New supervisory rules trigger alarm in Japanese banking system

The impact of a rigorous new Japanese bank inspection system is causing alarm at the country's banks, with many scrambling to shore-up fragile financial reserves ahead of its implementation in the next couple of months.

In the past, Japanese banks were not obliged to accept the findings of the Financial Service Agency's (FSA) inspectors or to reflect their results in account settlements. Authority to force compliance with findings was limited to the supervisory bureau of the Japanese watchdog, which often overlooked its inspectors’ own reports, Tokyo analysts said.

As a result, banks were able to deal with bad loans according to their own standards, rather than on the basis of actual needs.

Three new FSA