Following Prime Minister Junichiro Koizumi's recent Cabinet shuffle, moves toward a "public fund injection into banks" and "acceleration of bad loan disposal" are gaining momentum. These catch phrases alone, however, are no different from what was advocated at the time of the previous public fund injection in 1999, when Japanese banks supposedly adopted stricter asset assessment criteria.
The failures of Sogo Co. in 2000 and Mycal Corp. in 2001 revealed that the major lenders for these big retailers had been, in fact, applying lenient standards in assessing loans to them, classifying neither company as a borrower with a high risk of bankruptcy. Subsequently, the Financial Services Agency (FSA) conducted special inspections into bank lending policies, reclassifying loans in line with the agency's tougher criteria. Still, there is a prevalent "rational suspicion" among the general public that loans to corporate borrowers on the verge of collapse may be found alongside those loans classified as performing or risk-monitored, or that banks have not set aside enough loan loss reserves for loans to such high-risk borrowers.
Until now, the acceleration of bad loan disposal has meant an accelerated disposal of loans to borrowers classified as virtually insolvent. Yet, in taking this course, there remains a suspicion that "high-risk borrowers are hidden among non-risk and risk-monitored borrowers."
Verifying the validity of this suspicion must be the first step in the "acceleration of bad loan disposal." This requires a strict asset assessment as stressed by Financial Services Minister Heizo Takenaka, who concurrently serves as minister for economic and fiscal policy. It is not enough, though, for the government to simply tell people, "We have carried out a strict asset assessment." With people's distrust spreading to such an extent, a sufficient disclosure of assessment results is indispensable to restoring public confidence in banks' asset assessment. While disclosing the specific names of debtor companies and banks should be avoided as it would trigger unnecessary credit uneasiness, the government should compile the assessment results of assets held by major banks, and then disclose the compiled data as an indicator to show the extent of soundness in overall assets.
For instance, disclosing information in ways such as the following would help enable the general public to have a common view of the conditions of banks' assets and on the progress of bad loan disposal.
First of all, the government should disclose the top three lenders' classification and loan loss coverage ratios concerning loans to major companies that have failed in the past two years.
Also, the government should create an easy-to-understand benchmark for scrutinizing troubled major companies which, for instance, have share prices continually falling below ¥100 and those which have interest-bearing liabilities more than 10 times their annual operating profits. Next, there is a need to compile for disclosure the manner in which banks classify loans to such companies and how much loan loss provisions the banks set aside for them. By verifying the results of the FSA's inspections through separate inspections by the Bank of Japan, the credibility of the assessment results would be enhanced.
If the government is to avoid falling into the same rut as during the last public fund injection, which failed to mend the bad loan problem, the prerequisite to the implementation of a truly strict assessment of banks' assets is a thorough disclosure of compiled information.
Proceeding with a truly strict asset assessment would reveal a range of difficult problems. When banks fall into a state of undercapitalization, it necessitates additional infusions of public funds. When this happens, previously injected public funds are not returned, posing a major problem as to who should take responsibility for the failure to recover the public funds. Also, once strict assessment criteria are adopted, the consolidation or liquidation of troubled major companies must proceed along with the reorganization of industry. As companies and banks consolidate, unemployment inevitably increases. To cope with this, the government must expand safety net measures including an unemployment compensation insurance system, thereby, propping up the nation's economy.
To accelerate bad loan disposal, a "control tower," which oversees financial, industrial, employment and fiscal areas by eliminating the existing sectionalism of administration, must be established so that a comprehensive package of policies can be implemented in an orderly manner.
*reprinted from ASAHI Shimbun (October 4, 2002)
