Japan Watchdog Begins Megabank Probe Amid Crime Loan Scandal

Japan’s financial regulator started inspecting the nation’s three largest banks today after finding Mizuho Financial Group Inc. failed to end loans to gangsters.

The probe covers Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc., Japan’s biggest and second-largest lenders, as well as Mizuho, which last week submitted a plan to the Financial Services Agency outlining measures to improve internal controls.

“We will inspect common items, such as compliance and risk management, across the three megabanks,” Financial Services Minister Taro Aso said at a news briefing in Tokyo today. “We will also examine whether Mizuho’s business improvement plan is sufficient and their response is diligent.”

The agency told Mizuho Sept. 27 to strengthen controls after the Tokyo-based bank failed to break off 200 million yen ($2 million) of transactions with members of crime groups made through its Orient Corp. consumer credit affiliate. Less than two weeks later, Mizuho said it erred in reporting that only lower-ranking officials knew of the loans.

Mizuho’s incorrect report to the FSA “was extremely undesirable,” and the regulator will carefully consider how to respond, Aso said.

Consumer Credit

The trade ministry will ask consumer credit firms that have so-called tie-up loans made with financial institutions to submit reports on the matter, Trade Minister Toshimitsu Motegi said at a news briefing today.

Shinsei Bank Ltd. last week became the second lender to reveal transactions with crime groups, through a trust banking unit and a consumer finance arm, Aplus Financial Co.

Mizuho outlined measures in its business improvement report such as database sharing with Orient and the addition of an outside director to prevent further transactions with yakuza crime syndicates. President Yasuhiro Sato will give up six months’ pay while 53 other current and former executives will also be penalized, it said on Oct. 28.

Shares of Mizuho, Japan’s third-largest bank by market value, closed unchanged at 205 yen in Tokyo. They have dropped 7.7 percent since the bank was reprimanded by the regulator on Sept. 27. Mitsubishi UFJ fell 0.3 percent and Sumitomo Mitsui gained 0.1 percent. The benchmark Topix Index fell less than 0.1 percent.

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