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Regional banks need to strengthen their services through reorganization

Management reform of regional banks has begun to progress with the support of the government and the Bank of Japan. Regional banks need to accelerate improving their profitability and strengthening their business foundations, and make efforts to vitalize regional economies by expanding their financial services.

On Oct. 1, Fukuho Bank in Fukui Prefecture became a subsidiary of Fukui Bank, the top bank in the prefecture. Regional banks with a business base in Fukui Prefecture are now consolidated into one financial group.

In July this year, the Financial Services Agency introduced a system to subsidize regional banks and other financial institutions that have been subject to management integration. Fukuho Bank will be the first case in which the subsidy funding system is applied.

According to the agency, subsidies worth ¥1.4 billion are expected to go to the bank, mainly for the costs of consolidating branch offices and renovating computer systems as part of the reorganization.

The business environment of regional banks has been severe due to the declining population and low interest rates. The plight of small-sized Fukuho Bank has been particularly serious. The bank has indicated that it expects an operating deficit of more than ¥1 billion in its core business to continue from the current fiscal year ending March 2022 to the one ending March 2027. It is reasonable for the bank to seek a way out via reorganization.

Aomori Bank and Michinoku Bank, both in Aomori Prefecture, are planning to integrate their operations in April 2022. Fidea Holdings Co., the holding company of Hokuto Bank in Akita Prefecture and Shonai Bank in Yamagata Prefecture, is now in discussions to bring Tohoku Bank in Iwate Prefecture under its umbrella in October 2022.

These moves are all expected to be eligible for the government subsidies. Other regional banks need to consider realignment as a major option, with those examples as a reference.

In March this year, the central bank established a system to effectively provide funds to regional financial institutions that have integrated their operations or reduced costs, by increasing the interest rate paid on the regional financial institutions’ current accounts held at the central bank.

According to the central bank, about 50% of regional banks are stepping up cost-cutting efforts, such as by reorganizing their branch office networks.

The Cabinet of former Prime Minister Yoshihide Suga focused on stabilizing the management of regional banks as a priority policy and took a series of measures to support them. As a result, regional banks may now have greater awareness of management reform.

It is important to utilize such priority measures not only to strengthen the foundations of regional banks themselves but also to vitalize regional economies.

The tourist industry and eating and drinking establishments in regional areas have been hit hard by the prolonged novel coronavirus pandemic. In addition to helping local companies in need raise funds, regional banks are expected to support a wide range of the operations of local businesses.

It is vital to provide financial services that meet the needs of companies, such as helping them convert businesses that are unlikely to recover into new businesses, and assisting small and midsize firms’ digitization and decarbonization, issues that are difficult for them to tackle.

In recent years, with the advance of deregulation, banks have been able to expand their operations, allowing them to engage in temporary staffing services and other activities. Banks should accumulate human resources and know-how to contribute to the growth of the companies they finance.

— The original Japanese article appeared in The Yomiuri Shimbun on Oct. 13, 2021.