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Punishment on SMBC
Frightened Banking Industry

6, 04. 2006

   Sumitomo Mitsui Banking Corp. (SMBC) was penalized by the Financial Service Agency (FSA) concerning its sale of financial derivative products. What was lurking behind the scene was the circumstances under which banks are obligated to expand revenues by somehow selling investment trust and other lucrative products. This is why the banking circle was so frightened by the FSA' s ban on Sumitomo Banking’s sale of financial derivatives.

Is punishment to SMBC a
Is punishment to SMBC a "deterrent" for other banks?

   The FSA on April 27 banned the SMBC from selling derivative products for six months from May 15 as a penalty for forcing smaller businesses to buy interest swap derivative products by abusing its advantageous position as a bank.
   Besides the ban on sale of derivative products, the FSA also ordered the bank not to open new marketing outlets for corporate clients for one year. The punitive measures further included that the SMBC review its management control system and clarify the responsibility of managerial staffs concerning the incident. These were such severe punitive actions that an official of other banking institution commented that the revenue of the SMBC would be "greatly affected, taking into consideration the damage dealt to its image" by the punishment.

Earning By Fee Receipts To Cover Lendings That Could Not Be Increased

   The essence of the incident was that the SMBC took advantage of its position as lender and forced it clients, especially the smaller businesses that were in a weak position, to buy derivative products which are difficult to understand even if they are explained about. It would not be mistaken to say that the quota system of the bank was in the background.
   Was it only the SMBC that had the problems? The answer would be negative. There are countless cases of troubles involving financial products and incidents of clients forced to bear losses. In Japan, financial products are regulated by different laws depending on the kinds of the products. Deposits, for instance, are regulated under the banking law; stocks, government bonds and investment trusts are under the securities and exchange law; variable insurances are under the insurance law; and deposit trading is under the financial futures transactions law. There is no law regulating the interest rate and exchange swap trading.
   A bill of "financial products transaction law" is now planned to be presented before the current Diet. The proposed law is aimed at protecting investors by regulating financial products under the blanket. Under the law, the sales conducts of firms dealing with financial products would be regulated by the Financial Services Agency. Any violator would be subject to a ban on further dealing or placed under obligation to report measures to improve the business conduct.
   At present, banks have finished the resolving of the nonperforming loans and are trying to expand their revenues. The mega banks are expanding their financial business into local areas in competition with local banks and credit associations. This is presenting a severe business condition for weak local financial institutions. Investment trusts and other financial products are just the products for the banks to deal with. While the banks cannot increase their lending, they are raising revenues by taking fees for handling such products.

How Well Can SMBC Improve In-house Regulations?

   Under the quota system, the employees would work like a horse to get their assignments done. They would increase even the sale of such complicated financial products as derivatives to individual investors and ordinary customers. It is inconceivable that the sales of such products without sufficient explanations or understanding on the part of the purchasers will decrease in the future. The Financial Services Agency tried to prevent excessive sale of such financial products by telling the presidents of local banks across the country at their meeting in April that the agency would pay special attention to the sales of investment trusts and other risky products in the future financial inspection. In case it is found the banks have failed to give sufficient explanation to their clients in selling of such products, order to improve business conduct as punishment would be inevitable. If similar gravity of the punishments for the SMBC were meted out to smaller financial institutions, it could mean a mater of life or death for them. In other words, the sever punishment for the SMBC this time could mean a warning to hundreds of other banks.
   Other banks and credit associations are now keenly watching how well the SMG would improve its readiness to explain the products for selling them to its clients and other regulations. The system of the SMBC is certain to come out to be "of the highest level," an official at a local bank said. It might provide a good example for banks which are in the dark as to how and to what extend they should do in case they find themselves in a similar situation.

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