Small-Bank Failures Loom in Japan; Analysts Believe Bailouts May Be Growing Difficult

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Analysts Believe Bailouts May Be Growing Difficult

TOKYO -- High interest rates, softening real estate prices, and a slowing economy pose a triple threat to the Japanese banking industry. As a result, a shakeout of marginal institutions is likely this year, industry analysts said.

More banks could seek merger partners and, for the first time in postwar Japan, some smaller institutions could fail.

"I would no longer rule out the possibility that a deposit-taking institution might be allowed to go under in the not-too-distant future," said Simon Smithson, senior analyst at Kleinwort Benson International Inc.

Consolidation Expected

"Bank profitability will be depressed for some time due to deregulation and deterioration in asset quality," said Roger Arner, representative director of Moody's Japan. "A lot of people believe there will be consolidation."

Analysts see more risk of failure among smaller banks.

"Regional banks are more exposed to trends in local areas. City banks' risks are better spread," said Alicia Ogawa, senior equities analyst at S.G. Warburg Securities (Japan) Inc.

Thinking the Unthinkable

But many Japanese experts strongly deny a failure is likely. "A bank failure is unthinkable," a Japanese research institute analyst said. "This isn't America. It has never happened here."

Last year's stock market plunge has weakened many banks' financial positions. "Hidden assets" in the form of unrealized gains on securities have been drying up, leaving banks unable to cover loan losses by selling stocks as they have in the past.

Many smaller institutions are believed to be sitting on big unrealized losses from recent securities investments, and the March 31 fiscal year book closing could be hard on them.

A One-Way Matter So Far

Deregulation of interest rates has meant that banks must pay higher rates on an increasing share of their deposits, without a parallel means of raising rates on their loans.

The Ministry of Finance has stepped up its supervision of regional banks, credit cooperatives and other small deposit-taking institutions, requiring them to file detailed monthly reports, a ministry banking official said.

If smaller banks are on the brink of failure, the ministry could encourage mergers, the official said. "But we think it won't come to that. With proper guidance, they should be able to cope."

In Washington this week, Vice Minister of Finance Makoto Utsumi cited the U.S. savings and loan crisis in defending the slow pace of Japan's deregulation of interest rates.

A Big Temptation

"The banks have been left with no direct way to pass on their higher cost of deposits," said Ms. …