By Scott B. MacDonald

Japanese bank mergers have created some of the largest banks on the planet. Indeed, the three-way merger of Industrial Bank of Japan, Fuji Bank, and Dai-Ichi Kangyo has been called the "Godzilla Bank", as this $1.3 trillion asset-sized bank decidedly looms over the Tokyo landscape. There are others mergers in process including that of Sakura and Sumitomo and Bank of Tokyo-Mitsubishi and Mitsubishi Trust. Clearly, Japanese banking is in the process of revolutionary change. Yet, there are problems. In particular, the slow pace of consolidation can prove to be an Achilles heel if not addressed in the short-term. Bank mergers in Japan need to proceed with greater speed.

There are a number of differences in the merger process between the United States and Japan. In Japan, mergers are announced, but not followed by staff reductions, the sale of non-core assets or the creation of a single management team. The average bank merger in Japan is expected to take two years or more. The adoption of one computer system takes a long time, with each company having its own unique software. Moreover, in Japan committees are created to study the idea of cost-efficiency and to give the appearance of balancing interests. A sticking point can be arriving at an acceptable name for the new bank. Furthermore, the slowness of mergers allows time for infighting to occur and slows the pace of consolidation.

In the United States, the approach is considerably different. The goal is to move toward rapid consolidation, to achieve the best cost efficiencies, and to maximize profits, are soon as possible. The management team is often agreed upon during the merger talks. Credit Suisse First Boston's purchase of Donaldson, Lukfin & Jenrette was announced in September and departments were merged in October 2000. The management team of the new entity was announced within weeks of the merger. At the same time, there is usually a hard and quick examination of each business unit. Those businesses not regarded as essential are sold or disbanded. Extra staff members are fired. There is also a concerted effort to merge computer systems. The lack of a unified computer system means lost money. Furthermore, there is an effort to quickly come up with a new name. Within days of J.P. Morgan and Chase Manhattan Bank's announced merger, the bank had a new name. It is understood it is important to get a new name out to customers quickly. Good name brand promotion can mean millions in revenues.

The rating agency Standard & Poor's recently warned that "Japanese banks have a poor track record of implementing consolidation. New financial groups will need to chart their course carefully to avoid repeating these mistakes." One example of this is the so-called Godzilla Bank, formerly called the Mizuho Financial Group. While Mizuho moved rapidly to establish a new corporate name, the pace of consolidation has been slow. Under the merger plan's timetable, the three banks will continue to operate as separate entities until 2002, when three years after the first announcement, they will be reorganized under a single holding company as retail, corporate and investment banking units. In sharp contrast, Chase Manhattan and JP Morgan are planning to complete their merger in about six months.

As the Financial Times' Gillian Tett notes of Mizuho's gradualist approach: "This has created endless internal feuding: the banks have yet to decide, for example, who will be president or how they will organize their information technology. Furthermore, it has failed to find a business focus." It is well known that Mizuho could not reach a consensus on which of the three banksê information technology systems to adopt. Consequently, it was decided to combine several systems. This costly and time-consuming exercise is in sharp contrast to most U.S. and European mergers, where IT technology is one of the first things decided upon, considering the critical importance of technology in today's banking.

While substantial attention has been devoted to national and larger city banks, Japan's regional banks are also under considerable pressure. Outside Tokyo, many regional economies are in bad shape and the corporate climate is not encouraging. The depressed nature of many regional economies is reflected by the fact that the majority of Japan's prefectural governments are in the red for the second straight year in fiscal 1999-2000. They have been hard hit by a combination of swelling interest expenses on outstanding debt and lower-than-expected tax revenues. In many cases, nonperforming loans are at higher levels than those of the city banks and rising. Balance sheets show a deterioration due to unreserved bad assets. Moreover, regional banks are facing greater competition from the city banks and other financial institutions. As one Merrill Lynch report commented: "In our view, regional banks need to implement radical structural reform to resolve their problems." Part of this restructuring could be mergers.

The difference in speed is critical to the future development of Japanese banks. The slow pace of Japanese bank mergers invites a loss of efficiency. Moreover, big bang reforms are adding new competitors to the bank sector. Non-banks like Sony, BMW and Ito-Yokado (a supermarket chain) are all applying for banking licenses. Consumer loan companies, such as Acom and Promise, are busy expanding into businesses such as credit cards. The big brokerage houses have their own plans for financial expansion. The clear risk for banks is that they will fall even further behind the pack as they become caught up in the technical difficulties and business culture difficulties that complicate their mergers. Time is marching on and the competition is growing.