Tokyo says it knew of losses at Daiwa scandal

Tokyo

The escalating Daiwa Bank scandal threatened to draw in the Japanese government yesterday, after an admission by the finance ministry that it knew of the bank's $1.1bn (pounds 670m) in bond losses 41 days before they were reported to the US authorities.

The two top executives of Daiwa announced their resignations yesterday as a gesture of responsibility for the losses run up by a rogue trader at the bank's New York branch. "The bank intends to make a fresh start by improving the management and supervisory systems," said the departing president, Akira Fujita. The chairman, Sumio Abekawa, will also step down in the spring.

But the awkward questions raised by the debacle multiply. On Friday, Daiwa officials admitted that in a 1992 inspection they concealed their failure to separate the bank's bond trading and record-keeping operations - the failing that allowed an executive vice-president, Toshihide Iguchi, to accumulate immense losses over 11 years. Mr Iguchi is in custody on fraud charges, but Daiwa also acknowledged for the first time that several other employees in New York had been involved. Yesterday, the ministry of finance announced its ongoing investigation had uncovered an earlier, unreported bond loss of $97m incurred between 1984 and 1994 at the New York branch of Daiwa Trust Co., the bank's investment trust arm.

Perhaps the most serious of yesterday's revelations concerned the time lag between Daiwa's notification of its loss to the finance ministry and the report to the Federal Reserve. The outgoing president, Mr Akira, received a letter of confession from Mr Iguchi on 24 July, and informed the ministry's banking bureau on 8 August. But it was not until 18 September that the federal authorities were informed. Both US federal law and the state banking regulations of New York require that financial institutions report illicit activities immediately.

"We wanted to avoid inflicting damage to the Japanese financial system, which was already facing a series of collapses with the Cosmo Credit Corporation in July, and Hyogo Bank and the Kizu Credit Union in August," said Mr Abekawa, the departing chairman. The vice-finance minister, Kyosuke Shinozawa, said: "It is Daiwa Bank, rather than the ministry, which has the obligation to report the incident."

But it is certain to provoke suspicions that there was collusion between the ministry and Daiwa to allow the bank to cover its losses before revealing them publicly.