Press Conference by the Minister for Financial Services

(Excerpt)

21 September, 2001

Today, the Cabinet meeting was followed by a discussion about the Advanced Reform Program between the Government and the ruling party. As I have just been informed that the Program was submitted to the Council of Economic and Fiscal Policy and resolved in original form, I would like to elaborate on the issues relating to the Financial Services Agency (FSA).

As you already know, the so-called ''Basic Policies'' (''Structural Reform in the Japanese Economy: Basic Policy for Fiscal and Economic Management and for Economic and Social Structural Reform'')include the structural reform of the securities market, the promotion of the disposal of non-performing loans (NPLs), and the radical solution of NPLs. The gist of the Big-Boned Policies being as such, the Advanced Reform Program defines the Policies in more concrete terms in consideration of the events that occurred subsequently, which was part of our original plan.

Parts of the Advanced Reform Program relevant to FSA are summarized in the section titled Structural Reform of Securities Market and Financial System in the document distributed to you. The structural reform of the securities market requires proceedings relating to the tax system in particular, and this is as explained in the handout. So, let me move on to explaining the next section, Strengthening of Disposal of Non-performing Loans (NPLs) and Revitalization of Financial Sector.

As mentioned in the paper, we intend to enhance the disposal of NPLs and revitalize the financial sector, simultaneously with the promotion of structural reform in other sectors, in order to solve the NPL problem by the end of the three-year intensive adjustment period at the latest, based on two targets, namely, the NPL ratio and the credit cost ratio.

To begin with, let me give you an explanation of paragraph (a) Smoothening Supply of Financial Resources. Lately, there have been many claims that so much attention is being directed at whether banks are complying with orders relating to the disposal of NPLs, or put differently, at the quantitative control of NPLs, that banks are reluctant to look for good deals and supply financial resources of their own accord, which are activities fundamental to financial institutions. Let us clarify our position one more time: while we acknowledge why much attention is being paid to the disposal of NPLs, and to quantitative control as a means to achieve that, we expect and prefer to see banks take a positive stance to make that happen, so that the financial sector will demonstrate its intrinsic functions. Although we understand how difficult it is for financial institutions to respond to such claims, we want them to overcome those difficulties and actively seek good deals.

As for (b) Prompt and Rigorous Responses to Ensure Soundness of Banks, this section advocates a number of measures we will take with respect to the disposal of banks' NPLs. The first part is about normal inspections, which you are already aware of. For the purpose of accurately identifying the status of NPLs, we will increase the frequency of normal inspections, and conduct follow-up inspections to make sure that the instructions given upon inspections would be fully observed in the next settlement of accounts.

I will skip the following two paragraphs in this section, and talk about the sufficient provisioning for listed companies within borrowers classified as ''need attention'', which I referred to during the lecture at the UK Financial Services Authority. Substantial attention is being paid to borrowers in the ''need attention'' category, especially from market players. As our efforts appeared to be insufficient in gaining market confidence, I asked my staff at the administrative level to tackle this issue before my visit to the U.S. and U.K. At that time, suggestions were made to require banks to conduct internal rating of borrowers classified as ''need attention'' in a manner that reflects various market signals, as explained in this paragraph.

Subsequently problems emerged. To be honest, when one of the major retailers went bankrupt, I acknowledged that our inspection findings are somewhat inconsistent with the facts, so I asked why this is the case to the staff at the administrative level. The fact is that the signals generated by the market lag substantially behind inspection. Hence, we sought a way to eliminate such a time lag. As stated in the document, we decided to focus on borrowers whose market reputations are remarkably changing, and on specific borrowers during the period of self-assessment by financial institutions, and enquire them as to how they assess such borrowers during the inspection. It is aimed at overcoming the weakness in the existing system, that is, the long delay in normal inspection after the borrower's settlement of accounts, and at promptly identifying the borrowers' status in a manner that reflects various targets and signals in the market. We will rely on such signals upon selecting borrowers that require assessment: in particular, we will look into the business performance of selected borrowers and classify them accordingly, but that does not mean we will be doing anything special in the process. Please be fully aware that we will select borrowers requiring inspection based on market signals, but the inspection itself will strictly be carried out based on the inspection manual.

If we take such thorough steps, the market should respond in a responsible way, reducing the probability of emitting arbitrary signals. If the borrower classification deviates from the classification confirmed by FSA in previous inspections, the borrower will be classified based on the inspection results, and necessary write-offs and provisioning will be performed accordingly, as a matter of course. In regard to external auditors, we will work jointly with external auditors in this process.

Borrowers who were classified as ''in danger of bankruptcy'' as a result of the special inspection will be required to promptly take one of the measures stated in the document, and deal with the situation in an adequate manner.

Major banks should be required to disclose management information more frequently. Naturally, banks must consider quarterly disclosure.

The last paragraph is concerned with capital injection - our stance has nothing to do with our obstinacy or any of the decisions we have made in the past. As we have repeatedly explained to you, we will do anything to fulfill our role, which is to stabilize the financial system and make the financial system fully function. Although things are tough at the moment, the figures derived from our simulation studies do not indicate that capital injection is necessary. Please confirm that systems and funds have been made available to deal with a financial crisis, as you know.

The next section is titled (c) Disposal of NPLs and Corporate Reconstruction by the Resolution and Collection Corporation (RCC), etc. There have been many media reports suggesting that the functions of RCC under the Basic Policies should be enhanced, especially in relation to corporate reconstruction. We assumed a concrete scheme for tacking this issue, and as described in this section, we wanted to allow flexibility in deciding the purchase price of NPLs more than anything else. I believe there will be some questions related to this, but for the time being, please wait until the decision is made -this issue is currently under discussion with the Liberal Democratic Party.

The next paragraph states that loans from the Development Bank of Japan (DBJ) will be utilized in DIP financing. The following paragraph is concerned with so-called ''de-leveraging funds''. Among various means available for corporate reconstruction, we specifically decided that RCC should participate in ''de-leveraging funds'' as a means of corporate reconstruction.

In the last section, entitled Points to be Considered in Removing NPLs from Balance Sheet, we stated that financial institutions should pay consideration especially to small and medium enterprises and make efforts that will assist the structural reform of the Japanese economy.

Q.

What kind of instruction were you given by Prime Minister Junichiro Koizumi upon the preparation of this Program? Also, the document states that the ''resolution of NPL problems will be attained at the latest in 3-year period of intensive adjustment'', whereas FSA had projected in the end of August that the balance of NPLs would remain more or less the same over the next 3 years, and that the balance would just start to decrease in 3 years time. Is it fair to call this a ''resolution of NPL problems''?

A.

Firstly, Mr. Koizumi instructed me to think of a scheme that will gain public confidence. That is what he is most interested in, and that was his instruction to me.

In three years time, the intensive adjustment period will have ended, and I would not think it is appropriate to say simply that the balance of NPLs would only start to decrease at this point. Our scenario is based on the recognition that the situation is stable and resolved when, say, the NPL ratio and the credit cost ratio approach 4% and 0.3%, respectively.

Q.

Both at home and abroad, some people are doubtful about the real resolution of the NPL problem under the Advanced Reform Program. What is your response to such skepticism toward the Program?

A.

Firstly, I have stated that the level of confidence we have gained is hardly satisfactory from my point of view. I believe that the biggest factor is the difference in assessment by the market (financial institutions) and FSA (the regulator and supervisor of financial institutions). The special inspection under the Program takes this into account, as part of our efforts to verify each and every bit of deficiency on our part that generates such lack of confidence, aimed at closing the gap as much as possible, instead of leaving such differences as they are. The idea is to ensure sufficient provisioning even for borrowers classified as ''need attention'', taking the market's signals into account. Please note that we do not intend to do this in an unruly, compromising, opportunistic manner. We will strictly carry out inspections, and we will establish a strict set of rules on provisions especially for borrowers classified as ''need attention'', which shall be observed, realized and implemented by banks. That is what we have in mind. We do not intend to reject or undermine the substantial efforts we have made hitherto.

However, if our efforts have led to the market's lack of confidence in us, we must address them in good faith. That is our point of view.