Editorials

A super-bank in the making

A “super-bank” will soon be born in Japan. If everything goes according to plan, Dai-Ichi Kangyo Bank, Fuji Bank and the Industrial Bank of Japan will combine to create a gigantic financial group with assets that will eclipse all other banking institutions in the world. The fact that the three banks have chosen what amounts to an effective merger in consolidating their business indicates the tremendous pressure the Japanese banking industry faces to survive, now that the government has removed the protective blanket under the “Big Bang” deregulation initiative.

None of the three banks is a small fry by any measure. DKB is one of the top Japanese commercial banks in terms of physical size and assets; Fuji is not far behind. IBJ is the nation’s leading commercial bank specializing in long-term industrial financing. Their decision to band together is a harbinger of things to come in banking in Japan and elsewhere.

According to reports, the three banks are now in the final stages of mapping out a blueprint for a broad-ranging business alliance. Current plans call for the establishment of a financial holding company by the fall of 2000. Wholly-owned subsidiaries will then be formed to handle retail banking, investment banking, securities and other financial businesses. This, of course, will involve a complete restructuring and consolidation of the three banks. The latest company reports show that the three institutions command a combined 141 trillion yen in assets, a financial position that will greatly enhance their creditworthiness in the market. By restructuring their operations, the three banks also hope to sharpen their global competitive edge.

Consolidation within the Japanese banking industry is not unexpected. That was the underlying message when the Financial Reconstruction Commission decided last spring to inject public money into the battered Japanese banking system. In return for the public bailout, the commission demanded that the recipient banks submit blueprints on how they planned to restructure their business. The commission made it clear that the recipient banks must consider mergers or business alliances in order to improve their competitiveness, something it regards as a prerequisite for a sound financial system.

Under the commission’s grand design, Japan should have no more than three or four banking groups that provide a full range of services, both domestic and international. Other banks, whatever their size, would specialize in the home market, at the national or regional level. In a sense, DKB, Fuji and IBJ are simply following this script, and that is just the beginning.

As a matter of fact, the Japanese financial system is not yet entirely out of its hole. The huge amount of public money that has been sunk into the major banks has removed a sense of crisis in the banking system. With the “payoff system” — under which only a 10 million yen cap will be put on deposit guarantees — slated to start in April 2001, large depositors are already spreading their money around. Hence, weak financial institutions are bound to be squeezed out of existence unless they can find partners to consolidate their business.

The partnership among DKB, Fuji and IBJ is a case in point. Actually, DKB and Fuji have formed a joint venture in trust banking in order to seek new business beyond the traditional banking sector. Now that IBJ has decided to join the fold, the three banks obviously hope that their combined resources and expertise will ensure their survival and help them thrive in a ruthlessly competitive market that has gone global in scale.

The banking industry, of course, is not alone in the search for size. Automakers have gone beyond national borders in their quest for allies; so have petrochemical giants and behemoths in the chemical industry. If competition has become the rule, “megamerger” has become the mantra of big business.

But size, however important and appealing, is not everything. True, looser application of monopoly rules among the major industrial powers, in the United States and elsewhere, has made it possible for big businesses to grow bigger still through mergers and acquisitions. In the case of DKB and its two partners, the Fair Trade Commission has reportedly given a tacit go-ahead for consolidation. For those concerned that a super-bank might run roughshod over consumers and small customers, there is reassurance in the fact that today’s marketplace respects no national boundaries. Competition remains the name of the game.