Press Conference by the Minister for Financial Services

(Excerpt)

May 17 , 2003

Following a report from the Resona Bank stating that its capital adequacy ratio at the settlement of accounts as of March, 2003 was likely to be as low as 2%, lower than the ratio of 4% required of sound domestically operating banks, the Financial System Management Council held a meeting to deliberate whether a recapitalization based on the Article 102.1.(1) of the Deposit Insurance Law is necessary.

The council's verdict and the Prime Minister's statement in printed form were distributed to you. Let me read the Prime Minister's statement.

Statement by Prime Minister Junichiro Koizumi, May 17, 2003.

Today, I held a meeting of the Financial System Management Council and, after a decision by the Council, I made a determination on the necessity to take a measure to recapitalize the Resona Bank based on the Article 102. 1. (1) of the Deposit Insurance Law. I also set a time limit as May 30, 2003, by which the bank can submit an application for recapitalization.

Although, at the settlement of accounts as of March 2003, the capital adequacy ratio of the bank went below 4 percent which is the minimum requirement for sound domestically operating banks, the bank is not faced with problems such as deposit drain nor difficulty in raising money in the market at present. The measure to be taken this time is to recapitalize a financial institution not in failed conditions and to recover its soundness, which is different from measures for failed or insolvent financial institutions based upon the Article 102. 1. (2) or (3). Through this action, I will enhance the capital of the bank and thereby, prevent any critically significant disturbances in the maintenance of orderly functioning of the financial markets in Japan and in local areas where the bank is operating.

After this determination, the concrete decision regarding the recapitalization will be made based on an application from the bank. I intend to secure its capital adequacy ratio well in excess of 10 percent in order to ensure the stability in banks' businesses and not to raise concerns of depositors and others.

I believe that the soundness of the bank will be secured and its profitability will be enhanced through this recapitalization and thorough management reform. Since bank continues its businesses as usual and all types of deposits and transactions will not suffer from any problems, I hope all of its depositors, customer companies and others would feel secure.

At present, it is not in the situation where the implication of this event will affect the stability of the financial system. The Government is to continue to make assurance double sure on the stability of the financial system and also the protection of depositors and maintenance of orderly functioning of the financial markets in close cooperation with the Bank of Japan.

As seen from the Prime Minister's statement, the measure to be taken this time is not for a failed or insolvent financial institutions. It is a measure to assist the Resona bank in restoring itself to a sound state by sufficient capital injection. The bank will go on operating normally, so, I hope the depositors, customer companies and others would feel secure. Today the Financial Service Agency (FSA) organized a management monitoring team to keep tabs on the Resona Bank's compliance. We are to keep close watch over the bank through strict supervision and inspection.

Q.

Your determination on the necessity of public fund injection was supposedly made to avoid a crisis. Will you explain the ground for this determination?

A.

The Article 102 of the Deposit Insurance Law prescribes a measure to be taken in a so serious case that it may aversely affect the orderly functioning of the financial markets. In view of the significance of the scale and the foundation of activities of the Resona Bank, we held a Financial System Management Council meeting and determined capital injection into the bank. All these moves represent our strong will to prevent a financial setback from developing into a breakdown of the nation's entire economy.

Q.

Does it mean that all these moves were made to deal with a shortage of the bank's capital?

A.

Basically, we always have to take a prompt corrective action when a bank fails to meet its capital adequacy requirement.The decision we made, therefore, was that, in view of the difficulty for the Resona Bank to raise the necessary capital quickly from the markets and the foundation of the bank's activities and other relevant matters, we help it recover using public funds on the premises that the bank makes its own management reform efforts.

Q.

The Resona Bank's capital adequacy ratio dropped to 2%. Depositors of other banks will fear that the same thing may occur to their banks too. What's your explanation to them about that?

A.

Other banks are closing their accounts now. We understand that they are safe from such a decline at present. Resona's case is attributable to a number of causes. The bank initially estimated its capital adequacy ratio at 6% or so, but in actuality, it dropped to 2-odd percent. The difference is as large as 4%. Presumably, about two-third of the difference is due to the way of evaluation of the bank's deferred tax assets.

Q.

The management monitoring team is made up of six persons, and we are informed that seven more members will be added to the team. Are these seven additional officials of the Financial Services Agency?

A.

(Director-General of the Supervisory Bureau). They are officials of the Financial Services Agency.

Q.

Will you tell us about the role of the management monitoring team?

A.

The Resona will make efforts to restore its managerial soundness, boost its profitability and push forward its sound operations. On the other hand, the management monitoring team will carry on its activities with the main emphasis on its compliance within the framework of the Special Support defined in the Program for Financial Revival.

Q.

How much money will be required to raise the bank's capital adequacy ratio to 10% and why is the capital adequacy ratio of 10% necessary?

A.

We earnestly expect that the bank will restore stable and sound operations, and increase its profitability by capital injection and thereby contribute to the areas in which the bank is operating and ultimately to the entire Japanese economy. Some regional banks and some other financial institutions have a capital adequacy ratio as high as 11 - 12%. We expect that Resona will push forward its reform on a solid basis backed by a capital adequacy ratio above 10%.

Q.

How much will the public fund injection amount to?

A.

The necessity for injection is determined today and details of the injection are to be decided on after the bank's application for recapitalization. Those details will include the amount and the modalities of the injection. They will be determined after thorough assessment.

Q.

Will the bank's capital be decreased?

A.

The measure to be adopted this time is utterly different from the one prescribed by the Article 102, 1, (3) of the Deposit Insurance Law, by which all its shares were acquired by the government, and consequently, the value of the other shareholders' equity was reduced to zero, like the case of the Long-Term Credit Bank of Japan. The measure to be taken this time is not nationalization but injection of public funds as a public support. There is absolutely no likelihood of decrease of the capital by decreasing the number of shares or by reducing the shareholders' right to zero as in the case of the Long-Term Credit Bank of Japan.

Q.

Do you mean that there will be no partial decrease of the capital such as reduction of the number of shares?

A.

Essentially, reduction of shareholders' responsibility by way of capital decrease is out of the question.

Q.

But the markets may make a negative response since the bank will groan under a very heavy dividend burden and may not recover on its own easily.

A.

It will be up to the bank to decide whether to pay a dividend according to its result of operations. This is simply a managerial problem to be solved by the bank for itself.

Q.

The recently announced corporate governance enhancement policy refers to a possibility of exercising the conversion right in the case a measure is taken under the Article 102 of the Deposit Insurance Law. What principle do you have in mind with regard to the exercise of the conversion right?

A.

A determination on the necessity of the injection of public funds was made today. We are to decide on details of the injection and the treatment of preferred shares we already hold after reception of the bank's application for recapitalization. We are to make an adequate study according to the rule and in pursuit of a satisfactory effect of the measure.

Q.

Please let us hear your view of the way of assuming managerial responsibility Resona decided on. Public funds were injected into the bank twice in the past. What do you think of the administrative responsibility for the necessity of the injection for the third time?

A.

The present executive officers of the bank, I hear, will resign to take their responsibilities. Younger individuals will be picked out as their successors to push forward the necessary management reform. In addition, an individual with rich management experience and a fine achievement record will be asked to take up the post of chairman of the board for the Resona Holdings to strengthen its managerial power. The combined total amount of remuneration and bonuses will be reduced about 30%. We also hear that the number of the bank's affiliated companies will be practically halved. Other measures including appointment of younger executives and the reduction of the number of executives will be taken for those companies. All such attempts at managerial reform are welcome. We feel regret over the need of public fund injection into the bank more than once in the past and the recent recurrence of the need. But the measure adopted this time is not intended for any failed or insolvent financial institution. Its objective is to assist the bank in its recovery. Since public funds will be injected to the bank, I expect that its executives will lead the bank successfully out of the present difficulties. We are to keep close watch over the bank from the standpoint ofsupervisors as well as inspectors.

Q.

You said that the bank's capital adequacy ratio is 2% or so. Is there a concern of the insolvency? Is that ratio based on solid evidence?

A.

(Director-General of the Supervisory Bureau). A report is required under the Article 24 of the Bank Law and other provisions. We are informed that the bank will conduct an internal audit for itself and will undergo an external audit also. Since the bank is of course obligated to submit an accurate report, we believe that an accurate report is accordingly made to us. The report will be analyzed, and when an inspection is conducted, a check will be made to see if the report is false or not.

Q.

We know of cases in the past where presence of excessive liabilities had been denied but their presence was later revealed. Are you sure the Resona Bank is really solvent?

A.

I have to admit that there was something questionable with our assessment of assets of some failed financial institutions in the past. But we have been making strenuous efforts for improvement, and we are fairly confident that our asset assessment is quite strict at present. The discount cash flow approach and other new methods were incorporated in the Program for Financial Revival. If a discrepancy is noticed between the result of a financial institution's self-assessment and the result of our assessment, it is made publicly known to bring public pressure on the institution. For a team which has a hard-to-evaluate reconstruction plan under its charge, a reconstruction plan verification team is organized in a subsection of the Inspection bureau. The team, which includes experts from the private sector, is charged with a mission to verify the reconstruction plan. A special inspection is again conducted to supplement a regular asset assessment. To the best of our knowledge, the assessment of assets by banks is free of a fault. We will make further efforts and rigorously supervise banks on the basis of the inspection results and the account closing data built on those results.

Q.

We understand that the merger of the Daiwa Bank and the Asahi Bank was approved in March this year. Within less than one month from that, a capital deficit was detected on the new bank as a result of account closing work. Will you tell us about your view of the agency's supervisory responsibility for the approval?

A.

The conditions for approval are prescribed by the Bank Law. Strictly speaking, these conditions for approval are different from the supervisory conditions. We form our judgments on the basis of the correctness of business practices and other matters at the time our approval is given. A question about this point was put to me earlier. Anyway, an overall evaluation of the deferred tax assets of the bank was recently made in consultation with the auditing firm for the bank and others as a total judgment. DTAs may be regarded as a profit realizable in the future. We believe that we always passed the best judgment based on the best information available at the time.

Q.

Whether injected public funds should be repaid or not is a controversial matter. Resona is not a failed or insolvent bank. Nor was it nationalized. I wonder whether giving away public money to a bank in need of support as if it were a subsidy is proper use of taxpayers' money.

A.

The primary fundamental element of the Program for Financial Revival is proper asset assessment. A question was put to me earlier about this point. After proper asset assessment, ample equity capital should be then secured. Next a proper corporate governance system should be set to work. These were the basic elements initially specified. I am under the impression that you are wondering if the taxpayers will not tolerate Special Support to a financial institution devoid of such corporate governance. Of course, the main focus of our supervision is on the total corporate governance of financial institutions.

A.

(Director-General of the Supervisory Bureau). As the Resona Bank is not a failed or insolvent financial institution, the measure to be taken this time is not compensation for the loss with public funds. Public funds will be injected this time on condition that they should be returned by a prefixed point of time in some way in principle--for example in the manner prescribed by the Early Strengthening of Financial Function Law. No time limit by which the injected funds must be recovered is fixed if common stock is acquired with the injected funds. But if the corporate value rises and the stock price rises accordingly, a surplus over the injected amount will be gained. Anyway, public funds are injected on condition that they should be recovered.

Q.

We understand that a financial institution receiving Special Support is required to separate the two accounts inside its organization and to restore its sound operations in 3 to 5 years. Isn't it preferable to aim at quick restoration by transferring bad assets to the Resolution and Collection Corporation or the Industrial Revitalization Corporation of Japan at an early stage. In that case, however, the loss may increase, and the injected public funds may be simply eaten up. What do you think of this?

A.

Let me clear up a little misunderstanding. Separation of the two accounts, old and new, is for the purpose of the accounting management. Under the administrative-accounting principles, the newmanagement cannot be entirely responsible for the old account. Instead, those principles demand that the new management should undertake full responsibility for the new account. It is unlikely that the old account, separated from the new one, will be immediately transferred out of the organization.