Japan mulls bank rule change, prompts protectionist fears

According to the Financial Times, the Japanese Bankers' Association and regulators are looking to raise the current cap on banks' shareholdings from 5% to as much as 15%. The proposal, which is still only in the discussion phase, would allow Japan's banks to avoid writedowns on loans to small- and medium-sized enterprises (SMEs) by converting debt to equity.

Some say this would increase the interdependence of banks and their clients, but local PE executives argue that the measure is disguised protectionism aimed at keeping foreign investors from taking big stakes in Japanese companies with leading edge technology.

It follows KKR withdrawing a buyout offer for struggling chipmaker Renesas Electric Corp. after state-owned Innovation Network Corporation of Japan (INCJ) assembled a consortium of domestic companies to present a larger alternative rescue package.

Japanese banks' ownership of shares in their corporate clients has been a problem for years, exaggerating swings in the economy. Regulators say the change is meant to support SMEs rather than return to the cross-holding system under which the banks gained greater control over clients.

"There is little risk capital for SMEs, especially regional SMEs," said Masaaki Kanno, head of economic research for JPMorgan in Tokyo. "On a restricted basis such a measure could be a good thing. But it shouldn't apply to large companies who should go to the capital markets, not the banks."

Currently insurance firms are the only groups in Japan allowed to hold more than 5% of domestic companies. If the proposal wins approval, conglomerates might end up with large shareholdings because they could own multiple banks, which in turn hold 15% stakes in other companies.

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• regulation
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