Ashikaga's "Rural" Bank System
Some foreign commentators have observed that the members of the rural community in Tochigi were continuing to "whine" for more money from the bank. Foreign and some domestic investors apparently took the "hard line" approach to the Ashikaga failure as a positive, but in reality it highlights the discriminatory manner in which Japan's banking clean-up is proceeding. This has been pointed out by the FSA's critics, to the degree that FSA chief Heizo Takenaka took great pains to deny this was the case.
The facts however are different. In May, Resona Bank was effectively bailed out by the government under Article 102, Chapter 1 of the Deposit Insurance Corporation Law. The working assumption was that Resona Bank was a "going concern", i.e., that it had not actually fallen into a net negative equity situation. Based on this assumption, the FSA and the government "bailed out" Resona, thereby giving bank management, investors and depositors a full pass. Price
tag: JPY2 trillion plus.
In Ashikaga's case, the assumption was more severe, i.e., Ashikaga was not considered as a "going concern"--i.e., was deemed to have negative net equity, and this time management and shareholders were not bailed out, as the government used the more stringent Chapter 3 of the same Article 102, where the bank is declared insolvent, and completely nationalized. Payoffs to depositors in excess of the bank's assets would be provided by special emergency funding from the Bank of Japan.
Price tag: JPY1 trillion-plus.
The government apparently plans to pursue management responsibility in both civil and criminal terms. In short, they threw the book at Ashikaga, and indirectly at Tochigi Prefecture, where Ashikaga accounted for some 40% of the loans extended in the prefecture.
In each bank failure, the government and the FSA insist that "it was a special case". Nippon Credit Bank (now Aozora Bank), Long-Term Credit Bank (now Shinsei Bank), Resona Bank, Ashikaga Bank as well as a number of other regional banks and credit unions were all "special cases". The impression given in all these "special cases" is a piece-meal approach determined more by political wrangling than a cool-headed appraisal of the economic merits and demerits of each case, or indeed how the action fit into the overall bank clean-up policy.
What stretches the government's, the FSA's and the auditor's credibility to the limit is the insistance that "they didn't know" until the most recent inspections, when in fact they have known all along. The Resona case was unusual in that the auditors blew the whistle. Ashikaga was already showing deferred tax assets (vapor Tier 1 capital) of over 100%, but until fairly recently, there was also a major Trust Bank with DTAs in excess of 100% of stated capital. Even a slight scratching around the edges by either the auditors or the FSA could have easily revealed long ago that the bank was actually bankrupt. The FSA claimed that Ashikaga had net negative equity at the end of March 2003, while the auditors were having a heated internal argument about what they should do, but nevertheless gave the end March Ashikaga numbers a pass.
(TT's Take) The financial regulators have been walking a thin line between financial system "efficiency" and "stability". When stability prevails, you get a Resona bail-out, i.e., a big moral hazard. When efficiency prevails, you get Ashikaga. Resona was not particularly more deserving than Ashikaga, but that Resona's place in the financial system's pecking order was higher, and their political connections better. This was the
paradox of the previous "mega mergers" between the big banks. The real strategy was to become too big to fail.
It is understandable why the members of the rural community in Tochigi continue to "whine" for more money from the bank. They understandably feel they have been shafted while the Tokyo "fat cats" that have been doing the same thing and getting away with it for years get a full pass.
