Japan big banks reluctant to pay for subprime fund

TOKYO Mon Dec 17, 2007 5:44am EST

A pedestrian walks past the signboard of the Mitsubishi UFJ Financial Group (MUFG) bank branch in Tokyo, February 14, 2007. Japan's top three banks are expected to resist a request to put up a total of $15 billion for a U.S.-led subprime rescue fund, a move that could further cloud prospects for the bailout plan. REUTERS/Kim Kyung-Hoon

A pedestrian walks past the signboard of the Mitsubishi UFJ Financial Group (MUFG) bank branch in Tokyo, February 14, 2007. Japan's top three banks are expected to resist a request to put up a total of $15 billion for a U.S.-led subprime rescue fund, a move that could further cloud prospects for the bailout plan.

Credit: Reuters/Kim Kyung-Hoon

TOKYO (Reuters) - Japan's top three banks are expected to resist a request to put up a total of $15 billion for a U.S.-led subprime rescue fund, a move that could further cloud prospects for the bailout plan.

Sources told Reuters last week that Mitsubishi UFJ Financial Group (8306.T), Mizuho Financial Group (8411.T) and Sumitomo Mitsui Financial Group Inc (8316.T) had each been asked to pony up $5 billion, and to give an answer this week.

Citigroup Inc (C.N), Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N) initiated plans for the fund to prevent a fire sale of billions of dollars of securities held by structured investment vehicles (SIVs) at the heart of the subprime mortgage crisis.

But the size and even establishment of the fund have been put in doubt in recent days amid skepticism among market players over how effective it might be and an announcement by Citigroup that it would bail out SIVs on its own.

Executives at Japan's top three megabanks have meanwhile been wondering why they were asked to shoulder such a comparatively large part of the fund, whose size has recently been estimated by media at $30-60 billion.

"It could prove quite difficult for us to put up funds for this," said an executive at one of the megabanks, adding that he did not think the fund would be able to sell the commercial paper that would in theory be supported by Japanese credit lines.

"Logically, it just doesn't make sense for us."

Japanese bank shares slid sharply on Monday amid concerns they could be setting themselves up for further losses. While their exposure to the subprime loan market is much smaller than that of Western banks, Japanese lenders have not escaped unscathed.

Shares of Mitsubishi UFJ Financial Group, Japan's largest bank, tumbled 4.3 percent to 1,028 yen while No.2 Mizuho Financial fell 5 percent to 533,000 yen and third-ranked Sumitomo Mitsui gave up 3.7 percent to 825,000 yen.

The benchmark Nikkei average .N225 lost 1.7 percent.

"This is a credit line so they wouldn't have to come up with cash right away. But the amount of money requested is large and the need to provide cash could emerge depending on the actions of the fund," said Nomura Securities bank analyst Keisuke Moriyama.

That Japanese banks are being asked to help support the global financial system is a development that would have been unthinkable four or five years ago when the country appeared on the verge of a financial sector crisis.

Japanese banks have since cleaned up most of their non-performing loans and enjoyed a profit recovery thanks to a healthier economy, and their financial health has improved dramatically.

But they face their own domestic problems in exposure to a sickly consumer finance industry and an ongoing struggle to improve profits on corporate loans.

They would also face a difficult time explaining to investors the logic behind putting up money for the fund.

Against that backdrop, Nomura's Moriyama said he expected Japan's top three banks to offer to pay less than the requested amount or even refuse to help altogether.

But the issue could yet become political, the megabank executive said. Japanese banks are eager to expand their presence overseas and will not want to be seen as turning a blind eye to the health of the global financial system.

"What did America do when we had our non-performing loan problem? They just pushed us into the corner. European banks also ran away. Why should Japan now shoulder this burden?" said the megabank executive. "But this is a decision made at a high political level and could end up defying logic."

(Reporting by Nathan Layne and Taro Fuse, Editing by Michael Watson)

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