

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