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TOKYO March 13, 2009--Standard & Poor's Ratings Services said in a Japanese-language report published today that moves undertaken by the Japanese government to nationalize or part-nationalize banks in the wake of the 1998 financial crisis may offer insights regarding the future of nationalized or part-nationalized banks overseas. The Japanese banks that were nationalized or part-nationalized succeeded in disposing of toxic assets and recovering their financial health relatively quickly, though the financial burden for the government was larger than that relating to banks that received support but were not included in the nationalization steps. Europe has seen a series of bank nationalization or part-nationalization moves in 2008 and 2009, and both the U.K. and U.S. governments have extended additional capital support to some major banks and increased their shareholdings in these institutions.
In Japan, the government fully nationalized some banks and part-nationalized others under an amended legal framework within a time-span of several years around 2000. All nationalized banks succeeded in recovering healthy balance sheets within a relatively short period of time by drastically reshuffling management and enhancing governance. For example, Resona Bank Ltd. (A-/Stable/A-2) enjoyed a revival as a retail banking specialist by rapidly reducing its nonperforming loans (NPLs), equity holdings, and other risk assets under new management.
On the other hand, financial institutions whose business franchises were relatively weak originally are finding it difficult to stabilize earnings because nationalization causes customer churn and reputational damage. In addition, the amount of financial support that the government provided to all nationalized banks was larger than that extended to other banks, relative to total assets. This was due to the banks' high NPL ratios, plus the government's desire to improve the health of their balance sheets by evaluating their assets in accordance with more stringent standards. Given the heavy financial and administrative burdens placed on governments in such situations, bank nationalization is an option that can be executed only when it is expected to prevent systemic risk, and when banks have sufficiently strong business franchises and profitability.
Regarding major overseas banks, we believe governments intend to avoid full nationalization wherever possible, only taking drastic action in relation to banks with extremely weakened financial profiles. Yet uncertainties remain over potential additional losses at troubled banks, how much additional support is necessary in such cases, and how creditors (including holders of hybrid securities) and shareholders should be treated amid nationalization steps. If governments strengthen their control over part-nationalized banks and inject more capital into these institutions to improve their financial health, some of these uncertainties could be ameliorated. At the same time, however, governments would incur heavy financial and administrative burdens. The greater magnitude, complexity, and extended overseas networks of some overseas banks in relation to major Japanese banks suggests that managing such banks within a nationalized or part-nationalized framework would be a more difficult proposition than it was in Japan.
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