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Tuesday, March 25, 2008
Is it throwing good money after bad to keep Shinginko Tokyo afloat?
Shinginko Tokyo, Japan's first bank created by a local government, was set up by the Tokyo Metropolitan Government in April 2004 and started operations a year later to realize Tokyo Gov. Shintaro Ishihara's pet idea of supporting struggling small and medium-size companies in the capital. With many of its loans having soured, however, the metro government is now trying to bail out the ailing bank by injecting an additional ¥40 billion in taxpayer money.
The following are some questions and answers about Shinginko Tokyo:
Why did the metro government establish Shinginko Tokyo?
Gov. Ishihara proposed in 2003 to create a new bank to support small businesses in Tokyo as one of his policy pledges during his re-election campaign, which he won by a landslide to secure his second term.
Ishihara was critical of major banks. In fact, the metro government levied a bank tax in 2000 and imposed it on major banks operating in Tokyo. But the tax was judged illegal in a damages suit filed by major banks at the Tokyo District Court, and this was upheld by the Tokyo High Court. Both sides agreed to a settlement proposed by the Supreme Court in October 2003.
At the time, small and medium-size companies were facing a credit crunch because most lenders were struggling with massive nonperforming loans and were reluctant to lend to risky borrowers.
Ishihara's idea was welcomed by some experts and financial regulators, including then financial services minister Heizo Takenaka. But others said such a bank, whose goal was to let money-losing companies stand, would run counter to the principle of a market economy and negatively affect the operations of private-sector banks.
Who invested in Shinginko Tokyo?
The metro government invested about ¥100 billion and holds an 84.22 percent stake in the bank. Nine companies, including NTT Communications Corp. and Hitachi Ltd., also invested a combined ¥50 billion.
What is unique about the bank?
Unlike many other banks, Shinginko Tokyo lends up to ¥50 million over a maximum of five years to businesses without collateral or guarantors. This means even firms whose liabilities exceed their assets can get loans as long as they have stable cash flow.
What was the bank's initial business plan?
According to a master plan drawn up by the metro government, the bank was designed to become a medium-size institution in fiscal 2008 with overall assets of ¥1.6 trillion and loans and guarantees worth ¥930 billion. The bank was also projected to post a pretax profit of ¥5.4 billion in fiscal 2008.
The metro assembly later approved the plan.
Did the bank achieve its goals?
No. Its business went awry soon after its launch. The bank posted a net loss of ¥20.96 billion in fiscal 2005, which ended in March 2006. For fiscal 2007, which ends next Monday, it projects a net loss of ¥7.99 billion. As of the end of this month, its cumulative losses could reach about ¥100 billion.
Its loans and guarantees totaled only ¥242.2 billion over the first two years.
In contrast, defaults on its loans amounted to ¥2.4 billion in the second half of fiscal 2005 and ¥28.5 billion at the end of January 2008.
Who is responsible for the mess?
The bank's in-house investigation team, led by Shinginko Tokyo Chief Executive Officer Ryuichi Tsushima, concluded in a report released March 10 that Yasumasa Nishi, the bank's first CEO, who left the post last June, bears the greatest responsibility.
The report labeled the former Toyota Motor Corp. executive as the one who allowed the bank's lax management to continue. For example, the bank paid a bonus of ¥2 million annually to sales staff who extended loans, even if the loans later became irrecoverable.
He also hid the accumulating defaults from the board of directors, including outside directors, and failed to tighten the screening of borrowers. As a result, the bank's response to take measures to improve the situation was seriously delayed, according to the report.
However, a former Shinginko Tokyo official, who asked not to be named, blamed the metro government for having an unrealistic master plan.
The bank had to spend massive amounts on its retail services by opening branches, installing automated teller machines and issuing cash cards, as specified by the plan, he said.
It was also difficult for the bank or the largest shareholder to change the plan quickly to cope with a changing business environment because it needed to get approval from the metro assembly, he said.
Observers say it was unfortunate for the bank that other banks recovered strength and resumed lending more to small and medium-size firms in 2005, when Shinginko Tokyo was launched.
Why is the metro government still trying inject an additional ¥40 billion into the bank?
Without the ¥40 billion now, Tokyo taxpayers would be saddled with an additional ¥100 billion in the event of the bank's collapse, Ishihara said.
The metro government said the bank's capital-to-asset ratio could fall below the mandatory level of 4 percent by the end of fiscal 2008 unless the ¥40 billion is injected.
The Financial Services Agency will order the troubled bank to promptly improve its management to maintain the 4 percent ratio, the regulatory minimum for domestic banks.
How does the bank plan to restructure its operations?
According to the plan announced by the bank in February, the number of its branches will be reduced from the present six to one by the end of next March. The number of employees will also be cut from the current 450 to 120 by the end of March 2012. The bank hopes to generate its first profit in fiscal 2011.