New FSA inspection method must help boost lending to growing firms
If the Financial Services Agency limits its activities to pressuring commercial banks to dispose of bad loans, there is little possibility new loans will be extended to firms with growth potential.
The FSA has therefore found it necessary to revise its method of inspecting financial institutions to keep abreast of the times.
The FSA, the government watchdog of banks, brokerages and other financial businesses, recently made major changes in how it inspects and supervises financial institutions.
The focus of the changes lies in amending the conventional approach of examining the financial health of banks with a fine tooth comb to see whether they have nonperforming loans. Instead, it will leave the risk assessment of small-lot loans to small and midsize borrowers to the discretion of the banks.
The way the FSA inspected banks at the time of the financial unrest in the wake of the bursting of the bubble economy could be referred to as a “crisis response method” with priority placed on bad loan disposal. In those days, there were a number of cases such as those depicted in TV dramas in which grim-looking inspectors relentlessly took bank executives to task.
Even now, many banks, fearing FSA’s inspections, remain reluctant to provide loans to small and midsized companies and business ventures.
It is reasonable for the FSA, with a view to improving the current state of affairs which has seen financial services impeded, to shift its inspection method in favor of encouraging growth.
The greater latitude for discretionary judgment on the part of banks means that their management responsibility is heavier.
If banks turn down loan requests from small and midsize companies from now on, they may not be able to use the excuse of not being able to obtain permission from the FSA.
Banks must sharpen their “discerning eyes” to find small businesses with promising futures and competent managers.
Strengthen regional banks
It is essential for banks to adopt lending policies to sectors with high growth potential to make a major contribution to the Abenomics economic growth strategy led by the administration of Prime Minister Shinzo Abe.
Regarding inspections of the three megabank groups, including Mitsubishi-UFJ Financial Group, the FSA has decided not to check individual banks on a bank-by-bank basis but to inspect them in a cross-sectional way by setting up expert teams in accordance with key inspection categories such as lending risks and quality of corporate governance.
The new method is aimed at clarifying problems and challenges common to the megabanks to help them improve their management. The megabanks, for their part, should accept suggestions offered through the new inspection method to enhance their international competitiveness.
There is no doubt that the rigorous inspections the FSA put into place in the past contributed to helping stabilize the nation’s financial system by pressing banks to quickly liquidate bad loans that ballooned as a result of the collapse of the bubble economy.
While it is reasonable for the FSA to respect banks’ self-assessment of their assets, the agency must remain vigilant concerning large-lot loans to keep a damper on nonperforming loans.
In this connection, it is noteworthy that the FSA has called on regional banks and similar financial institutions to study the advisability of working out medium- and long-term business strategies over five- or 10-year periods.
As there are too many regional banks—three or four in a single prefecture—there are cases in which some have become financially strapped because of excessive competition.
The Abe administration places great hopes on the financing functions of regional banks and similar local financial institutions remaining robust to reinvigorate local economies.
Regional banks must waste no time in revising their management strategies, including business realignment through mergers or other means with other banks.
(From The Yomiuri Shimbun, Sept. 23, 2013)