Japan's credit associations (known as shikin banks) are having balance sheet problems. The central bank for Japan's nationwide shikin banks, the Shikin Central Bank, has injected JPY40 billion of capital into five member shikin banks.
Two of these banks have received financial support from the credit association central bank for a second time. The issues affecting the balance sheets of such banks center on undercapitalization under the Bank of Japan's tough assessment of bad loan write-offs, and losses on investments in securitized and other financial products. Currently, there is no "selection mechanism" to force distressed credit cooperatives out of the market. Capital injections by the central bank for such credit associations implicitly assumes that management will be improved/restructured through consolidation, but as other members have declined to step up to the plate, the troubled institutions remain in business.
During the Heisei malaise, Japan resorted to forced bankruptcy procedures for financial institutions, with 181 such bankruptcies occurring since 1991. But no action has been taken on a financial institution since regional bank Ashikaga Bank was nationalized in 2003. Since then, a soft landing approach has been taken.
Current Financial Services Minister Kaoru Yosano is reluctant to forcefully close such associations, believing that an upper limit on deposit funds in the case of a bank failure would be too disruptive.
A revised bank recapitalization law became effective at the end of 2008 that does allow for preemptive injections of public funds. Since then, the government has injected JPY121 billion into North Pacific Bank (subsidiary of Sapporo Hokuyo HD, 8328.T) as well as Minami Nippon Bank (8554.T) and Fukuoka Bank. These capital injections however are no guarantee of lasting reforms in operations.
Given the current still-fragile global financial system, there is considerable caution about allowing shakeouts in Japan's second and third-tier banking institutions, but the fact remains that Japan is over-banked, with financing capacity that is much larger than actual demand for funds. As long as the government continue to avoid the needed clean-up, Japan's regional banks will remain inefficient and vulnerable to future crises.
From the big picture perspective of the Financial Services Agency or the Bank of Japan, however, these institutions are not central to the viability of Japan's banking system.
The irony is that Financial Services Agency is also examining about 30 financial institutions, including nine major banks, to see if they have improperly denied credit or reduced existing loans to businesses, as the BOJ's Tankan survey shows that credit availability in Japan remains tight, especially for smaller firms.
