Bank of Japan sets course for conflict of interest

Japan's Central Bank is trying to find ways to pull the country's financial services industry out of the mire created by a mountain of "non-performing loans" or bad debt. The debt crisis has many causes from simple bad lending decisions to corruption where loans were made to organised crime figures or contacts of the bankers without any expectation of repayment.

The Financial Services Agency, the regulator, is working with the BoJ on examining various options including the most radical option of BoJ taking a stake in some of the weaker banks. Suggestions that BoJ might simply inject money into banks to prevent them failing is regarded as unsatisfactory.

But the plan is open to significant concern. BoJ retains a considerable degree of influence at the FSA, which is, on paper at least, independent of the BOJ. The question of how the FSA would discipline a bank in which BoJ has an interest is causing furrowed brows in the compliance community.

"It's like asking a child to discipline its mother" said one banker. "How will there be even handed treatment of banks which are owned or not owned by the BoJ?" said another.

Foreign regulators are expected to be equally scathing of the plan. There is already concern that foreign banks are treated more harshly than local banks if there is a disciplinary problem. Foreign regulators, as much concerned with protecting the banks they regulate as disciplining them, will be worried that their charges are subject to further discrimination.