Darrel Whitten
December 10, 2002
I have a couple of comments on the latest Miyakodayori.
1) I agree it is important to ensure that banks make accurate judgements regarding the fate of each corporate borrower by adopting strict standards for asset assessment. Ostensibly, they will be forced to do this by the Financial Revival Plan (FRP), which will require the banks to use discounted cash flow evaluations for loan-loss provisions, and because the loan classifications for each borrower will be harmonized among the banks.
2) As for reinforced governance and innovation of business models, the last thing a bank wants to become is a "special support financial institution" as described in the FRP.
3) I believe that the FRP's bite is almost as good as its bark, with of course the exception of deferred tax assets (DTAs). If however the DTA balances would have been dramatically altered, the government would have been faced with the situation of nationalizing several big banks by whatever date the changes would have taken place.
4) "While NPLs are being disposed, the reconstruction of borrowing companies must proceed in a systematic manner". While this is true, it is inconsistent with the next statement that "a financial revival and an industrial revival will not happen simultaneously, so two sets of measures should be implemented on seperate timetables". However, the whole function of the Industrial Revival Corporation (IRC), which the ruling party, business and finance circles had insisted was necessary, is to purchase non-performing loans from the banks for those heavily indebted companies the IRC deems revivable. If the IRC is to be moving on a different time-frame than the FRP, who will be buying the non-performing loans from the banks? The five-year timeframe for the IRC ostensibly is to conduct concentrated purchases of NPLs in the first two years, then focus on reviving the companies whose NPLs they bought from the banks.
5) If the two are out of sync, then the whole object of the exercise becomes debatable, and deflationary pressures will be exacerbated for the time being because of accelerated NPL disposal, which is not being made "market neutral" by IRC purchases. If the IRC is not the one who will be the counterpart for NPL disposals, does this implicitly mean bank nationalizations?
6) Finally, there is the issue of adequate funding for the IRC. It is my belief that the clean up operation will be much more costly than is currently prepared for. Presently, the IRC in terms of funding will be piggy-backing off of the DIC's funding, under a "Financial Revival Account", which is also used by the Resolution and Collection Corporation (RCC). The funding ceiling for this account is currently JPY12 trillion, JPY4.5 trillion of which was already used in the prior two bank nationalizations, which leaves JPY7.5 trillion, a portion of which as noted is being used by the RCC. This falls far short of the JPY15 trillion as suggested by Finance Minister Shiokawa, and even farther short of what I suspect it will take for the clean-up.
