Jury out on new bank's prospects

Joy among small firms tempered by pundits' skepticism

A new bank proposed by the Tokyo Metropolitan Government appears to be good news for struggling smaller companies.

But some pundits are cautious about the new public bank’s prospects, citing the difficulty of finding good borrowers amid the economic gloom.

On Friday, Tokyo Gov. Shintaro Ishihara officially announced that the metro government will set up a new bank in fiscal 2004. The bank will aim to let money flow into small and midsize companies that are struggling in the face of stringent lending strategies pursued by existing financial institutions.

“We want to create a strategic lending model and smoothly supply money (to smaller firms),” said Ishihara, who accused conventional lending practices based on collateral and assets of being “rigid.”

If the bank’s lending activity turns sour and its capital becomes depleted, the metropolitan government will not inject it with Tokyo taxpayers’ money, Ishihara told a news conference.

The new bank will be capitalized at 200 billion yen, the majority of which will be held by the metropolitan government. The target amount of total assets stands at 5 trillion yen.

The new bank will start operating after it obtains a license from the Financial Services Agency as an ordinary bank focusing on domestic business.

Ishihara stated that the current policy measures pursued by the metropolitan government in order to help smaller firms are inadequate.

In its lending operations, the new bank will cooperate with “shinkin” credit unions and Tokyo Tomin Bank, the only regional bank based in Tokyo, using their small firms expertise, Ishihara said.

The new bank is expected to extend loans to smaller firms based on an appraisal of their technological potential and other capabilities.

At the same time, the bank will manage risk by adopting the so-called portfolio approach, Ishihara said.

A senior metropolitan official later explained that the bank will create a lending standard, which takes the default rates of borrowers into account, in the context of its overall portfolio.

Ishihara added that the new bank will seek to offer a tool whereby individual clients can manage their financial assets in cooperation with four financial institutions.

These are the JP Morgan group, the BNP Paribas group, the American International Group Inc. and Shinkin Central Bank, the umbrella organization for shinkin lenders.

“We hope to connect the huge financial assets held by individuals to the enormous potential of small and midsize companies,” Ishihara said.

The new bank will also offer comprehensive services featuring information technology in the fields of transportation, distribution and administrative services.

To this end, the new bank will tie up with six companies, including East Japan Railway Co. and supermarket operator Ito-Yokado Co.

Some financial experts are less than optimistic over the bank’s prospects.

When the economy is stagnant, finding good borrowers among small firms is difficult, even for banks with extensive experience, according Yasuhide Yajima, senior economist at NLI Research Institute.

“Bringing in experts from the outside (of the metropolitan government) is one solution,” Yajima said. “But even so, I think there is a big question mark over whether the new bank can acquire such expertise under the current severe macro-economic circumstances.”

Although there is a small number of small companies that perform well, they can raise funds within the existing financial system, Yajima added.

Toshio Mikami, senior economist at the Japan Research Institute, said that the new bank is another example of public interference in the financial system.

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