TOKYO, Oct 10: Some major Japanese banks which are already undercapitalized may be left “practically insolvent” if authorities implement realistic measures to deal with credit and market risk, Fitch Ratings warned.

But a failure by the government to implement “genuine” reforms in the sector would likely lead to ratings downgrades, the London-based ratings agency said in report issued late Wednesday in London.

Fitch said its support ratings for major Japanese banks, which are mostly ‘1’ or ‘2’, indicate “we believe the government will provide timely and adequate support to banks deemed to be of systemic importance”.

These support ratings are “the main factor underpinning the investment grade credit ratings of most of the Japanese banks as the financial performance and strength of most are very weak on a stand-alone basis.

Fitch is not predicting that all, or indeed any (banks), will necessarily survive in their current form, the agency cautioned, despite its expectation of government support for these 1 and 2 rated banks.

The agency said it believed support from the authorities would be extended in such a way, up to and including nationalisation and forced restructuring, that the interests of depositors and senior creditors would be protected.

That approach would be in line with the view recently expressed by new the head of the Financial Services Agency Heizo Takenaka, who said in a magazine interview earlier this week that no bank is too big to fail.

Since his appointment as FSA head last week, Takenaka has appointed a hand-picked team which is expected to toughen the assessment of bad loans at banks and accelerate bad loan write-offs.

Fitch said it welcomed the move by the government to review the public policy stance towards the banking sector, noting recent announcements provide some basis for optimism that real reform may be in the offing.

It warned that such a policy would be fiercely resisted by the political old guard and many in the bureaucracy, but if the opposition won the day, the final reckoning would be much worse.

As pointed out in other Fitch reports, if the forces that are resistant to genuine reform succeed in slowing change, the ultimate costs to the banks and the economy will be far greater than if action is carried out resolutely, the agency said.

A continuation of the piecemeal ‘muddle through’ approach of recent years will likely result in Fitch taking negative rating actions on Japan’s banking sector, it said. —AFP