Many of Japan's regional banks face an increasingly difficult business environment. The ultra-low interest rates over an extended period under the Bank of Japan's massive monetary easing operations have cut the profit margin on their lending, while the client base in their respective markets is shrinking amid the falling population. More than 60 percent of listed regional banks posted either losses or reduced profits in the latest business year to March. A Financial Services Agency estimate shows that in the not too distant future, a majority of regional banks will likely suffer losses in their mainstay lending businesses.
In a turnaround from the earlier emphasis on disposing of nonperforming loans that piled up at financial institutions after the collapse of the bubble boom, the FSA has been calling on the regional banks to take risks and extend more loans that spur growth of local businesses in the markets they serve. Against this industry background, Suruga Bank, a Numazu, Shizuoka Prefecture-based regional lender that maintained a profitable business in recent years with its aggressive focus on real estate-related loans to individual borrowers, has often been hailed by the financial authorities as a model case for survival of regional banks.
That the same bank is now mired in a scandal over alleged improper loans to investors in share houses may spell trouble for the new policy of regional banking industry administration. The problems exposed at Suruga Bank do not lessen the need for other banks to explore new business models as they seek to weather the industry's tough times, but what lay behind the problem at the bank should be scrutinized as a lesson to be shared by banks and the financial authorities as they try to devise strategies for the industry's future.