Japan FSA Pushes for Sustainability in Bank Business Models

Source: Regulation Asia Editors, Regulation Asia 2020-07-13

Management changes may be needed at regional banks that lack sustainability in their business models, says the FSA’s Toshihide Endo .

Japan’s FSA (Financial Services Agency) has reportedly targeted some regional banks for “intensive dialogue”, which could lead to regulatory action if they are unable to provide assurances of their viability.

In an interview with Bloomberg, FSA Commissioner Toshihide Endo said the traditional model of deposits and lending has been “completely shattered”, but that there has been no innovation to create more sustainable business models.

The FSA has long been frustrated with diminishing profitability at regional banks, who have historically blamed the BOJ (Bank of Japan) for creating a low interest rate environment since April 2013.

In 2018, Endo made headlines by saying regional banks need to get their act together and more seriously consider ways to build more sustainable business models, rather than blaming the central bank for their woes.

Last year, the FSA unveiled a plan to stress test regional banks and improve its early intervention regime to more quickly address weakness at some banks and ensure financial stability.

Subsequent legislative changes mean the FSA can now issue business improvement orders against banks that are deemed to lack sustainability in their business models, even if they meet capital requirements or other measures of financial soundness.

The pandemic has “shortened the time frame” for banks to tackle their problems, given that their corporate customers are also under pressure. Endo is urging banks to help corporate clients not just by lending them money but also by providing strategic advice.

The plan to allow regional banks to enter new areas of business, including management consulting services, was unveiled in January. At the time, Endo had said he wanted banks to engage with customers and help them grow, and even help them market their products.

Other measures in the pipeline include plans to exempt banks from antitrust law to promote mergers, incentivise financial robustness by lowering deposit insurance fees paid by better-capitalised banks, and facilitate easier access to capital from banks’ larger peers.

Amid mounting concerns that some regional banks are too weak to withstand current conditions, Endo says some local bank managers may not have the ability to push through the needed changes. These executives may need to step aside in favor of external managers, he said.

“It’s impossible for them to change the business model. So the question is whether they can see that they aren’t cut out for it and bring in outside talent.”

FSA

Japan FSA Pushes for Sustainability in Bank Business Models

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