Policy Update 004

Upon the Announcement of the Timetable for the Financial Revitalization Program

TSURU Kotaro
Senior Fellow, RIETI

On Nov. 29, the government released a timetable outlining the timing for the consideration and implementation of the various items listed in the "Financial Revitalization Program" unveiled in late October. It is important to consider the element of time when implementing a policy package that covers several different items, or when undertaking comprehensive reforms, as the total effect of those individual measures may vary depending on the order and timing with which they are carried out.

Based on the timetable, it is clear that the end of March, when companies close their books, holds great significance. Several specific measures concerning the stricter assessment of banks' assets are to be prepared in time for the closing of books, and banks will be graded using "report cards" in line with their March earning reports that will be based on evaluations that are more stringent than those conducted in the past. According to the timetable, the banks that receive "unsatisfactory grades" will be required to take responsibility by implementing certain measures to improve their governance. One of the key features of the timetable is that the period during which financial institutions that have been ordered to adopt prompt corrective measures must improve their capital adequacy ratios has been shortened to one year from the current three years. While this step is necessary if the government intends to put an end to the problem of non-performing loans by fiscal 2004, this consideration of the element of speed should be praised.

Meanwhile, guidelines for the specific conditions under which banks' preferred stock can be changed to ordinary stock, thereby paving the way for nationalization, are also to be formulated by the end of the current fiscal year. However, caution is necessary when proceeding with this part of the program. For example, if detailed steps for stricter asset assessment are put into place and the banks' report cards are made public before these specific conditions are drawn up, they may be set in such a way that the nationalization of banks would be put off for the time being. On the other hand, if the conditions for nationalization are hammered out first, the measures for the assessment of assets may become lenient, thereby preventing the nationalization of certain banks. In other words, if the entire scheme, in which the stringent assessment of assets helps identify problem banks and this identification leads to their nationalization, is to function as an effective governance mechanism, it is imperative that individual measures not be correlated with each other, but rather be decided independently of each other.

Finally, the matter of tackling the non-performing loans held by smaller and regional financial institutions has been earmarked as an issue to be dealt with in the future. Although an action program for dealing with this problem is to be drafted by the end of the current fiscal year, the direction in which the discussions will proceed remains unclear. In recent years, it has become clear which of these financial institutions are strong, and these lenders have also come under the close scrutiny of depositors on such occasions as the introduction of a partial guarantee on time deposits. Regulators will have to simultaneously consider both the downside - the fact that they may not be able to dispose of their bad loans using the same measures as major banks - and the upside - the need to find a new role for those regional banks that have proven to be highly rated financial institutions - of time deposits. Regarding the latter, from the viewpoint of encouraging new entries as a means of dealing with banks' unjustified refusals to extend loans and their aggressive loan collection tactics, I hope that these strong financial institutions, along with foreign banks, will act as a catalyst to break down the cartel-like "do -as -others do" mentality of Japan's major banks.

>> Original text in Japanese

December 2, 2002

December 2, 2002