Mizuho: Bank chair to resign after mob loans scandal

Reuters with
Kiyoshi Ota | Bloomberg | Getty Images

Mizuho Financial Group said on Monday that the chairman of its banking unit, Takashi Tsukamoto, will resign, while its president will take a six-month pay suspension, following a loans-to-mobsters scandal.

Mizuho — Japan's second-biggest lender by assets — has been under fire after regulators last month reprimanded it for failing to terminate loans to members of organized crime syndicates for more than two years after it found about them.

Japan's Financial Services ordered Mizuho to submit a report by Monday on how it will improve its compliance regime. The regulators demanded another report after the bank said some of top management had been actually known about these problem loans, contradicting what it told the FSA earlier.

However, it looked likely to escape serious penalty after an outside panel hired by the bank said on Monday that Mizuho had not intentionally covered up the shady lending.

The external panel of lawyers said in a report that Mizuho's management was lax in its handling of the loans to "yakuza" gangsters, but did not intentionally mislead regulators with an initial false report on the extent of the problem.

"We can say there is no possibility" of a cover-up by the bank, said panel leader Hideki Nakagome, announcing the results of the three-week investigation.

(Read more: Probe clears Mizuho of gangster loans cover-up)

In the latest scandal involving a major Japanese company's ties to the underworld, regulators disclosed in late September that Mizuho had learned in late 2010 of the $2 million in mob loans. The 230 small transactions, mostly car loans, were made by Mizuho consumer-finance affiliate Orient Corp and were among bulk loans the bank later bought from Orient.

The Financial Services Agency (FSA) ordered Mizuho to improve business practices after the bank did almost nothing about the mob lending for more than two years.

Mizuho initially said that knowledge of the loans went only as far as the bank's compliance officers, but days later the bank acknowledged that the transactions had been reported to top officials, including CEO and President Yasuhiro Sato, at board meetings.

Sato said he had been "in a position to know" about the mob loans, but had not noticed them.

'No cover up'

The panel of lawyers said there was no intention to cover up the responsibility of the top management from the FSA or malfeasance in keeping the mob loans after discovering them.

The bank failed to "recognise the gravity" of dealing with organised crime and failed to consider the loans as the bank's own, even though it had bought them from Orient, the panel said.

In addition, the panel said, the bank was preoccupied with addressing a massive technical-systems failure in the wake of the March 2011 earthquake and tsunami. This prevented management from prioritising the need to break ties with mobsters, it said.

The scandal hit Mizuho just as it was seeking to improve its corporate governance and accelerate growth, especially in overseas markets.

Sato will likely remain president and CEO of the financial group and its core Mizuho Bank unit, people familiar with the matter told Reuters last week, allowing him to resume his reform drive and seek to bring its compliance under tighter control and establish the lender as "Asia's core bank".

The relatively light judgment from the outside panel appeared to support that outcome.

But while Mizuho wants to move beyond the scandal, the pressure may not abate quickly. Some members of parliament have called for Sato to testify on the affair and, people familiar with the matter say, the FSA is under pressure to appear tough as questions arise over why it did not uncover the shady loans earlier.

Finance Minister Taro Aso, who heads the FSA, said on Friday the regulator would decide what action to take based on Monday's panel report.

Left behind by rivals

More than 30 executives will take pay cuts, and Mizuho will ask about a dozen former executives to return some of their compensation, Japanese media said.

The scandal, in addition to highlighting the pervasive reach of "yakuza" crime syndicates and other underworld elements throughout Japan Inc, highlighted the lapses in corporate governance that Sato himself has been struggling to fix.

(Read more: Lavish nights at Club Godfather led to Japan bribery case)

The bank, 13 years after its formation in a merger during Japan's financial crisis, remains riven by factions associated with its legacy banks: the Industrial Bank of Japan, Dai-Ichi Kangyo Bank and Fuji Bank.

The tussling fiefdoms have fostered a culture of protecting turf and refraining from taking broad responsibility for problems, Mizuho bankers say.

As a result of this disunity and other factors, the company has failed to match its main competitors, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group, in key measures of profitability.

Even if Mizuho escapes the mob scandal without crippling penalties, it may find itself constrained.

"I don't think Japanese regulators will willingly approve overseas acquisitions by Mizuho for a while, given the scandal," said a financial industry analyst in Tokyo, who declined to be named given the sensitivity of the matter.