ING Barings gets slap in Japan

The bank watchdog is frustrated with bank analysts in Japan, where it is often criticized for underestimating bad loans

By CNN's Alex Frew McMillan in Hong Kong

TOKYO, Japan (CNN) -- Japanese regulators have slapped the wrist of the brokerage ING Barings for errors in an analyst's report.

The Financial Services Agency (FSA), Japan's bank watchdog, issued an official letter of reprimand on Monday.

The Improvement Order requires the brokerage to step up its fact-checking system to prevent mistakes.

The FSA also demanded the investment bank monitor internal communications better, particularly between research and the trading side of the bank.

The FSA said the warning was the first it had issued against a brokerage for a report.

The bank, part of the Dutch company ING Group NV, has to report back in September with improvements.

Issue stems to May report on Daiwa

The issue stems to May 25, when bank analyst James Fiorillo published a critical report on Daiwa Bank Ltd.

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The report included a downgrade and noted many financial challenges for the bank.

It also had several mistakes that the bank traced to human error. For instance, the bank's Tier 1 capital ratio was transcribed as 4.79 percent instead of the correct 7.49 percent.

Fiorillo left soon after for a three-month leave of absence. ING Barings says the timing was purely coincidental.

ING Barings subsequently ran newspaper advertisements apologizing for the errors.

Daiwa is widely regarded as the most troubled of Japan's "city banks" so negative reports about it are particularly sensitive, with investors already questioning its chances of survival.

Increased scrutiny of rumors

Daiwa stock sank 8.5 percent in five days after the report came out.

Regulators have also increased their scrutiny of investment bank trading practices and are looking to cut back market-moving rumors.

But the FSA has developed something of a "persecution complex", members of the overseas investment community say.

The FSA is particularly frustrated with overseas bank analysts. They repeatedly claim that the agency is understating the problem of bad loans at Japan's banks.

The International Monetary Fund uses private estimates of the problem, disregarding Japan's official figures.

FSA officials fault bank analysts for misunderstanding the issue and for perpetuating a scare story.

The agency has recently tightened its scrutiny of all non-Japanese finance houses. It punished Goldman Sachs in June for an error with warrant prices.