The Daiwa Bank, Ltd. History
Chuo-ku Osaka 540-8610
Incorporated: 1918 as Osaka Nomura Bank
Total Assets: $7.46 billion (2000)
Stock Exchanges: Tokyo
Ticker Symbol: 8319
NAIC: 52211 Commercial Banking
Daiwa Bank is currently making the transition to a Superregional Bank with strong ties to the Kansai region. As we move into the 21st Century, the guiding principle throughout the Bank's scope of operations will continue to be to retain the confidence and trust of its customers. Key Dates:
- Company founded as Osaka Nomura Bank.
- Company's name is changed to The Daiwa Bank, Limited.
- A New York office is opened.
- Daiwa begins to offer pension-trust banking services.
- Bank fined $340 million and forced to close U.S. offices.
Following a 1995 scandal in its New York branch office that resulted in a massive fine and a ban on operating in the United States, The Daiwa Bank, Ltd. is returning its focus on its core domestic business, as well as transforming itself into a 'superregional' bank of Asia. The Daiwa Bank is unique among Japanese financial institutions in that it is licensed to conduct both trust and regular banking operations. Daiwa is therefore able to offer a wider range of in-house services and to emphasize a number of diverse and more profitable operations as market conditions change. In an environment such as Japan, where a bank's fortunes are normally tied to a narrow range of financial products, Daiwa has clearly enjoyed greater mobility and flexibility over the years, giving it a distinct competitive edge.
Early 20th Century Origins
The Daiwa Bank was founded in Osaka, Japan's first major industrial and commercial center, by Tokushichi Nomura, a shrewd entrepreneur and talented venture capitalist. Daiwa came into existence in 1918 as the Osaka Nomura Bank. It was created largely to take advantage of the new capital Japan had amassed from foreign commercial ventures and domestic industrialization. In many cases, the Osaka Nomura Bank arranged financing that enabled small but promising companies to expand and prosper under often-difficult economic conditions.
One of the bank's operations, the securities division, experienced such growth both in volume and in profits that it was run almost as a separate entity. Finally, in 1926, the division was spun off to create Nomura Securities, one day Japan's leading securities company. The following year 'Osaka' was dropped from the bank's name to give it a closer identification with Nomura Securities and to dispel the impression that its business was limited to Osaka.
Nomura (later Daiwa) would continue to maintain a close relationship with Nomura Securities, which acted as the bank's sole underwriter. (Daiwa Securities, a competitor of Nomura, was in no way related to the Daiwa Bank.) Nomura became a major shareholder of the Daiwa Bank, and, though Daiwa eventually divested itself of its interests in Nomura, the two companies maintained many parallel interests through an informal arrangement.
While the Nomura Bank had developed interests all across Japan, in 1929 it was appointed the sole banking agent of the Osaka prefectural government. It continued, therefore, to be associated with the Osaka establishment, leading it to be viewed with some suspicion in the more dynamic rival commercial center of Tokyo.
Japanese industry grew spectacularly during the 1930s as Japan began to mature as an industrial power. One of the most important factors in Japan's industrialization was the rise to power of militarists who favored the creation of larger, centrally directed firms. During World War II these militarists permitted, or directed, the Nomura Bank to absorb the operations of its affiliate, the Nomura Trust Company, in 1944. It was as a result of this somewhat awkward centralization scheme, coming at a time when the war was placing increasing hardships on the Japanese economy, that the bank began to operate both trust and regular banking services.
After the war, the Allied occupation forces enacted a variety of laws aimed at decentralizing Japanese industry. Many companies were divided into smaller ones, and many were forbidden to use their prewar names. Unlike some competitors, the Nomura Bank was not split up. It was also permitted to continue both trust and regular banking services, though it was forced to change its name. In 1948 it became Daiwa Bank (Daiwa means 'great harmony' in Japanese).
In addition to expanding its domestic network, Daiwa established a foreign department in 1948, and the following year was authorized as a foreign-exchange bank. It took Daiwa several years to open overseas offices. Unlike its competitors Mitsubishi and Sanwa, which had merely to reopen their American and European offices, Daiwa entered these markets with Japanese clients who were attempting to expand overseas. Daiwa opened representative offices in New York in 1956 and in London in 1958. The bank also gained a stronger presence in the Tokyo market during this time, taking over seven offices there that had been operated by the Bank of Tokyo. It was an important acquisition for Daiwa, as Tokyo had become the center of Japanese commerce.
Daiwa began pension-trust banking in 1962. It was the first Japanese bank to manage pensions, a business that later proved both stable and profitable. Daiwa was also the only bank allowed to maintain branch offices inside the Diet--the Japanese parliament. The bank established a second office there in 1962, creating one for the Upper House and one for the Lower House. This presence gave Daiwa an intimate knowledge of government activities and a more privileged role in government finance.
Japan experienced a powerful export-led economic expansion during the late 1950s and the 1960s. Daiwa experienced similarly rapid growth as a banker and financial agent for Japanese exporters. However, it was from the pension market that Daiwa experienced the bulk of its growth. The Japanese, without a social security program, had a great propensity to save, and their employers generally maintained conservative pension and insurance practices. During the following decade, the bank opened more overseas offices, in Los Angeles in 1970, Frankfurt in 1971, Hong Kong in 1976, and Singapore in 1979. Although shaken by the Arab oil embargo in 1973 and 1974 and the Iranian Revolution in 1979, Daiwa avoided serious reverses. Some losses were incurred and, predictably, growth slowed, but by 1980 the bank's pension trust surpassed ¥1 trillion, and only four years later the fund exceeded ¥2 trillion.
Beginning in 1952 the gradual deregulation of Japanese financial institutions caused occasional shocks in the banking community. One trend, however, that became especially acute in the 1980s was the narrowing spread between lending and deposits&mdash a result of increased competition. The Japanese banking community in general began to promote fee-based services. Daiwa took the matter a step further, attempting to cover all the bank's expenses with revenues from fee income alone. In the event that spread-based operations became unprofitable, the bank could more easily maintain growth.
Daiwa established a new trust headquarters in 1985 to reinforce its position in trust banking, promote fee income, and demonstrate its ability to accommodate the increasingly diverse needs of Japanese society. As an example, Daiwa became involved in land trusts, a type of real estate-asset management. The bank's most important land trust was the Chuokan project, operated on behalf of the Osaka prefectural government.
The man most responsible for Daiwa's successful exploitation of fee-based services was Sumio Abekawa, who was named president in 1984. He replaced Ichiro Ikeda who, despite tremendous personal sacrifice, had been unable to shake Daiwa out of a period of stagnation. Daiwa resumed a higher rate of growth during the mid-1980s, and began to prepare for the ensuing decades as a more aggressive and confident institution.
However, it was Daiwa's entry into securities trading in the 1980s that would lead to a scandal with longtime repercussions. Daiwa, like most Japanese banks, made its profits through lending, but failed to implement appropriate oversight procedures when it turned to high-volume securities trading. The Japanese business culture encouraged management to place far more emphasis on trust in subordinates than on oversight. Because books had to be kept in English for offices in the United States, Japanese bankers were even more dependent on employees fluent in English. Furthermore, while European and American banks were employing computer systems to monitor trades, Daiwa was still working with paper documents. In September 1995 the world would learn just how ill-prepared Daiwa was to deal in securities, when officials reported that one of its New York bond traders, Toshihide Iguchi, had embezzled funds and altered bank records in order to conceal 11 years of losses than amounted to $1.1 billion. Iguchi was not only a trader, he was in charge of oversight in his office. What began as an effort in 1984 to conceal a $200,000 loss on the American government-bond market spun out of control, as Iguchi raided accounts belonging to customers to finance further trading in order to recoup his mounting losses. He then forged documents to make it appear that the customer accounts were still intact.
This coming less than a year after the notorious Barings Bank collapse caused by nearly $1.4 billion in losses by Nick Leeson, it was easy at first to paint Iguchi simply as a rogue trader who had deceived Daiwa. As more facts came out, however, the bank's management became more mired in scandal. It was revealed that Iguchi confessed to his conduct in a letter to management in July, yet Daiwa waited nearly ten weeks before reporting the information to U.S. officials, and only then after the urging of their American attorneys, who along with the accountants had been kept in the dark about the problem.
In October 20, 1995, Iguchi pleaded guilty in Manhattan federal court to six counts of fraud, but he also testified that even after he confessed his conduct to Daiwa, he was asked to continue to forge bank records to conceal his losses. Daiwa, despite knowledge to the contrary, told the U.S. Federal Reserve that it still held $600 million in government securities that Iguchi had already sold to conceal his losses. Iguchi also testified that in 1989 and 1992 Daiwa management misled state and federal regulators when it maintained that the bank's trading operations were moved uptown to keep it separate from the oversight function of record-keepers. Although the traders did change offices, the separation of functions simply did not exist. Unconnected with the Iguchi losses, another impropriety also came to light through court proceedings. Daiwa's New York office used a corporate shell in the Cayman Islands to absorb some $97 million in losses incurred between 1984 and 1987.
The general manager of Daiwa Bank's New York office, Masahiro Tsuda, was also indicted and would eventually plead guilty to a single conspiracy count. The bank itself would plead guilty to 16 fraud charges and agree to pay one of the largest fines ever imposed in the United States, $340 million. Daiwa was also expelled from the country. In Japan the bank faced a $1.4 billion suit from shareholders, as well as restrictions placed on it by Japan's Ministry of Finance.
Daiwa, unlike Barings, was never in danger of collapse. Losses of $1.1 billion represented only eight percent of it capitalization, but its reputation was severely tarnished. Trust customers in particular had to be reassured that their funds were being properly administered. Daiwa closed four overseas offices and returned its focus to retail and trust banking. In September 2000 Daiwa was still enduring the impact of the New York scandal when a Japanese court ruled on the shareholder suit. A number of former and current management officials were ordered to pay $775 million in damages to shareholders for failing to properly oversee Iguchi's trading. How long the cloud would hang over Daiwa was uncertain.
With some 180 offices total, in Japan, China, Indonesia, Singapore, South Korea, Thailand, as well as the United Kingdom, Daiwa set about controlling the damage of its U.S. entanglements. The company upgraded its computer systems, and, in an uncharacteristic move for a Japanese firm, turned to an outside company, IBM, to complete the work. In essence Daiwa was recasting itself as a regional bank with a limited overseas presence. Toward that end, it explored opportunities for joint venture with Japan's Sumitomo Trust, acquired assets of the Japanese Namihaya Bank when that bank failed, remained one of the country's top business lenders (committed in particular to supporting the activities of the ailing Tokyo Mutual Life Insurance Company), and continued to manage the trusts and pensions of Japan's largest companies.
Principal Subsidiaries: Daiwa Bank, Canada; Daiwa Bank (Capital Management) Ltd. (U.K.); Daiwa Overseas Finance Ltd. (Hong Kong); Daiwa Fiananz AG (Switzerland); Daiwa BK Financial Futures Singapore Pte. Ltd.; Daiwa Finance Australia Ltd.
Principal Competitors: Sumitomo Trust and Banking Co., Ltd.; Yasuda Trust and Banking Co., Ltd.; Chuo Mitsui Trust and Banking Co., Ltd.; Sanwa Bank, Ltd.; Asahi Bank, Ltd.
- Kashiwagi, Akiko, 'Daiwa Officials Fined Millions; Japanese Executives Held Accountable in Landmark Case,' Washington Post, September 21, 2000, p. E2.
- Leung, James, 'Daiwa Transforms Itself,' Asian Business, February 1999, pp. 34-36.
- Mulligan, Thomas S., 'U.S. Charges Japanese Trader with Bank Fraud,' Los Angeles Times, September 27, 1995, p. 1.
- Norihiko, Shirouzu, 'Daiwa Scandal Creates Fallout for Tokyo,' Wall Street Journal, September 28, 1995, p. A16.
- O'Brien, Timothy L. O'Brien, 'Daiwa May Have Condoned Earlier Loss,' Wall Street Journal, November 8, 1995, p. A15.
- 'Wall Street Shokku,' Economist, September 30, 1995, p. 83.
Source: International Directory of Company Histories, Vol. 39. St. James Press, 2001.