Magazine article American Banker

Lender's Rescue in Japan Stirs Fear for Big Banks

Magazine article American Banker

Lender's Rescue in Japan Stirs Fear for Big Banks

Article excerpt

TOKYO - The rescue of Japan's biggest housing finance company has alleviated fears of a crisis in the financial industry, but economists and bankers worry that the plan set a precedent that could eventually weaken big banks.

The bailout was accomplished, averting the use of taxpayers' money, when nine major creditor banks agreed at the end of February on a 10-year restructuring plan for Nippon Housing Loan Co.

The banks, including Sanwa Bank Ltd. and Sakura Bank Ltd., agreed to surrender interest income on outstanding loans over the next 10 years.

|Worst Appears to Be Over'

"Nippon Housing has been regarded as a problem of Japan's financial system, so the agreement, led by the Finance Ministry, suggests the worst appears to be over," said Yushiro Ikuyo, director of research at Prudential Securities (Japan) Ltd.

But, he added, if the ministry continues to ask big banks to bail out ailing financial institutions, strong banks in Japan will disappear. "If banks cannot get interest income on their loans for 10 years, the impact on their profits will be enormous, particularly when interest rates move higher."

Nippon Housing's outstanding loans are estimated at the equivalent of $19 billion, of which about half are thought to be nonperforming, according to banking sources involved in the rescue.

The nine banks have some $7 billion in outstanding loans to Nippon Housing, of which Sanwa and Sakura are owed about $2 billion each.

Costly Agreement

Under the agreement, Sanwa and Sakura each forgo some $119 million of interest annually.

The restructuring plan also calls for agricultural financial institutions to lower the annual interest rate on outstanding loans to Nippon Housing to 4.5% for 10 years and other creditors to cut their rates to 2.5% for the same period.

The plan will, in effect, supply some $680 million to $765 million a year in fresh funds to Nippon Housing over the next 10 years, they estimate. …

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