TOKYO (CNNfn) -- Japan's scandal-plagued banking system had to make some massive adjustments last year.
Many leading institutions underwent restructuring in 1996, while others came under close scrutiny as business leaders and government officials weighed a five-year plan for financial reforms.
What went wrong, and what lies ahead?
CNNfn correspondent Bill Dorman recently sat down with Fuji Bank Chairman Toru Hashimoto to discuss Japan's banks and the need for reforms.
Q. What is the current situation for banking in Japan?
A. "Although the problem is not completely finished, the worst is behind us. There could be further failures of non-bank financial institutions and probably some regional banks. But I think those will be of manageable proportions. So we don't see any crisis coming."
Q. What have Japanese banks learned in the last year about risk management?
A. "In the first place, one must stick to the basic principles of lending. That is, you should not rely only on collateral, you should analyze the borrowers. You should know very well who runs the company, what sort of business they're in and what sort of cash flow you can expect from that particular borrower. So what we're doing is to retrain our lending staff so that they know their business. They should return to the basic principles of lending."
Q. Is this a change in behavior for Japan's banks?
A. "Yes, I think that's generally true for all banks. I think we have learned a lesson. We must try not to repeat it again
to repeat this failure again."
Q. Should some powers of the Japanese Finance Ministry be changed?
A. "I am of the opinion that the Ministry of Finance covers too many areas. Maybe they should stick to public finance, and the administration of banks and other financial institutions should be under another department."
Q. Does the Bank of Japan need more independence?
A. "Yes, I think so. The Bank of Japan needs more independence. And it's being proposed that the Bank of Japan Law be amended to insure the independence of the Bank of Japan with respect to monetary policy.
Q. What is the problem with the BOJ?
A. "Under the present, in many cases the Ministry of Finance can direct the Bank of Japan to take a specific monetary policy. The Ministry of Finance, on the other hand, does their own financing. They issue government bonds, and so there is a sort of a conflict of interest."
Q. Do you think that Prime Minister Ryutaro Hashimoto's financial reforms are going to be fast enough to keep Japanese banks globally competitive?
A. "Well, no. I would hope that the process will be speeded up. The completion of the 'Big Bang' in 2001 is a bit too late for me. I hope efforts will be made to accelerate it."
Q. Overall, how do you feel Japan's banks stand in the world of global competition?
A. "In 1989, I remember that the share of Japanese banks in the syndicated loan market worldwide was nearly 20 percent. It went down to something like 8 percent in 1992 as a result of the collapse of the bubble, which has limited the activities of Japanese banks. But then most recently, in 1995, it recovered to something like 12 percent. So it's gradually coming back."