TOKYO, OCT. 7 -- In classic Japanese fashion, the chairman of Sumitomo Bank, the world's third largest, resigned today over a scandal at one of the bank's branches that has focused attention on the underside of Japan's spectacular economic growth.

Ichiro Isoda, 77, announced his resignation at a press conference two days after the arrest of a Yokohama branch manager, who allegedly arranged $167 million in illegal loans for a stock-speculation group and allegedly was rewarded with kickbacks, according to prosecutors.

"This kind of crime, even if committed by only one part of our company, is very serious, and it is quite natural that the top person should take responsibility," Isoda said.

Isoda's action followed a Japanese tradition in which some corporate executives show remorse for the mistakes of subordinates by quitting. Airline executives, for example, have resigned after plane crashes.

The Sumitomo scandal is particularly embarrassing because it has put the spotlight on one of the more worrisome aspects of Japan's financial success in recent years -- the close ties between banks and people who speculate in stocks and land.

In the 1980s, Japanese banks advanced loans secured by rapidly rising securities and real estate, a situation that -- in the wake of the Tokyo stock market's downturn -- has evoked concern among economists about the prospect of a financial debacle. Some Japanese banks could fail if land prices follow the stock market downward, analysts said.

While no evidence has surfaced suggesting that Isoda knew of the branch manager's actions, some critics said Sumitomo's aggressive management style created an environment in which middle managers could overstep their bounds.

Among Japanese banks, Sumitomo is known for taking bold risks and employees are known for working particularly hard to increase profitability. The strategy has paid off: with more than $400 billion in assets, Sumitomo ranks third in asset size in Japan but first in profitability. The bank's net income in the fiscal year ending in March 1990 was about $2.65 billion.

Tokyo prosecutors are investigating to determine whether high-ranking executives were involved in the scandal. Attention has focused on Akinori Yamashita, 45, who allegedly used his branch manager position to funnel $167 million to several stock speculators. Among the speculators is Mitsuhiro Kotani, 53, the head of Koshin Co. who has been indicted for illegally manipulating share prices.

Prosecutors said Yamashita persuaded some major bank customers to lend money to Kotani, in violation of laws forbidding bank employees to arrange loans for third parties outside their companies.

Yamashita and a associate, Kiyoshi Akiyama, allegedly received nearly three quarters of a million dollars from Kotani, plus inside information that he used to make a killing in the stock market.