Japan’s Messy Mega-Merger

Japan’s banking industry may have pulled back from the brink of collapse, but it remains in a parlous state. A financial meltdown was avoided last year only by the government’s injection of billions of rescue dollars. There are still too many banks and they are inefficient and unprofitable.

So the banks, following the lead of their European and U.S. competitors, are trying to grow out of their problems, and on a huge scale. Three of Japan’s biggest banks announced last Friday that they will unite as the world’s largest financial holding company. Other consolidations are on the drawing board. Certainly, restructuring Japan’s troubled banking sector is in order, and mergers are inevitable. But this mega-deal raises tough questions that should be answered before Tokyo banking regulators approve it.

As announced, Fuji Bank, Dai-Ichi Kangyo Bank and Industrial Bank of Japan would form an alliance now and merge by 2002, creating a financial institution with assets exceeding $1.2 trillion. The size of the new bank alone should sound alarm bells, dwarfing its nearest competitor, Germany’s Deutsche Bank, which has assets of $753 billion, and America’s Citibank, with $669 billion. The Bank for International Settlements, which oversees banks worldwide, warned in a report released Monday that banks are becoming so big that their failure could topple entire economies. Much smaller bank mergers than this have raised alarms about the “too big to fail” risk. Can a merger of three unhealthy banks, as is being done in Japan, produce a giant healthy one? Not likely.

The mergers that work best are among banks that have already reorganized or are undergoing a rigorous financial fitness program, including tough cost-cutting. This is a messy job that Japanese corporate managers try to avoid. Yet the terms of the merger would require three separate management teams to slash combined staff by nearly a fifth, shut down 150 branches and stop lending to their deadbeat industrial allies.

On the plus side, the consolidation would create Japan’s first one-stop financial institution, combining consumer banking, investment and corporate lending. But critical details of how the new functions would be divided are yet to be worked out.

Before Japanese authorities begin to talk about this mega-merger as a model for others to follow, they must make sure they will not be consolidating a small banking problem into a monstrous one.