What's Holding Up Asian Bank Reform?

It took the U.S. $150 billion and half a decade to work out its savings and loan banking crisis in the mid-1980s. Asia is entering Year Two of its own crisis and only just starting to move about $1 trillion in bad loans off the books of its banks. The longer it takes, the worse the recession will be. Japan has squandered seven years of economic growth because it has refused to deal with its banking problems. The rest of Asia has already lost one year to procrastination. Laws have been passed. Local U.S.-style Resolution Trust Corp. organizations have been set up. But few bad loans have actually been sold off, and even fewer banks have been closed. As a result, many poorly managed but well-connected companies are being kept afloat, while healthier businesses are starved for credit. Until Asia's banking system is reformed, the economy will continue to suffer.

So far, RTCs have been set up in Japan, South Korea, Thailand, Indonesia, and Malaysia. Seoul recently closed five small banks, triggering a worker rebellion that resulted in the sabotage of computer systems. Thailand and Indonesia are beginning the process of auditing poorly performing loans, then selling them. But there is resistance: Many see the process as enriching certain individuals with friends in high places.

Japan, of course, has the biggest problem. It just passed a Total Plan to overhaul the banking system, but questions about implementation abound. A new Financial Supervisory Agency that is supposed to audit banks' books and shut down bad banks will be staffed by former Ministry of Finance bureaucrats, most of whom come from the institutions they will now supervise. In the past, the MOF has protected banks, not restructured them. Moreover, there are voices in the government of Ryutaro Hashimoto that say only small banks will be closed--not the larger ones carrying most of the bad loans.

Bad banking triggered the Asian meltdown. Fixing ailing banks is the only way back to economic health.

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