MNI INSIGHT: BOJ Concerned Govt Lenders Hurting Regional Banks

--In Low Interest-Rate Environment, Govt Lenders Taking Business Away From Banks

--Govt Lenders Seen Working Outside Their Mandates At Expense of Regional Banks

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials want government agencies to limit

their lending activities because they are crowding out the private sector,

particularly regional banks, MNI understands.

     But central bank officials monitoring the health of commercial banks and

the financial system are being careful about how they approach their government

counterparts on the issue because the BOJ does not regulate financial

institutions. That's the job of the Financial Services Agency, the government

regulatory body that was created after the 1998 bribery scandal involving senior

officials at the Ministry of Finance and the BOJ who oversaw financial firms.

     Structural issues -- declines in the working-age population and in the

number of smaller firms in rural areas -- are the main culprits for the low

profitability of regional banks. But these banks are also facing stiff

competition from government financial entities.

     Lower loan rates being offered by governmental institutions are

intensifying competition among all lenders.

     In its semi-annual Financial System Report issued in October, the BOJ urged

regional banks to improve their profitability, as super-low interest rates

resulting from the BOJ's accommodative monetary policy would continue squeezing

their profit margins at least for a few more years.

     However, government financial institutions have been expanding beyond their

primary roles, exacerbating the deterioration of business conditions for

regional banks.

     The role of public financial institutions has traditionally been to

supplement private-sector lenders, taking risks and extending loans to private

firms when private banks have difficulty doing so. In particular, government

lenders are expected to extend more loans during economic slumps.

     But once the economy recovers, lending by public institutions should

decline significantly, BOJ officials argue. However, this has not been the case

recently, with public institutions expanding their lending in smaller cities,

squeezing the profits of regional banks.

     Lending rates offered by governmental financial institutions are about

one-third of those offered by regional banks, Kyodo News reported on Nov. 16,

based on the results of a survey of 64 regional banks conducted by the Regional

Banking Association of Japan in August and September.

     The average government agency loan rate to the most creditworthy firms is

0.27%, compared with 0.76% offered by regional banks, according to Kyodo's

report.

     The association refused to disclose its survey results to MNI, but publicly

available data confirm the thrust of the Kyodo report: the lowest loan rate

published by the government-sponsored Japan Finance Corporation is 0.3%,

compared with an average loan rate by private regional banks of 0.931% in

September, according to the latest BOJ data.

     Public financial institutions should concentrate their lending efforts on

firms with low credit ratings, to which private banks hesitate to lend, BOJ

officials argue.

     However, regional banks lost 424 borrowers in an unspecified recent period

to more favorable lending conditions offered by governmental financial

institutions, the Nikkei reported on Nov. 17.

     Public financial institutions, such as Shoko Chukin Bank and Japan Finance

Corporation, have been increasing loans to companies with high credit ratings by

offering relatively low lending rates, at the expense of regional banks.

     That may be starting to change. Shoko Chukin Bank will implement governance

reforms after its president was forced to step down over allegations of

widespread manipulation of loan documentation under a program intended to help

small businesses in crisis.

     BOJ officials stress that regional banks must do more themselves to

increase their profits from lines of business other than lending and worry that

many aren't actively pursuing new businesses to boost profits.

     Regional banks "uniformly" lack a sense of crisis, even though they are

facing a common problem, contenting themselves with a "too many to fail" moral

hazard attitude, BOJ officials believe.

     BOJ officials are increasingly worried about the potential vulnerability

facing regional banks, and so the entire financial system.

     Should regional banks continue to suffer from low profits, it would

restrict their lending and undermine the stability of the nation's financial

system, which would adversely affect the economy.

     The BOJ hasn't publicly mentioned the low-profitability issue, which it

believes is partly caused by over-lending by government lenders, since April

2012. The BOJ took up the issue in its Financial System Report at the time,

drawing the ire of the Financial Service Agency, the government watchdog of the

industry, which thought the BOJ should mind its own business.

     In the April 2012 report, the BOJ said: "Public financial institutions,

which set relatively low interest rates on loans, have been increasing loans."

     "Lending competition has intensified and interest rates on loans have

declined for high-rated firms" as a result of the lending by public financial

institutions, the report said.

     At that time, the BOJ also noted that public financial institutions had

noticeably increased their share of loans to high-rated firms, taking business

from regional banks.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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