JAPAN'S BANK BAILOUT: PAINKILLER OR REAL REFORM? (int'l edition)
Under enormous international pressure, Japan's Prime Minister Keizu Obuchi is embarking on a massive bailout of its banking system. Some $510 billion will be set aside to cover depositors, inject capital into ailing banks, and effectively nationalize the insolvent ones. The up-front money for the salvage operation represents about 12% of Japan's economic output--a commitment that dwarfs the money spent on the U.S. savings and loan crisis. How will the plan work in practice? And will it restore Japan's crippled banking sector to health? Here are some key issues to consider.
Is the plan designed to reform Japan's troubled banks or merely to prop up the existing structure?
The quick answer is the latter, but that's a pretty urgent need at this point. The banking sector is saddled with $1 trillion-plus in problem loans. That's why Japan is in a credit crunch. And with an economy as highly leveraged as Japan's--bank loans represent more than 100% of gross domestic product, vs. 40% in the U.S.--a contraction in lending has dire consequences. Japan needs a quick fix to halt the corporate bankruptcies that have worsened its current recession. The rest of the world needs a stronger Japan to avert a global recession.
Where exactly will the money come from?
Bank of Japan officials say they will use a mix of monetary expansion and Japanese government-bond sales to raise most of the $510 billion. The proceeds will then be lent to the Japanese Deposit Insurance Corp. The DIC will set up four special accounts: one to cover the cost of nationalizing insolvent lenders, another to help banks that are hurting but are not technically insolvent, and two others to cover depositors in the event there are any bank closures.
How will banks receive the help?
That depends. In really dire cases, the government will take a controlling stake by purchasing common and preferred shares. It will then effectively run the show until it can find a merger partner. If the plans works, the government might even sell back its equity stake at a higher price than it paid and lower the ultimate cost of the bailout. The first nationalization candidate will likely be the Long-Term Credit Bank of Japan Ltd. Another government workout vehicle called the Resolution Trust Corp. (RTC) will purchase bad loans from the banks. In that case, fewer banks would have to sell shares to the government and so face less interference.
But isn't Japan's RTC effectively parking the dud loans on the government books, rather than the banks?
Initially, yes. But the hope is that some of those loans, and their underlying real estate collateral, can be sold off to global investors in the form of securitized bonds. This kind of market is just getting under way in Japan and the government is trying to make it easier to crack down on deadbeat borrowers, settle competing claims on property, and set up auctions. That's going to take some time, though.
Where does the plan fall short?
The biggest concern is that a fair number of weak, but not insolvent, banks won't step up for public funds--and the government can't force them to do so. The banks fear being marked as basket cases by global investors and foreign banks. Instead, they will try to muddle through. Another worry is that those banks that get government help won't dump their bad managers, won't spin off money-losing units, and won't restructure enough to become viable in the long term. There will be a great temptation to use public money to prop up the whole rickety structure, rather than overhaul it.
What's the biggest challenge for the future?
It's one thing to restore solvency--and quite another to restore profitability. For decades, friendly bureaucrats have shielded bankers from competition and market discipline. Banks must do a better job of lending according to risk and must figure out how to explore new markets and businesses that play to their strength. If Japan shirks this challenge, then it faces a never-ending string of bailouts.
What's the bottom line?
This is just a morphine injection for a sick banking system. It's not the restructuring the banks need. A lot of poorly run banks will be frozen in place--without layoffs or real cost cuts being placed on the table. Real repair of Japan's financial system will be put off till later.
By Brian Bremner and Emily Thornton in Tokyo
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