Taxpayers' money to shore up Japanese bank

The Japanese government agreed today to use taxpayers’ money to shore up the nation’s fifth-largest bank after executives said its capital had fallen below legally required levels.

Prime Minister Junichiro Koizumi and his top financial officials approved the measure at a meeting hours after Resona Bank announced it was seeking public funds because falling stock prices had eroded the value of its assets.

Financial Services Minister Heizo Takenaka told reporters after the meeting that the government would decide on the size of the capital injection after the bank makes a formal application and submits a turnaround plan to regulators.

The president of Resona Holdings Inc., Yasuhisa Katsuta, would say only that the bank was requesting “a considerably high amount.”

Japanese media reports said the total aid package could be as high as 2 trillion yen (£10.5bn).

The money would be earmarked under a law passed in 2001 to prevent a troubled bank from causing a financial panic. The prime minister told reporters the government was taking the step to reassure Resona’s depositors and corporate borrowers.

“I won’t allow a financial crisis to happen,” Koizumi said.

Japanese officials stressed that the bank lacked sufficient capital to meet regulatory requirements but was not going bankrupt.

“The objective of using public funds is to revive this company, not to dispose of a bankruptcy,” Takenaka said.

It would be the first such injection of public funds into the industry since March 1999, when the government pumped 7.45 trillion yen (£39.4 billion) into major Japanese banks.

The Japanese government already owns preferred shares in Resona that give it a potential ownership stake of 40%.

Depending on the amount of taxpayers’ money spent to increase the bank’s capital, the government could end up as a majority shareholder in Resona, marking its de facto nationalisation.

Resona Holding’s capital adequacy ratio – a percentage of a bank’s capital to risk-weighted assets – had slipped to 3.78% at the end of fiscal year that ended in March. Banks operating domestically in Japan must keep that ratio at a minimum of 4%.

Katsuta blamed a heavy burden of bad loan disposals and declining share prices for the bank’s predicament.

Japan’s lenders have struggled during the country’s decade-long slump as falling real estate, stock, and consumer prices have eaten away at their assets.

The banks hold a large portion of their capital in shares of other companies, a tradition that has hurt them as the Tokyo stock market has fallen to 20-year lows.

Deflation – or prolonged declines in consumer prices – has added to banks’ woes by squeezing corporate profits and forcing more business to default on their loans.

Resona Holdings revised its earnings down dramatically today, saying it now expects to post a group net loss of 838 billion yen (£4.45 billion) for the year ended March 31, compared with an earlier projected loss of 290 billion yen (£1.5 billion).

Top executives at the holding company, including Katsuta and Vice President Yukio Yanase, said they would step down to take responsibility.