Bank of Japan Finds ‘Defects’ in Daiwa’s Internal Management Controls

The Bank of Japan said Monday it had decided to conduct monthly inspections of Daiwa Bank, after a review of Daiwa’s Tokyo and Osaka operations found a company culture that tended to “make light of” rules and regulations.

Bank of Japan Executive Director Tatsuya Tamura said in a news conference Monday night that the central bank normally conducts inspections once every three years, but decided that Daiwa needed to be watched more closely after discovering “defects in internal management” controls and little regard for banking rules and regulation.

The Bank of Japan’s action was the latest official censure of Daiwa, which is buffeted by scandal over $1.1 billion in trading losses in New York. Last week U.S. authorities decided to expel Daiwa from the United States. Daiwa officials must provide regulators a status report every five days on their progress toward pulling out, and the books and records of any Daiwa office in the United States are open for inspection whenever regulators deem it necessary. Daiwa also is prohibited from removing or destroying any documents without prior approval.

In addition, prosecutors issued a 24-count indictment against it, alleging a cover-up of the losses. Daiwa, which has denied the charges, faces a fine of up to $1.3 billion if convicted.

The Daiwa scandal has helped increase international nervousness about Japanese banks. They are carrying nearly half a trillion dollars of bad loans left from the collapse of Japan’s booming “bubble economy” of the late 1980s.

Japanese officials said that in light of the Daiwa scandal they were reorganizing to try to catch banking fraud more quickly. The Bank of Japan said it planned to step up checks on overseas operations of Japanese banks. The Finance Ministry said it plans to establish a team of inspectors for Japanese overseas branches, and to increase the number of its inspectors. It currently has about 420, compared to 8,000 U.S. inspectors.

The Daiwa scandal prompted the main opposition party, Shinshinto, or New Frontier Party, to issue a demand for the resignation of Finance Minister Masayoshi Takemura. Takemura heads Sakigake, or the New Party, the smallest group of the ruling coalition.

Monday morning, Daiwa ordered extra employees to come to work as the bank’s branches opened for the first time since U.S. authorities took their action (Friday was a banking holiday in Japan). Japanese authorities stood by, ready to provide loans to the bank if a run occurred, banking analysts said.

But there turned out to be no need for the precautions. Analysts said that depositors appeared calm.