Foreign banks will probably face tougher scrutiny from regulators in the wake of Daiwa Bank Ltd.'s $1.1 billion trading loss, legal sources predicted.
"The Fed is going to come down very heavily on foreign banks," said one Washington-based lawyer. "The perception at the Fed is that they're not being taken seriously by some Japanese and other foreign banks.
The Federal Reserve System and the New York State Banking Department last week issued a joint-cease-and-desist order against Daiwa Bank Ltd.'s U.S. trading operations, pending an audit. The order came in the wake of massive losses incurred by one of the bank's traders over an 11-year period. Japanese banking authorities launched a separate investigation into the bank Friday amid mounting speculation that the bank's president, Akira Fujita, would resign.
Legal sources said they doubted U.S. regulators would go so far as to shut down Daiwa's U.S. operations.
The bank has $12 billion in U.S. assets and 18 branches, agencies, and representative offices around the United States. Nearly three-fourths of Daiwa's U.S. assets are in the New York branch.
Sources said that Daiwa faces stiff fines, which could run to millions of dollars from both the Fed and New York State Banking Department.
Toshihide Iguchi, the Daiwa trader allegedly responsible for the fraud, faces possible prosecution by the U.S. attorney's office. Daiwa representatives are scheduled to appear before an administrative law judge in New York on Dec. 27 unless the bank reaches a consent agreement with regulators before then.
Banking officials said Daiwa's shortcomings are likely to have a ripple effect on regulators' dealings with foreign banks.
"Understandably, all interested parties, including of course, the banking regulators, will be reviewing existing policies and practices in light of this occurrence," said Lawrence R. Uhlick, executive director of the Institute of International Bankers, the main association representing foreign banks in the Untied States.
A spokeswoman for the New York State Banking Department said the department was conducting a review to determine whether "any supervisory practices need to be altered in order to avoid such a recurrence in the future."
Legal sources said any review is likely to go well beyond just revising examination procedures. "There's a notion within the Fed that there has been this undue reliance on canned policies and procedures, and that the banks obviously have a greater allegiance to the Bank of Japan than to U.S. regulators," said one Washington-based source.
"The Fed is extremely miffed about what happened and there's going to be a carry-over effect into the foreign banking community and into the Japanese banking community in particular."