[paper] The Pressing Need for Management Reform in Banks Rather than Public Capital Injections

Yuko Kawamoto: McKinsey Japan Senior Expert

Yuko Kawamoto is a graduate of Tokyo University's Literature Department School of Social Psychology, and holds a Master's Degree in Economics from Oxford University. Before joining McKinsey & Co.'s Japan office in 1988, she worked at the Bank of Tokyo (now Bank ofTokyo-Mitsubishi). She has published several books on banking, notably Banks Profit Revolution. She is a member of the Finance Service Agency Minister's discussion committee on the future vision of the Japanese financial system and administration in Japan. She is also a member of the Finance Service Agency Deliberation Council's Working Group, which was created to review the regulations governing capital asset ratios.

Currently another public investment of capital into Japanese banks is popularly being discussed in both the private and public sectors, but the question, "for what reason public capital will be injected?" or more simply stated, the original purpose of the capital injection has not been talked about. If the purpose of the public injection of capital into the banks is aimed at resolving the non-performing loan problems of the banks, then first and foremost the soundness of bank management should be made a priority. Similar to the way it became clear after the details of the 1999 public injection of capital into the banks, if there is no management reform to make the banks independent, then no matter how much capital you inject into the banks it will be a waste.

The Japanese banking sector as a whole is already in a situation of excess capital. For example the amount of capital the Japanese banks invest for profit is 3 times the amount of French banks and 10 times the amount of English banks. That in itself is a situation of excess capital, and if additional public capital was injected, the efficiency of the banking sector, as a whole, would drop a level.

If banks retreat from international affairs, that in itself would drop the capital adequacy requirements from 8% to 4%, and for large city banks this would give them access to trillions of yen in capital. In order to compress capital and break up over-banking, there are many options that should be tested including this type of domestication of banks.

The government, which through the capital injection of 1999 has become the banks' main shareholder, should strongly push bank management towards the realization of the management options stated above, before there is another injection of public funds.

Up until now, from the management side, there has been no indication that they have the clear goal of speeding up the process of disposing non-performing loans. Right now what is important for the banks is to show a clear commitment toward the goal of disposing of non-performing loans. They should commit to achieving the goals as management itself should decide the next course of action and make business results their goal using indicators such as the return on assets (ROA) and the return on earnings (ROE) as to show progress.

What the banks should do is: strengthen profitability by matching the cost of trust with fair interest loans, and decrease costs by revising services from the point of cost efficiency. If this can't be done and management reforms conclude without a serious effort, banks will continue to constantly depend on public capital.

It is true that by nature the Foreign Ministry's affairs do not involve vested interests, but it is only too naive of them to say that they have nothing to do with such interests. This naivete is the very cause of those faults of which the zokugiin, and other politicians such as Suzuki who work for their constituency rather than the nation, could take advantage. "Muneo House" is a good example. Foreign Ministry officials are inexperienced in bidding and that must have made them sitting ducks for zokugiin like Suzuki. The ministry officials were Suzuki's mere puppets in the recent scandals. Professor Hasegawa is concerned that if the Suzuki scandals will not be thoroughly investigated, similar incidents will certainly occur in the future.