Two failures rock bank system in Japan

Panic as problem property loans close institutions with pounds 1.9bn deposits

DIANE COYLE

Economics Correspondent

Two of its biggest failures in the past five decades shook the Japanese banking system yesterday. The Ministry of Finance simultaneously suspen- ded the country's biggest credit union and closed a sizeable regional bank. The two institutions, which collapsed because of problem property loans, have deposits of nearly Y4,000bn (pounds 1.91bn) between them.

There were scenes of panic during the day as thousands of depositors at Kizu Shinyo Kumiai, a credit union based in Osaka, withdrew a total of Y100bn from its 27 branches. The announcement of Kizu's suspension at the end of a frantic day of business follows the closure of Tokyo's Cosmo credit union a month ago.

Hyogo Bank, the country's 38th-biggest and based in Kobe, was shut down at the same time. It was a victim of January's earthquake, which meant many borrowers could not keep up loan repayments to the already-troubled bank.

The Japanese authorities stressed that depositors at both institutions would be fully protected, beyond the amount of official deposit insurance. They also insisted the problems would not infect the entire financial system.

Yasuo Matsushita, governor of the Bank of Japan, said: "There is absolutely no need for concern that the problems will spread to other financial institutions and increase worries over the credibility of Japan's financial system."

Banking experts welcomed yesterday's moves. In a widely-shared view, David Marshall, of bank credit rating agency IBCA, said: "What is encouraging is that we are seeing the beginning of the resolution of the problems in the Japanese financial system."

However, the scale of problem loans, put at more than Y50,000bn for the whole banking system, makes further rescues likely. The authorities tried to play down this risk.

The Finance Minister, Masayoshi Takemura, said he did not expect further big closure announcements. But Eric Fishwick, an analyst at IBJ, said some credit unions and regional banks could still face problems. "Common sense suggests that small niche lenders could still be at risk," he said.

Both Hyogo Bank and the Kizu credit union had extensive property-related loans that soured as a result of Japan's prolonged real estate crisis. According to Graham Turner, a researcher at Tokai Bank in London: "There will continue to be banking casualties until real estate values stop falling."

Hyogo, a second-tier regional bank, has deposits of Y2,530bn. Of its Y2,800bn of outstanding loans, problem loans amount to some Y1,500bn and unrecoverable loans about Y790bn.

Hyogo's business will be transferred to a new bank, funded by its own remaining capital, an injection of new capital from other banks and government funds.

Its two biggest shareholders are Sumitomo Bank, with a near-5 per cent stake, and the Long Term Credit Bank of Japan, with 4 per cent. Its staff have been fired, although some will be rehired at lower wages to run down the bank.

Kizu is now headed by a former Bank of Japan official. All operations apart from withdrawals have been halted. Total loans made by Kizu stand at Y1,100bn, with more than Y600,000bn unrecoverable.

Its deposits stood at Y1,200bn at the beginning of July, but fell by at least Y80bn during August because of panic reaction to the closure of the Cosmo credit union on 31 July.

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