Strengthening regional banks vital to support small, midsize companies

A special measure that makes it easier for regional banks and other financial institutions to apply for an injection of public funds is expected to be utilized for the first time. This must lead to the revitalization of local economies suffering due to the novel coronavirus pandemic.

Jimoto Holdings, Inc., a regional banking group in the Tohoku region, has begun considering applying to the Financial Services Agency for an injection of public funds into Kirayaka Bank, a regional bank based in the city of Yamagata under the umbrella of Jimoto Holdings.

The amount is expected to be around ¥20 billion. This would be the first injection of public funds into a regional bank in eight years, since Howa Bank in Oita Prefecture.

As a measure against the COVID-19 pandemic, the government in 2020 revised the Law on Special Measures for Strengthening Financial Function to inject public funds into regional banks and other institutions. Special exemptions for the COVID-19 pandemic were established through the revisions, including removal of the 15-year repayment deadline and temporarily dropping the review of an institution’s management structure that is a requirement for applying for the funds.

The purpose of the revision was to facilitate the lending of public funds to banks by making it easier to apply for them and strengthening the financial base of regional banks that support their local areas. The aim is understandable because with the help of the new system, Kirayaka Bank could support the financing of small and midsize companies.

Many of Kirayaka Bank’s clients are said to be in the tourism and restaurant industries, which have been hit hard by the pandemic. As the reason for its possible application, Jimoto Holdings cited the expected increase in demand for funds for capital investment to revitalize their businesses.

Kirayaka Bank’s final profit for the business year ended March 2021 fell into the red due to the COVID-19 pandemic. The bank attempted to gain profits from overseas bond investments amid ultra-low interest rates in Japan, but latent losses have ballooned and weighed down the bank’s financial situation.

Jimoto Holdings has a capital and business alliance with SBI Holdings, Inc., a major online securities service company. Kirayaka Bank has been trying to utilize this relationship to improve profitability, but a full-fledged recovery is a long way off.

Kirayaka Bank received public funds in 2009 after the collapse of Lehman Brothers and again in 2012 after the Great East Japan Earthquake. The bank has not repaid ¥30 billion, of which ¥20 billion is due in September 2024.

Even though the conditions were eased under the COVID-19 exceptions, public funds come from taxpayers. If the bank is to receive new funds, it must not fail to strengthen its financial situation and contribute to the local area. It is then necessary for the bank to redraw its long-term management strategy to ensure steady repayment.

After the application by Kirayaka Bank, other regional banks are believed likely to follow suit. It is undesirable to have a situation in which a series of casually made applications result in a burden on the public. The FSA must carefully examine an applicant’s ability to repay the money.

As a drastic measure to improve profitability, regional banks should position restructuring as a viable option.

(From The Yomiuri Shimbun, May 17, 2022)