The new Financial Services Agency policy on supervision of the banking industry urges regional banks to shift the emphasis of their lending decisions from the creditworthiness of their corporate borrowers to the firms' business potential. This marks a major turnaround by the FSA, which since the creation of its predecessor in 1998 amid the financial sector crisis has focused on banks' financial health by getting them to shed nonperforming loans.
The new policy can potentially benefit both the regional banks — whose future profitability is increasingly in doubt with the nation's aging and shrinking population — and promising small and medium-size companies having trouble getting bank loans to expand their operations due to a lack of collateral or other guarantees. The FSA, however, should be careful so that its new policy won't constitute excessive intervention by the industry watchdog on the banks' business. It needs to be mindful of the risk of effectively prodding banks to lend more in its position of power as supervisor.
An FSA survey of the regional banks' management and their client companies found that they essentially restrict their lending to major companies and local government organizations with low risk of the loans becoming irrecoverable, practically excluding smaller firms that do not have collateral that they can secure against loans. Many blame this risk-averse stance to years of FSA supervision of the banking industry that prioritized cleaning up their bad loans and rigorous assessment of their borrowers' financial conditions.