The results of special bank audits announced last week by the Financial Services Agency confirm that Japan's banking sector is still saddled with large amounts of bad debt. The message is that banks remain heavily exposed to the risks of default despite stepped-up efforts to improve the situation.
The special audits, carried out for 13 top banks from November to March, examined loans to heavily indebted large clients, such as those hit by sharp drops in credit ratings and share prices. Normally the FSA checks banks' financial conditions after, not before, they close their books. This time around, FSA inspectors, working with outside auditors as well as the banks, conducted elaborate checks in the last months of the fiscal year, also taking into account the market evaluations of the targeted clients.
The ad hoc inspections were prompted by the sudden collapse last September of Mycal Corp., a major supermarket chain -- a symbolic event that highlighted banks' inclination to keep failing clients afloat. Several months earlier, the retailer had taken a beating in the stock market, which regarded it as being effectively bankrupt.