Tomorrow's FT. Is this what the financial community is wanting?
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SATURDAY AUGUST 22 1998ÿÿAsia-Pacificÿ
LTCB pledges reform in exchange for state aid
By Gillian Tett in Tokyo
The ailing Long Term Credit Bank of Japan yesterday announced a sweeping restructuring plan.
The decision, which removes the bank's senior management, is expected to pave the way for the government to merge LTCB with Sumitomo Trust Bank.
Kiichi Miyazawa, finance minister, said the government would give a "favourable" response to the plan. Officials privately indicated that the bank would receive at least 500bn ($3.5bn) and probably up to 1,000bn if necessary.
LTCB's pledge was interpreted as a sign that the government remains determined to bail out Japan's largest banks rather than let them collapse. This in turn suggests Tokyo is determined to keep a gradualist approach to banking reform.
The fate of LTCB is seen as a critical test of the government's determination to tackle Japan's financial problems. The government has come under mounting pressure from its trading partners and the financial markets to take radical action.
This has prompted market speculation that it might close LTCB if it was found to be insolvent. However, the ministry of finance and Bank of Japan have argued that a failure would cause a systemic risk and further damage confidence in Japan. The Financial Supervisory Agency, Japan's banking watchdog, is conducting an audit into LTCB. Masaharu Hino, head of the FSA, told parliament yesterday that a preliminary audit had so far found that LTCB was solvent.
The issue of solvency is critical because the government, under current banking laws, can only give public funds to solvent banks.
Mr Miyazawa stressed that funds would only be provided if the government approved LTCB's plan. This includes an acceleration of an earlier commitment to cut around 700 of its 3,000 staff and close its overseas offices. Six directors would be removed.
The bank would also write off 750bn of bad loans, including 450bn to lossmaking affiliates. Sumitomo Trust is refusing to absorb any of LTCB's problem loans. LTCB's share price rose 18 yesterday to close at 74.
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