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We publish exclusive excerpts here. The interview took place in early September.
A full version of the Kuroyanagi interview, which is part of a roundtable discussion on the impact of the global financial crisis on the banking industry – and includes contributions from the CEOs of Citi, Société Générale, Deutsche Bank, Fortis, ING, Santander and Credit Agricole, among others – is now online.
Euromoney: What are the key lessons your bank has learnt from the present financial market turbulence?
Kuroyanagi: Japanese banks had learnt an important lesson with the non-performing loan disposal that followed the collapse of the bubble [in Japan], and were therefore more rigorous in their evaluation and assessment of credit risk. In particular, they viewed the sudden rise in property prices in the US and some other countries with considerable caution, and were conservative in their approach to securitized business, since it involves CDOs and other secondary or tertiary securitized products that are at a remove from actual conditions.
We expect that the financial institutions of the world’s leading countries will now focus on management strategies that emphasize return on equity, with the aim of restoring soundness to their balance sheets. Securitization markets where the value of the asset-backing of securitized products lacks transparency are likely to disappear. There is a strong chance that banks will distance themselves from complex structured finance. We expect to see a broad trend to refocus on corporate finance and retail business, which are more closely linked to the actual economy.
Euromoney: How well have regulators and policymakers responded to this crisis?
Kuroyanagi: When one looks at the response of regulators so far, it may be said that the response of the FRB has indeed been rapid, with major interest rate cuts and the introduction of unconventional financial policy measures (PDCF, TSLF, TAF, emergency lending). However, these measures came in response to financial system-related problems that initiated the financial crisis; they do not address the write-downs of non-performing US mortgages and US bank balance sheet problems that are at the core of the financial crisis. There is a need to inject public funds to end the crisis, such as developing a framework for the purchase of non-performing loans and foreclosed collateral property.
A recovery in confidence in the financial markets is vital for financial institutions to strengthen their capital. As macroeconomic conditions worsen and credit tightens, investment in financial institutions bears extremely high risks, and even if banks attempt to increase capital, finding buyers is likely to prove difficult if left entirely to market mechanisms. However, if a strong commitment is shown by governments to inject public funds toward ensuring financial market stability, this will surely enable a smooth transition to a situation in which funds may be more easily procured from the market.
Euromoney: What opportunities do you see for growth in your businesses over the next two to three years?
Kuroyanagi: Looking at overseas markets on a regional basis, Asia has a high growth rate compared with the US and Europe and it remains our policy to focus operational resources on this area. One new area that we are examining as a business that we want to develop full-scale is global asset management. While the asset management needs of foreign investors such as sovereign wealth funds in the Middle East and Asia are increasing, investment in Japanese equities and property remains at relatively low levels (compared with investment in the US and Europe). We aim to draw on the comprehensive strengths of our group, using our trust asset product office functions with its strengths in real estate, along with the overseas coverage functions of our securities and commercial banking.
Euromoney: In what positive ways has your bank been able to distinguish itself through this troubled period with credit investors, equity investors, customers and regulators?
Kuroyanagi: The amount of the losses that we have incurred as a result of the recent financial turmoil are small in comparison with those of most US and European financial institutions. A major cause of this is our investment policy of focusing on primary securitized products and AAA-rated products, and the fact that we were not conducting arrangement business in securitized products overseas.
While many US and European financial institutions have recorded enormous losses and as a result are being forced to strengthen capital and carry out business disposals and other measures, we aim to take advantage of our position of comparatively superior capital strength to inject resources into growth areas, including non-organic strategies. Looking ahead, if there are quality proposals offering potential for synergies with our business strategy, we will consider using our capital to pursue such proposals.