Japan: bank nationalization

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Government intervenes to rescue Ashikaga Bank
Koizumi treads delicate line over 1 trillion yen failure

By MAYUMI NEGISHI
Staff writer
The Japan Times: Nov. 30, 2003

Stepping into a political minefield, Prime Minister Junichiro Koizumi
decided Saturday that the government would temporarily nationalize
Ashikaga Bank, currently part of the Ashikaga Financial Group Inc.

The move -- prompted by the bank being declared insolvent by auditors --
will wipe out shareholder capital and mean the government taking a 100
percent equity stake in the local lender.

"We must proceed with both bad loan disposal and economic recovery
simultaneously," Koizumi said, following an emergency meeting Saturday
night. "We will take measures to prevent confusion or uncertainty, and I
believe the markets will respond calmly."

Although Financial Services Minister Heizo Takenaka said the amount of
capital that will need to be injected has yet to be decided, the
government is expected to provide more than 1 trillion yen.

It will be the first such nationalization since the government acquired
Nippon Credit Bank in 1998.

The Ashikaga group's capital had deteriorated to minus 102.3 billion yen
as of Sept. 30, according to the Financial Services Agency, a sharp drop
from the 150.9 billion yen reported at the end of March.

The negative net worth -- the margin by which a company's debts eclipse
its assets -- pushed down the regional bank's capital adequacy ratio to
minus 3.7 percent, the agency said.

The most serious losses will be felt by local businesses, which hold large
amounts of preferred shares, large banks -- including Mitsubishi Tokyo
Financial Group, which held a 3.5 percent stake as of March -- and
insurance companies.

But the furor over the second-tier bank's fate goes beyond its investors.

Based in Utsunomiya, Tochigi Prefecture, Ashikaga Bank's fate is being
watched anxiously by other struggling banks and their customers across
Japan. Could they be next?

Under Article 102 of the Deposit Insurance Law, the state-backed Deposit
Insurance Corp. will acquire Ashikaga Financial's stock for 0 yen.

Public funds from the DIC's 15 trillion yen pool for distressed banks
would then be used to shore up the bank's finances before it is resold to
the private sector.

This will be the second time the government has intervened to inject funds
into a sinking bank under the terms of Article 102. In June, 2 trillion
yen was used to bail out Resona Holdings Inc.

But concern in banking and business circles is running high. Ashikaga
Bank, the nation's 10th largest in terms of assets, is responsible for 45
percent of all lending in Tochigi Prefecture and holds 40 percent of local
residents' deposits.

Founded in 1895, Ashikaga Bank is responsible for handling the finances of
every village, town and city in Tochigi Prefecture, as well as those of
the prefectural government.

But accounting firm ChuoAoyama Audit Corp. told the bank that a sizable
chunk of its deferred tax assets could not be counted toward capital.

Without its deferred tax assets, or windfalls on future taxes, Ashikaga
Bank fell into negative worth, auditors said. Ashikaga had already skipped
paying a dividend on the 130 billion yen in public funds it received in
1998 and 1999.

The FSA announced that the group had effectively become insolvent at the
end of March.

Ashikaga's close ties with the community are enough to fuel concerns of a
systemic risk within Tochigi Prefecture, FSA officials said, especially as
many local businesses depend on Ashikaga for end-of-year funding.

Resona, the nation's fifth largest banking group, also saw its capital
fall short of regulatory requirements following a stricter audit, but
shares remained stable as the government bought them at market price.

All Ashikaga Bank deposits will be fully guaranteed and the Bank of Japan
has decided to provide emergency loans to support the bank's short-term
funding activities.

Saturday's decision by the government is likely to dampen exuberant rises
in bank stock prices since Resona's bailout, analysts said.

With so many key regional banks struggling, another framework for helping
smaller institutions may be necessary, said Ryoji Yoshizawa, banking
analyst at U.S. credit rating agency Standard & Poor's.

"There are other banks like Ashikaga Bank that wholly hold up certain
regions," Yoshizawa said.

And with the nation's tax revenues likely to fall even further, every yen
counts.

"Can the nation afford to prop up every troubled bank on the grounds that
customers need it?" asked Takehiro Sato, an economist at Morgan Stanley.
"I think it's time to review once again the criteria for injecting public
funds."