Japanese trust banks

Japanese trust banks

Beyond the city banks and the long term credit banks, Japan has another influential form of banking. This is the trust bank.

Trust banks were separated from bank trust departments in the early 1960s to bridge the gap between banks and securities firms. Until recently there were only seven trust banks, with Sumitomo, Mitsubishi and Mitsui dominating the industry.

Each of these three has bank assets of about ¥25 trillion - about the size of Citicorp. Total trust bank assets are ¥125 trillion.

Foreigners were shut out of the trust bank business until 1985 when nine foreign firms were allowed into the business.

Trust banks provide long-term loan and equity capital to industry. They also provide conventional banking services and asset management including pension management.

Trust banks have separate trust and banking operations. Trust accounts collect long-term deposits from consumers to provide long-term loans.

The banking accounts collect short-term money in ordinary accounts to be used for short-term loans, much as commercial banks do.

Trust banks, like the city and long-term credit banks, have problems with property loans. On a relative basis, the trust banks are facing more problems because they lent more to property developers.

Trust banks have about 35 percent of their loans in property and construction loans. With Japan's property market a shambles, some even say that the trust banks are technically insolvent.

Because of these non-performing loans, pension fund management is the most profitable area of trust banking. Until recently only a few trust banks and life insurers had a stranglehold on private pension fund management.

The 1986 Investment Advisory Act broke this stranglehold by allowing about 140 licensed advisory firms - one third of them foreign - to manage pensions. Still these advisory firms have only gained control of a small percentage of total pension assets. Trust banks and life insurers still dominate.

In the climate of financial deregulation in Japan, the trust banks are being allowed to enter the securities business. Trust banks are now allowed to establish securities subsidiaries, and several larger trust banks already have done so.