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. Last Updated: 07/27/2016

Tokyo Takeover Raises Hopes of Banking Reform

TOKYO -- The Japanese government has ordered the forcible takeover of ailing Nippon Credit Bank, raising hopes that Tokyo is giving up its old protective ways in a better-late-than-never bid to cleanup its stagnant banking industry.

NCB is the second bank to be nationalized in two months; the first was the Long-Term Credit Bank of Japan, or LTCB, in late October.

The government's move against NCB on Sunday marked a potential change of course because while LTCB had voluntarily applied to be taken over, NCB had resisted until the bitter end, insisting it had the ability to restructure itself.

The decision by financial regulators to nevertheless have NCB put under state control suggests a more aggressive government drive to weed out losers, analysts said.

"Financial regulators have clearly changed their banking supervisory policy and they will let troubled banks fail if they judge them incapable of restructuring or finding a merger partner," said Yoshinobu Yamada, a senior analyst at Merrill Lynch Japan. Regulators signaled an end to the "convoy system" under which the government holds healthy banks back by forcing them to help weaker banks, they said.

Yamada and some other analysts said, however, that NCB would be the last major bank put under state control.

Akira Takai, a senior analyst at Daiwa Institute of Research, noted: "NCB's collapse came before Japan injects public funds into major banks which are financially sound."

The government plans to pump public money into Japan's major banks, urging them to apply for the funds to boost their capital as much as possible by early next year and to make further restructuring efforts to consolidate the bloated banking sector, he said.

Fifteen of Japan's biggest banks have said they are considering applying for up to 5.8 trillion yen ($50 billion) in government-supplied capital in early 1999.

Sakura Shiga of Japan's Financial Supervisory Agency said major banks were not planning on enough government funding to recapitalize and restructure and said the FSA, a watchdog agency, would try to corner major banks into applying for more public money.

Two months ago, the government earmarked 18 trillion yen to temporarily nationalize failed or failing banks. The money can also be used to cover loan losses if a bank is taken over as a public "bridge bank."

Another 17 trillion yen has been set aside for protecting depositors if their bank fails. The government also made available 25 trillion yen for weak but viable banks and in some cases sound banks.

But some analysts estimate the banks will need more than 10 trillion yen to cover potential loan losses. They estimate problem loans could total more than 50 trillion yen.

Mitsuhiro Fukao, a professor at Keio University in Tokyo, said that for Japan's economy to recover from its longest and deepest postwar slump, it should adopt a policy to make strong banks stronger by strictly assessing their asset quality.

He said authorities should require major banks to withdraw from international markets and in some cases close down if they are too weak to raise capital in the market on their own. "If Japan continues to postpone tackling bad loan problems, minus economic growth will continue."

Fukao said about two-thirds of the 15 major banks which have said they may apply for public funds to improve their capital may be unable to raise capital in markets.