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Suruga Bank stuck in murky loan scandal extended to founding family

Suruga Bank President Michio Arikuni, right, meets reporters in Numazu, Shizuoka Prefecture, on Dec. 27, 2018. (Mainichi/Tatsuya Fujii)

NUMAZU, Shizuoka -- Suruga Bank Ltd. filed a damages suit on Dec. 27 against its former Chairman Mitsuyoshi Okano and other ex-officials after finding them responsible for irregularities that caused massive losses to the bank through murky loans to companies linked to its founding family.

Under the more than 30-year reign of Okano, who hails from the founding family, the bank's management was left crooked, allowing for substantial amounts of loans extended to founding family-affiliated firms to remain unrecoverable. It remains unclear why those funds were provided and how they were used.

Suruga Bank was founded by Okano's great-grandfather, Kitaro Okano, and others in 1895. The bank currently runs 132 outlets in the central Japan prefecture of Shizuoka and Kanagawa Prefecture south of Tokyo, with total deposits of some 3.4 trillion yen. Up until 2016, the bank had been helmed by members of the founding family.

A fact-finding committee that was recently set up to investigate the bank's irregularities has found that there are more than 30 companies linked to the Okano family, including a company operating the Bernard Buffet Museum in the town of Nagaizumi, Shizuoka Prefecture.

Of them, 12 companies had borrowed a total of 120.8 billion yen from Suruga Bank as of 2002. They included a company owning the buildings that house the bank's branch offices and one selling and buying art works linked with the museum. The screenings for those loans were effectively rubber-stamped at the instruction of the late former vice president Kinosuke Okano, a younger brother of Mitsuyoshi Okano.

"The loans extended to firms associated with the founding family were called 'Okano matters,' and their loan proposals could be made without attaching documents specifying the purpose of the loans," said a senior Suruga Bank official. "Those loans were sanctioned without verifying the repayment plans or discussions at a board meeting."

Suruga Bank classified those affiliated companies as "specially managed borrowers" and managed to reduce their outstanding loans to 48.8 billion yen by the end of March 2018. However, the founding family never stepped in to rectify the cozy relationship between its affiliated companies and the bank. A number of retired Suruga Bank officials close to the Okano brothers and Keio University graduates were added to the management of the affiliated companies.

In a report released on Dec. 27, the fact-finding panel recognized two primary cases of irregularities. One of those cases involves a company affiliated with the founding family that had 8.833 billion yen in outstanding loans with the bank. In October 2015, Suruga Bank released from collateral some 1.71 million shares in the bank submitted earlier by the Okano family firm.

While the shares were sold for 4.1 billion yen, only 1.865 billion yen was used to repay the loans to Suruga. Of the remaining amount, 1.2 billion yen hovered between companies linked to the family, and a portion of the funds were remitted to Kinosuke's personal account. "The money flow was likely aimed at refinancing loans for companies with ties to Kinosuke," the report said.

While recognizing that Mitsuyoshi and Kinosuke Okano violated the duty of care of a prudent manager and duty of loyalty as directors, the report stopped short of accusing them of criminal responsibility, such as aggravated breach of trust.

At a press conference, panel member and lawyer Yoshihiro Kataoka admitted that their probe had its own limits, saying, "Former vice president Kinosuke (Okano) was the sole figure who was aware of the full breadth (of the loans) and made decisions."

--- Rocky road of rehabilitation lies ahead for Suruga

After registering record high net profits for five years in a row until the business year ended March 2017, the bank stumbled to post a 100.7 billion yen deficit in its September 2018 midterm settlement after suffering massive losses from uncollectible loans over shared housing loan schemes.

Slapped in October with the Financial Services Agency's administrative punishment, the bank suspended its mainstay businesses including loans for real estate transactions for investment. While the suspension will be lifted in April next year, there is no way the bank can rely on businesses that used to provide primary revenue sources.

"Our financial settlements will turn around from the next business year onward," boasted President Michio Arikuni, but the bank has yet to find a new effective source of earnings, facing a rough ride toward its rehabilitation.

While Arikuni and other executives attempt to highlight their departure from the founding family through the lawsuits filed against Okano and other former execs, negotiations over the repayment of loans extended to the family's affiliated companies and the sale of Suruga Bank shares held by the family have hit a snag, casting a shadow over the bank's plan to start over for a successful turnaround.

(Japanese original by Takashi Narumi and Takayuki Sakai, Business News Department)

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