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Tuesday, March 25, 2008
WITH FSA KEPT AT BAY, BAILOUT DOUBTS MOUNT
Ishihara brainchild Shinginko said doomed from the get-go
When Rikkyo University professor Yoshiyuki Yamaguchi first heard about Tokyo Gov. Shintaro Ishihara's plan to set up a new bank in 2003, one thought immediately leaped to mind: This is doomed to fail.
Yamaguchi's doubts appear to have been borne out by Ishihara's recent proposal that Tokyo's 12 million tax-paying residents provide ¥40 billion to bail out financially troubled Shinginko Tokyo, which was launched in April 2004.
Few experts believe the rescue plan will solve the problems of the money-losing bank. As Yamaguchi points out, many expect that even with the emergency capital injection, the bank, which is owned by the Tokyo Metropolitan Government, will soon fall into financial straits again and impose further burdens on the taxpayers of the capital.
During the 2003 gubernatorial election campaign, Ishihara promised the Tokyo Metropolitan Government would set up its own bank to extend loans to struggling small firms based in Tokyo.
But as professor Yamaguchi noted in a recent interview with The Japan Times, by that time statistics showed that the credit crunch stemming from the domestic financial crisis of the late 1990s had already subsided.
"The concept of a new bank was totally meaningless because the credit crunch had already ended when the idea of the bank was proposed," said Yamaguchi, an expert on finance and a noted commentator on the Shinginko Tokyo issue.
According to a survey of business sentiment conducted by Chudokyo, a national association of small and midsize firms, the majority of companies were finding it easier to secure short-term loans from banks by the fourth quarter of 1999.
This trend continued, and conditions for borrowing were vastly improved by the time Shinginko Tokyo opened its doors in April 2005.
"The situation had totally changed but Ishihara ignored it and forcibly carried out his plan," Yamaguchi said. "His responsibility is grave."
He added that "the governor should resign to take responsibility" for wasting billions of yen in taxpayer money.
Yamaguchi further alleges that Ishihara's campaign promise was calculated to tap into voter frustration aimed at unpopular major financial institutions.
Regarded as in league with the affluent, the major banks fell further out of favor with the average citizen when they showed themselves extremely reluctant to extend loans to small businesses during the financial crisis of the 1990s.
"Ishihara won over the masses by making (major banks) a scapegoat," the professor said.
Ishihara's politically motivated populism, however, did not mesh with economic realities.
Setting up a new bank requires a huge investment in branch offices, automatic teller machines and other expensive computer systems. In addition, a new bank faces competition from existing major financial institutions, Yamaguchi pointed out.
It is far cheaper and more efficient for a local government to give direct financial support, such as subsidizing loan interest payments or providing credit guarantees on loans from existing banks, instead of launching a new bank, Yamaguchi argued.
Yamaguchi and other experts maintain that liquidating the bank now will cost far less in the long run than keeping the arguably ill-fated bank temporarily afloat by injecting ¥40 billion in fresh capital.
Ishihara has resisted the liquidation option, pointing out that no banks are willing to take over Shinginko Tokyo's assets and liabilities.
But according to Yamaguchi, this unwillingness is because the Financial Services Agency has yet to inspect the details of the bank's financial condition, particularly the nonperforming loans extended to troubled small companies.
Without an FSA evaluation, other banks cannot rule out the possibility that Shinginko Tokyo's bad loans could turn out to be far larger than the metro government now claims.
Allowing the agency to determine the value of the nonperforming loans is a precondition for any rescue or liquidation plan for Shinginko Tokyo, Yamaguchi said.
But Ishihara and the bank are unwilling to accept inspections by the agency. They probably fear such scrutiny will reveal that the bank's financial condition is far worse than currently claimed by the bank and the metro government, Yamaguchi said.
The metro assembly is now expected to give the final green light to the ¥40 billion bailout plan at a plenary session Friday, with the blessing of the Liberal Democratic Party-New Komeito ruling bloc.
"It would be extremely irresponsible for the LDP and New Komeito to have ¥40 billion in assistance approved by the assembly. Voters won't forget it so easily," Yamaguchi warned.