Resona, Japan's fifth largest bank has recently shown its capital adequacy ratio (CAR) of 2%, lower than minimum of 4% regulatory requirement. The bank has more than ¥2 tn bad loans. Japanese banks are making full use of Deferred Tax Assets (DTAs) to boost up their CAR and DTAs accounts for more than half of the core capitalization of all major banks compared to US banks, which are allowed to use DTAs for maximum of 10%. Big accounting scandals in US are forcing the auditors to show their creditability. The profit prediction of major banks after posting huge losses is in doubt because they were unable to prove their words in the past.
The nightmares of Japanese banks are ongoing. The country's fifth-largest bank, Resona Holdings disclosed on May 17, 2003 (a key barometer of a bank's health) whose capital adequacy ratio had fallen dangerously low. Resona was created only in March 2003 by the merger of Asahi Bank and Daiwa Bank. The Resona Group came into being through the merger of the former Asahi Bank and Daiwa Bank. The goal of the group was to become a "super-regional" bank. The two parent banks of the Resona Group, however, were low-ranking commercial banks. The group's profitability failed to improve following the integration of management, and its business foundation remained weak due to the continuing deflationary situation.
The Resona Group had more than ¥2 tn in non-performing loans. This along with other factors kept the Resona base weak. Besides, an independent audit firm in May noted that the bank had been overestimating its future income. Resona was forced to downward revise its deferred tax assets-tax refunds that it expects to receive in the future and its capital adequacy ratio subsequently dropped. In the year 2002, the bank had stated that it had ¥709 bn in deferred tax assets, but the independent auditing firm allowed a figure of only about ¥435 bn in 2003. When this happened, the capital adequacy ratio that the bank had assumed for itself, of around 6% fell to 2.07%. The capital adequacy ratio of Resona Holdings also dropped to 3.78%. A ratio of 4% is the minimum necessary for a bank to conduct business in Japan.
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