WASHINGTON - House Banking Committee Chairman Jim Leach warned that U.S. branches of foreign banks may deserve closer scrutiny in the wake of the recent $1.1 billion bond trading loss at the New York office of Daiwa Bank Ltd.
"It would appear that more comprehensive examinations may be needed of foreign institutions, particularly those from countries lacking U.S. standards of transparency and regulatory discipline," the Iowa Republican said at a hearing Monday on the Japanese financial system.
"It is extraordinary that the Daiwa problem was missed ... in standard Federal Reserve exams," Rep. Leach added.
The Fed has been examining foreign bank branches since 1991 after getting the authority to do so from the Federal Deposit Insurance Corporation Improvement Act.
Earlier this month, U.S. banking regulators charged that Daiwa and Japanese regulators waited nearly two months before disclosing that its New York branch suffered $1.1 billion in trading losses.
"It is impossible not to register deep concern over this brief but significant cover-up," Rep. Leach said.
Most of Monday's hearing focused on broader issues related to the Japanese banking industry's downturn. Japanese banks are suffering because of a rapid decline in the nation's real estate market and a drop in the Tokyo stock market.
According to the Japanese Ministry of Finance, Japanese banks held approximately $400 billion of nonperforming loans at the end of March 1995. Financial experts testifying before the panel agreed that the problems do not threaten to shut down Japan's largest banking institutions.
While Japan's credit crunch may curb Japanese banks' lending here, the effects on the domestic financial system should be minimal, they said.
"The impacts on U.S. borrowers will be modest because U.S. banks are well capitalized and will be in a strong position to extend more loans to compensate for the decline in loans from the U.S. branches of Japanese banks," said Robert Z. Aliber, professor of international economics and finance at the University of Chicago.
Japanese banks account for nearly 9.4% of all lending in the United States.
