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Friday, July 30, 1999

Analysis: Credit Suisse case seen as a warning

Staff writer

Thursday's decision to revoke the license of a Credit Suisse financial group bank signifies that financial authorities will no longer tolerate foreign banks that try to cash in on Japanese firms hoping to conceal financial losses.

But experts say Credit Suisse was not alone in assisting window-dressing efforts by Japanese corporations, noting the authorities might have made an example of Credit Suisse to warn other banks, especially foreign ones.

"Foreign banks had gone unchecked by the regulators until recently," said Tetsuo Fujita, a senior economist at Japan Research Institute.

"Foreign financial institutions, as opposed to Japanese financial institutions, which have long judged what they can and cannot do from their opaque contacts with Finance Ministry officials, have conducted business in Japan with the stance that they can do whatever is not clearly defined as illegal," he said.

As regulatory power has shifted from the Finance Ministry to the Financial Supervisory Agency, authorities seem to be getting tougher on conduct they consider inappropriate.

But even the FSA on Thursday would not go so far as to say that Credit Suisse's derivatives transactions themselves were illegal.

In the transactions in question, the Credit Suisse group allegedly helped corporate clients conceal losses on their balance sheets by allowing them to put loss-incurring securities holdings in trust accounts at book value instead of market value.

In doing so, the group apparently took advantage of loopholes in the nation's accounting rules, which do not explicitly prohibit such transactions.

"It is not clear whether the transactions themselves were legal or illegal," Fujita said.

An official at a major Japanese bank said he suspects other foreign banks -- and maybe even some Japanese city banks -- were engaged in transactions that effectively helped firms move their losses off-balance.

The official, who refused to be named, said his bank is "helping" some of its clients unwind the derivatives transactions conducted by foreign financial institutions. The products these clients bought are of a high risk, high-return type, and they are now worried that they might incur huge losses in the future, he said.

Financial Reconstruction Commission Chairman Hakuo Yanagisawa told a Thursday news conference that the decision to revoke the banking license from Credit Suisse Financial Products Bank, a Credit Suisse unit, was based on:

1) The obstruction of FSA inspections;

2) The fact that the bank engaged in "repetitive and continuous production and sales of financial products," which kept Japanese firms from properly disclosing their bad loans;

3) And other law violations, including an offense violating the ban on securities businesses by banks.

While the officials stressed that the license revocation -- unprecedented in postwar history -- was based on an accumulation of all three factors, it remains unclear what derivatives transactions banks will be punished for in the future.

Fujita said the government should come up with some kind of administrative guidelines to make clear what transactions financial institutions should not conduct.

"Drafting such guidelines is difficult," he said. "But even if they simply stipulate that transactions that help firms conceal their losses should not be tolerated, it will help deter banks from such practices."

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The Japan Times

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