Too-Big-to-Fail Lenders Must Curb Pay, Japan Bank Lobby Says

Banks deemed too big to fail must rein in executive pay to curb the excessive risk taking that helped cause the global financial crisis, the head of Japan’s banking lobby said.

“Compensation levels for the financial industry should be similar to the range of paychecks for other industries,” Masayuki Oku, chairman of the Japanese Bankers Association, said in an interview in Tokyo this week.

Pay in the tens of millions of dollars spurred U.S. bankers to assume greater risks and focus on short-term profit, leading to the 2008 meltdown, says Katsuyuki Kubo, a commerce professor specializing in corporate governance and executive compensation at Waseda University in Tokyo. The Basel Committee on Banking Supervision last month said lenders are failing to implement bonus limits that would help to avoid a repeat of the worst financial turmoil since the Great Depression.

“To prevent the financial sector from derailing, governance issues such as executives’ ethics and wage policies must be reviewed and improved,” Oku, 65, who is also chairman of Sumitomo Mitsui Financial Group Inc., said in the Nov. 2 interview.

Executive Pay

No executives at Sumitomo Mitsui, Japan’s second-biggest bank, were paid more than 100 million yen ($1.2 million) in the 12 months ended March. Average pay among 17 top executives at JPMorgan Chase & Co., the third-biggest U.S. bank, was $8.8 million, according to data compiled by Bloomberg. JPMorgan had at least $69 billion of losses and writedowns since the credit crisis started, compared with about $1.3 billion at Sumitomo Mitsui, Bloomberg data show.

In 2008, U.S. lawmakers criticized bank executives for reaping bonuses while shareholders bore the brunt of writedowns on mortgage assets and credit losses.

Richard Fuld, former chief executive officer of Lehman Brothers Holdings Inc. received $40 million for 2007, almost all in the form of restricted stock, the company said in March 2008. Merrill Lynch & Co. said in November that year it would pay John Thain, then-chief of the U.S. bank, at least $44 million in bonuses, salary and stock grants for the year.

Mizuho Financial Group Inc., Japan’s third-biggest lender, paid only six of its directors more than 100 million yen last fiscal year. Mizuho’s losses and writedowns during the crisis exceeded $10 billion, more than any other Asian bank.

Capital Surcharges

Oku said extra capital surcharges or financial rule changes similar to the U.S. Dodd-Frank law aren’t needed for Japanese lenders because they mainly focus on commercial banking and don’t try to boost profits through leveraged financial products.

“Whether to impose surcharges on systemically important financial institutions should hinge on each government’s decision,” Oku said. “A one-size-fits-all approach wouldn’t work because banking business varies from company to company and from country to country.”

Global regulators are searching for ways to ensure the world’s most important lenders can withstand financial shocks. Financial Stability Board Chairman Mario Draghi has said capital and liquidity rules for too-big-to-fail banks may differ between countries.

The U.S., U.K. and Switzerland are considering imposing capital surcharges on their largest lenders on top of minimum rules for banks proposed by the Basel Committee in September. Japan’s Financial Services Agency said on Oct. 6 that it’s not considering extra capital requirements for big banks.

Raised Capital

Sumitomo Mitsui, Mizuho and larger rival Mitsubishi UFJ Financial Group Inc. raised about 4.5 trillion yen in total by selling shares in the past two years, bolstering their balance sheets as regulators called for lenders to hold more capital.

“Japanese banks should go abroad at a faster pace and invest in more assets there to seek profit growth,” said Yoshinobu Yamada, a Tokyo-based analyst at Deutsche Bank AG. “They wouldn’t see a brighter future if they stay inside Japan.”

Mitsubishi UFJ is in talks to buy project-finance assets valued at about 4 billion pounds ($6.4 billion) from Royal Bank of Scotland Group Plc., two people with direct knowledge of the matter said yesterday.

Oku said that while Japanese banks will meet the new Basel standards, they face a challenging few years as the need to hold more capital limits the risks they can take to increase profit. The Topix Banks Index dropped to a record low on Nov. 1 as Japan’s stagnant economy dimmed domestic earnings prospects. The index climbed 1.6 percent at the 11 a.m. break in Tokyo today.

“How to address these regulation changes is the biggest issue for banks over the next two years,” Oku said. “Bearing these rules in mind, we need to determine how we can enter growing markets to expand.”

To contact the reporter on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net; Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net.

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net.

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