The Future of Japan's Regional Banks - Could They Adapt Themselves to The Growing Financial Service Orientation? -

Ju-ichi Yamanaka

Summary

Ten years after it began， financial deregulation is entering the final stage， deregulation of field. But the bubble economy of the late 1980s and its subsequent collapse have put financial institutions in a bad loan crisis of unprecedented proportions. The total amount of bad loans is now estimated at 40 trillion yen， and as financial institutions grapple with defaults and losses， the very health and stability of Japan's financial system are in jeopardy.
Due to the bad loan problem， the prudent behavior of individuals in selecting financial assets， and slump in the loan market， the profitability of financial institutions has plummeted and financial markets are stagnant. However， despite this bleak invironment， some regional banks managed to escape the brunt of the crisis and register superior performance.
In terms of bad loan retio， these regional banks are outperforming the major city banks and occupying the top ranks of the banking industry in Japan. What these superior regional banks have in common， in addition to a stable share in deposits and loans in their franchises， is an extremely conservative management policy. However， this conservative policy also hinders their diversification into financial services and delays structural changes.
In the U.S.， a shift toward a financial services orientation is enabling banks to improve their non-interest income， thereby stabilizing their profit structure. Both major banks and regional banks are reevaluating conventional broad-ranging strategies， and focusing on areas in which they have a competitive advantage.
In Japan， regional banks are also facing a period of major structural change. A thoroughgoing reevaluation of management policies is being manifested in new developments including the training of specialists， emphasis on individual customers， and feasibility study on database marketing. A full-scale shift has begun toward a financial services orientation.
In the near futute， a financial services orientation among regional banks will be the driving force behind the creation of super-regional banks in Japan. We are now at the approach phase prior to takeoff. The tekeoff will require these banks to create their own grand designs regarding the type of bank they aim to be in the new era， build their own areas of expertise， and improve their ability to take risk. Another indispensable element will be in making management more transparent.
In the 21st century， all financial institutions will have to defferentiate themselves as they grope for new corporate alliances to enhanse their particular strengths. They will have to confront a tougher era in which non-competitive financial institutions will be mercilessly culled.