November 2, 2018 / 7:31 AM / 9 months ago

EXCLUSIVE-Scandal-tainted Suruga Bank to receive $2.2 bln credit line from BOJ -sources

* Mid-sized lender reeling from retail property loan scandal

* Regulators do not expect liquidity crunch -sources

* Regulators want Suruga prepared for any contingencies -sources

* Depositors withdrew $2 bln in Q1, similar amount in Q2 -sources (Recasts and writes through with details of the scheme)

By Taro Fuse and Sumio Ito

TOKYO, Nov 2 (Reuters) - Japan’s scandal-hit Suruga Bank will receive a credit line for as much as 250 billion yen ($2.2 billion) from the country’s central bank after seeing two quarters of desposit outflows, two people with direct knowledge of the matter said.

The mid-sized lender in central Japan is reeling from a scandal over retail property-investment loans that has slammed its shares and led to the departures of top executives.

Regulators do not expect Suruga to suffer a liquidity crunch but they have asked the lender to secure funding from the Bank of Japan (BOJ) to be ready for any contingencies, the sources told Reuters. They spoke on condition of anonymity, as they were not authorised to discuss the matter publicly.

Some depositors pulled money out of the bank in the wake of the scandal, with net outflows of 220 billion yen, equivalent to about 5 percent of the lender’s total deposits, in the April-June quarter. The sources said outflows continued at roughly that level in the July-September quarter.

That compares with virtually flat levels for deposits between October last year and March.

A BOJ spokesman declined to comment, saying the central bank does not disclose specific collateral conditions. A Suruga spokesman said he could not comment on specific transactions. Officials for Japan’s Financial Services Agency were not immediately available for comment.

Shares in Suruga ended 2 percent higher after Reuters reported the move shortly before the close of trade in Tokyo on Friday. That gave the lender a market value of about $1.1 billion.

The Shizuoka prefecture-based lender will use a programme introduced in 2016, in which the central bank accepts beneficial interest of a trust in mortgage loans as eligible collateral for funding, the sources said.

The bank’s shares have fallen some 80 percent since the start of the year when its troubles surfaced. The scandal has sent ripples through Japan’s banking industry where Suruga was a darling of investors and a role model for carving out a niche in a crowded banking market.

Japan’s bank regulator last month ordered Suruga to stop making new loans for property investments for six months, after a third-party panel found that Suruga had been involved in falsifying documents on loans made to investors who built “share houses” where tenants share bathrooms and other facilities.

The government also found that the bank had made improper loans to businesses related to the bank’s founding family, and had allowed “anti-social elements”, a euphemism for organised crime in Japan, to open deposit accounts.

The BOJ does not accept mortgage loans directly as collateral, so Suruga’s assets will essentially be securitised by a trust bank into beneficiary rights for the loans as a package, which is eligible to be used as collateral with the central bank, the sources said.

Suruga will initially pledge about 300 billion yen worth of loans, which would enable it to receive 150 billion yen from the BOJ, the sources said. It will later increase the pledged collateral to secure up to 200-250 billion yen in funding, they said. ($1 = 113.0100 yen) (Reporting by Taro Fuse and Sumio Ito; Additional reporting by Takahiko Wada; Writing by Taiga Uranaka; Editing by William Mallard and Edwina Gibbs)

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