In a landmark suit involving a bank’s responsibility for bad loans, Sumitomo Bank earlier this week agreed to pay 3 billion yen to the Housing Loan Administration Corp., the public debt-clearing body for bankrupt home-loan companies. The HLAC had initially demanded 5 billion yen in damages, saying the bank brokered loans to the nonbank lenders even though it knew the loans could not be collected.
Sumitomo Bank has refused to pay damages, but it has effectively acknowledged its legal responsibility for the brokered loans. Thus the court-arranged settlement represents a victory for the corporation, even though it does not carry the same weight as a ruling. The settlement is bound to affect the corporation’s dealings with other banks that it says “introduced” similar borrowers to the “jusen” lenders.
Clarification of banks’ responsibility for such home loans — which went sour after the end of the real-estate boom — was a key condition attached to the 680 billion yen public bailout of the failed home lenders. Now that one bank has admitted its responsibility in court, the process of collecting bad jusen loans is likely to pick up momentum. The HLAC, created in 1996, took over 1.6 trillion yen in performing loans and 1.47 billion yen in nonperforming loans.
During the court proceedings, the corporation questioned Sumitomo Bank’s ethical standards, saying that it had used the jusen companies as the conduit for loans to stock speculators. “There are limits to what banks can do,” the corporation said. “They must maintain the minimum ethical standard that is required of companies engaged in financial business, which is highly public in nature.”
Sumitomo Bank said there was no reason for it to pay damages unless the court issued an injunction, which it did not do. The bank argued that the loans were made under contracts between lenders and borrowers. That is technically true. The fact remains, however, that the deals were made because the borrowers had been introduced by a leading money-center bank.
There is no question that Sumitomo has moral responsibility. But the line between moral and legal responsibility is blurred. A bank that admits its moral responsibility does not necessarily lose the case unless it is found to have broken the law.
In the settlement, Sumitomo Bank acknowledged that it was not fully aware of this “public” nature of banking and expressed its resolve to conduct business with a greater sense of responsibility. This is certainly a welcome step forward for a bank struggling to make a fresh start.
The settlement, coming at a time when bad-debt disposal is reaching a crucial stage, puts the bank in a delicate position. In April, the Resolution and Collection Corp. will be launched through a merger between HLAC and the Resolution and Collection Bank. The new body will take over bad loans not only from failed banks but from viable banks as well. A continuing court battle at such a time would have further damaged Sumitomo’s public image.
The bank may have had another reason to reach a quick settlement: the possibility of a shareholder suit in the event that it admitted its responsibility for mismanagement. The court-ordered settlement could head off such legal action by shareholders.
The HLAC says Sumitomo Bank arranged for 73 improper loans through jusen companies and that loans worth 64.7 billion yen remain uncollected. The suit involved what the corporation judged to be the five worst loans.
The 3 billion yen settlement represents a major compromise on the part of Sumitomo Bank. The amount of money can be taken as proof that the bank was in an ethically indefensible position. No doubt the compromise will set a precedent in future talks between HLAC and other banks that brokered jusen loans. The corporation says at least 10 banks facilitated such loans.
The Tokyo District Court, meanwhile, left something to be desired in its handling of the case. The HLAC filed the suit in hopes that the court would make a clear-cut, binding decision against Sumitomo Bank. As it turned out, however, the court recommended a compromise without even calling witnesses. That a court of law should lead proceedings in this manner is unusual.
Experience shows that many compromises reached in court actually represent reasonable settlements between the parties involved. Still, the jusen loan case is essentially different from ordinary civil suits. The Tokyo court should have at least tried to state the pros and cons of the two sides’ arguments in the ruling. Had it provided guideposts or standards for the resolution of jusen debt problems, the trial would have set a more useful precedent.
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