Press Conference by the Minister for Financial Services

(Excerpt)

28 August, 2001

Q.

Let me ask this again, I think you gave a comment on a TV program on Sunday, effectively saying that you were wondering if it would be feasible to take current market indexes into account when reserving provisions for non-performing loans of borrowers categorized as 'Needs Attention', in addition to their loan loss records in the past. Could you please rephrase this in your own words to make your thought clearer?

A.

First of all, as I made that comment in the course of discussion, I don't recall well if I went that far or exactly how I described it. Anyhow, what had happened was, we came to notice that some people seemed to suspect that the provisions might not be sufficient.

I took it this suspicion was not directed to the general state of things but was referring to the provisions reserved for loans made to 'Needs Attention'-categorized borrowers, and I do believe this understanding of mine isn't off the mark. Well, basically, it is a fundamental and very obvious accounting principle not to estimate a future loss or expense as a shot in the dark when calculating provisions. Rather, it is described that provisions to be posted should be based on an estimate conducted on strictly objective grounds.

Current procedures are done under such a principle, and we are not at all willing to yield this practice of using loan loss records as an accounting basis. I guess it would be one way to put all the loans made to 'Needs Attention'-categorized borrowers together and ask ''Now, what was the state of the loan loss records?''. However, considering that the loans made to 'Needs Attention'-categorized borrowers total to a fair amount, a feasible process would be to divide those loans into smaller groupings and figure out loan loss records for each grouping. So if respective weights of those groupings shift, an amount of provisions to be posted naturally gets calculated as a result of that. The resulting provisions are of a general characteristic as what we are talking about here deals with general provisions for loans.

Under such procedures, when, for example, a certain company whose share price goes below its face value is included in one of those groupings, a relevant loan loss record gets presented as a result. One should be able to figure out such a loan loss record by tracking down the relevant records. Thus I believe, if the weight of such loan loss records shows an increase or, in other words, if the loan loss records are in high numbers, that will be reflected in the calculation of a total amount of general provisions for loans as a result.

Well, that's basically how the procedures would work. So I think people got a bit surprised when they read in some of today's newspapers about a demand for amount increase, which is not necessarily precise. What was actually on my mind at that time was, based on the recommended method of grouping which is described as the best practice, it might be a good idea to conduct some research and development for the purpose of introducing market signals into the grouping process and, if possible, to actually put that into practice -- by giving thoughts to such an idea, I thought it might be good to introduce external credit ratings in addition to internal ratings, thus introducing more market signals in the process. Anyway, according to what I heard yesterday, the Commissioner will supposedly cover my comment, of which content I am not informed about yet. Well, that's all I have to say now.

Q.

By what you just said and according to your judgement, do you think that the amount of provisions for the loans made to 'Needs Attention'-categorized borrowers would increase considerably?

A.

I don't know about that. I really don't.

Q.

Does 'don't know' mean it would be impossible to know without putting it into practice?

A.

Impossible to know without putting it into practice... well, there are already some companies whose share prices are below 50 yen and it's not that their loan loss rates are excluded from the whole loan loss rates, so you can't say they're not currently reflected.

Nonetheless, I think they would be reflected more instantaneously in the end though I can't really know just by thinking this over in my head, whether or not the figure would be that different from the current one. The idea of viewing something to be 'impossible to know without putting it into practice' does not mean things should totally change after putting it into practice. I think a response or a timing of a part that should eventually change anyway would get faster.

Q.

Do you mean this issue will not develop into a discussion concerning yet another injection of public money?

A.

Naturally, I don't think it will. It is because this issue is already factored in the loan loss rate. It's not counted out, as you know. What we are contemplating is a scheme that would immediately reflect what is going on in the market 'at this point of time' [as appeared in the original Japanese text]. I believe it is here that listening to voices in the market becomes meaningful. I intend to have our officials giving proper answers concerning this scheme upon further examination of various technical aspects.