Japan’s Banking Woes Stir Some Action : Tokyo imposes new guidelines, but they don’t go far enough

Japan has belatedly acted to bolster its wobbling banks by overhauling the supervision of the institutions, which are holding hundreds of billions of dollars in bad loans. The initiative marks a major and needed change. However, the measures unveiled last week by the Ministry of Finance do not go far enough in disentangling the traditionally cozy relationship between banks and their regulators.

Had there been more of an arms-length arrangement in the late 1980s, regulators would have flagged the reckless lending of the so-called bubble economy; that lending now is causing huge problems for Japanese banking. And was there a cover-up when U.S. officials were not told of $1.1 billion in trading losses at the New York branch of Daiwa bank until six weeks after Daiwa briefed Japanese regulators? The U.S. Daiwa branch was ordered shut down.

Over the last year, seven Japanese credit cooperatives and one major bank have failed because of bad real estate loans. More failures may follow as the industry struggles to dispose of at least $365 billion in bad loans.

The U.S. Federal Reserve Board, concerned about the fragility of the Japanese banks, which hold about 4% of U.S. Treasury bonds, assured Japanese authorities in October that if a financial crisis occurred, the board would provide emergency cash infusions to Japanese banks operating in the United States.

If Japanese banks are to become more accountable, they must be compelled to make their operations more transparent. They are notorious for inadequate disclosures. This problem has long troubled foreign investors, and the new guidelines do not increase disclosure requirements. The ministry also stopped short of implementing punitive measures, such as ordering a bank to stop paying dividends if its capital ratios fell below a certain level.

Instead, the new guidelines, which critics maintain are merely polished versions of previously announced steps, include beefing up the ministry’s inspection division, implementing an early warning system based on tougher objective criteria for banks’ financial strength, improving the system for informing foreign regulators of possible problems in overseas branches of Japanese banks and strengthening auditing procedures. The proposals also require banks to improve their internal management controls.

In announcing the guidelines, Finance Minister Masayoshi Takemura called them changes that “will bring Japan’s regulatory system up to the same level as that in the U.S.” Tokyo has a way to go.