TOKYO -- The massive loan scandal at Japan's Suruga Bank was the result of misconduct by a host of bank employees, coupled with indifference from the executive ranks, according to an independent investigative report released Friday.
Employees either looked the other way when confronted with improper loan applications, or actively steered them toward approval, according to the report, which called the behavior "systemic." In hundreds of cases, the applications made use of falsified documents.
The third-party investigative panel charged Suruga executives with breach of due diligence obligations for allowing the misconduct to happen under their watch. Five executives, including President Akihiro Yoneyama and Chairman Mitsuyoshi Okano, who is a member of the founding family, stepped down Friday.
Suruga's newly appointed president, Michio Arikuni, told reporters Friday that the Shizuoka Prefecture-based lender could face additional losses associated with disposing of toxic loans. "We are conducting a self-assessment for the end-of-September earnings report," said Arikuni. "We are planning to raise loss allowances if needed."
The misconduct surfaced in January when Smart Days, a Tokyo operator of a chain of women-only share houses, told investors it would stop paying them a portion of rental revenue. Yoneyama spoke in May of the suspicion that a large number of Suruga employees financed the investors while knowing about falsified loan documents. The investigative panel was launched the same month.
Investigators found that Suruga employees, mostly in Tokyo-area branches, granted real estate investment loans to clients despite knowing that documents verifying income were forged. They discovered 795 cases of falsification since 2014. Some bank employees took an active role in contributing to the forgeries.
The findings were based on email and other electronic data obtained from the bank and other relevant parties, as well as interviews with Suruga executives and staff.
The report paints a picture of a corporate culture that prized profit above all else. In particular, it pointed to Sugura's "heavy dependence" on real estate investment loans.
These high-interest loans account for about 2 trillion yen ($18 billion), or two-thirds, of the bank's lending balance.
Throughout Japan, loans made out to individual residential property lessors exceeded 23 trillion yen in June, up 20% from 2009, just after the global financial crisis. Regional banks like Suruga hold 50% of the market. But some rivals, facing weak economic bases at home, have started migrating to the Tokyo area.
This has spurred competition. Strong loan applicants, such as high-income corporate workers, were enticed by regional lenders offering lower interest rates. That left a remaining pool of subprime clients who often had lower take-home pay or were asset poor.
These individuals would not normally be considered for financing. But Suruga employees desperate to maintain quotas accepted them, going as far as approving, or in some cases, doctoring, fake documents to help candidates pass screening tests.
"Many bank employees said they either falsified documents themselves, tacitly accepted the forgeries, or proceeded with the financing despite holding suspicions," said the investigative report.
Some of the harshest criticism fell on Suruga's brass for failing to stay on top of the situation, and for instead instituting harsh quotas geared toward boosting revenue and profit. "An extreme negligence was found with regard to compliance, and a considerable deterioration of the corporate culture was apparent," the report said.