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Had auditors informed banking group Resona Holdings Inc. by March of critical changes in auditing standards, next month’s infusion of 1.96 trillion yen in public funds could have been avoided, former Resona Holdings President Yasuhisa Katsuta told the Diet on Wednesday.

In their first appearance before the Diet since the government pledged to funnel an unprecedented sum of public money into the nation’s fifth-largest banking group, whose capital levels had plunged, Katsuta and the heads of Resona’s former and current auditing teams engaged in two hours of finger-pointing.

“We could have cut risk assets, but we were denied time to do even that,” Katsuta told the Lower House Financial Affairs Committee, adding that the bank could have tightened credit or transferred housing loans to other financial institutions.

In March, Resona succeeded in raising extra capital from investors by promising a capital adequacy ratio of more than 6 percent.

It was never suggested during consultations with auditor Shin Nihon & Co. that the fundraising move would end with the adequacy ratio of core member Resona Bank down to a little above 2 percent, below the 4 percent required for domestic banking.

The auditors, for their part, cited the flimsiness of Resona’s projected profits.

“In the preliminary audit, we found a capital shortfall unless we included deferred-tax assets,” said Shigeru Iwamoto, chief executive of Asahi & Co., following a rare summons to testify about a client. “In the absence of capital-shoring plans, we were forced to be very strict about the inclusion of tax assets.”

Banks can count as capital excess tax payments that will be returned in the future. Yet this presupposes the bank will actually realize profits projected on paper — an assumption Asahi & Co. found hard to accept in light of rising credit costs and the bank’s vulnerability to stock price falls.

The auditor on April 30 discontinued its audit of Resona Bank, leaving Shin Nihon & Co. to complete the audit on its own.

“The gap between our concept of deferred-tax assets and the bank’s was unbridgeable,” Iwamoto said.

The exchanges indicate that an ugly political and legal battle sure to further alienate the public may be around the corner, even as analysts cheer the aggressive capital injection as a sign that banking reform may actually be moving forward.

Through the infusion — Resona’s third, counting those received by its predecessors — the government will acquire a 72 percent stake in Resona Holdings.

The move implies that the government will demand a stock price rise and order Resona Holdings to become more businesslike, rather than the welfare institution some experts accuse Japanese banks of being.

If Wednesday’s hearings are any indication, however, banking reform and its prerequisite, auditor independence, still face severe political resistance.

Iwamoto and Shin Nihon & Co. chief Kenji Takeyama were bullied by questions from Liberal Democratic Party member Kozo Yamamoto, who asked them how they meant to “explain decisions that will cost 2 trillion yen in public funds.”

Finance Minister Masajuro Shiokawa spoke out in a regularly scheduled news conference against banks’ recent efforts to shore up their capital — moves that necessarily result in cutting off borrowers.

“Bank management should not just be about avoiding risk,” he said. “I hope banks will be more aggressive in the future.”

Political opposition has been accompanied by fierce public suspicion over the circumstances behind the capital injection, along with the abrupt refusal of Asahi & Co. and Shin Nihon & Co. to approve the bulk of Resona Bank’s deferred tax assets.

Issues raised in Wednesday’s hearing included allegations that Financial Services Agency officials pressured auditors to fudge the books, the suicide of one Asahi & Co. auditor working on the Resona account, and rumors that Resona’s Kinki Osaka Bank held nonperforming loans tied to organized crime.

Auditors denied they were pressured by the FSA and rejected allegations of any book-fudging, past or present. Meanwhile, Katsuta denied any ties with the underground economy.

“We do not hold assets of an antisocial nature,” Katsuta said. He added, however, “It is true that (Kinki Osaka) suffered damage from many nonperforming loans related to subsidiaries that offered retired bank officials ‘amakudari’ posts.”

This term, literally meaning “descent from heaven,” refers to the practice in which public officials, after retiring secure work in the sector they had been regulating.

The three appeared as unsworn witnesses. No criminal charges would be pressed should their testimony be proved false.

Stricter auditing standards were adopted as part of a banking reform campaign spearheaded by Financial Services Minister Heizo Takenaka.

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