Japan’s banking upstarts are facing big challenges in terms of overcoming high operational risks and securing profitability, Standard & Poor’s Corp. said Thursday.

The U.S. credit-rating agency also said in a report that its ratings on the industry newcomers will largely depend on their parent firms’ credit standings.

Banks launched recently include Internet-only banks Japan Net Bank, Sony Bank and eBank, as well as a niche bank specializing in settlement services at convenience stores called IY Bank.

S&P said it will probably take two to three years or longer for these banks to secure profitability, adding that it remains to be seen whether they can obtain their planned number of customers and transactions.

But the new banks also have advantages, such as flexibility in business strategy and lower operating costs, which in turn could help promote competition among existing banks, S&P said.

FSA punishes Citibank

The Financial Services Agency said Thursday it has ordered the Japanese branch of Citibank, a unit of U.S. financial giant Citigroup Inc., to suspend some of its operations due to a violation of securities regulations.

The top financial regulator said it ordered Citibank to suspend all operations at one of its investment-related divisions from today through Thursday because it was involved in inappropriate transactions that could be used to window dress financial statements.

The branch was also involved in some securities transactions from August 1997 to December 2000 that violated the Securities and Exchange Law, the agency said.

It sold loss-hiding financial products worth up to 40 billion yen to 40 clients, according to the agency.

The FSA said it also ordered the branch to improve operations to ensure compliance with local rules and regulations.

The agency has been cracking down recently on foreign financial institutions. In June, it punished the Japanese securities arms of France’s Societe Generale Group and U.S. investment bank Goldman Sachs Group Inc. for allegedly violating local securities regulations.

Key rate increase

The Industrial Bank of Japan, Shinsei Bank and Aozora Bank will raise their long-term prime lending rates today by 0.1 percentage point to 1.65 percent, the banks separately announced Thursday.

The hike in the key rate, the first since September, is in response to the rising trend in medium- and long-term interest rates in financial markets, the banks said.

The banks have maintained a record-low longtime prime rate of 1.55 percent since July 10.

The long-term prime rate, charged to the bank’s most creditworthy customers on loans of one year or more, is customarily set 0.9 point higher than the coupon on five-year bank debentures issued monthly to institutional investors.

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