Press Conference by the Commissioner

(Excerpt)

6 August, 2001

Q.

As banks announced their business rehabilitation schemes on August 2nd, do you have any idea of actually issuing a management improvement order to the banks which have projected a net loss for the current term or no dividend payment on preferred shares?

A.

One single bank projected a net loss and the depletion of surplus causing a lack of funds available for dividend payment for the term ending March next year in its business rehabilitation scheme. I would assume that your question relates to whether we intend to issue a management improvement order to this bank.

As noted earlier, this bank is among the sixteen banks that were required to review business rehabilitation schemes, and such review, of course, includes one for the term ending March next year. In connection with this, the bank expects that it will incur a net loss and that there will be no funds available for making dividend payment. As the bank is one of the recipient banks of public funds, we have, of course, carefully examined what has caused this, and furthermore, checked whether the repayment schedule can be observed, and if so, what alternative measures will be taken. As a result, the bank has submitted to us schemes including stringent restructuring plans for the March 2002 term. Unfortunately, the bank projects a net loss for the term, and it is expected at this point that there will be no funds available for making dividend payment if things follow the course as projected.

This situation is partly attributable to a special circumstance in that four major customers of the bank were forced into judicial liquidation, but as far as we are concerned, given the situation as such, we do have plans to enforce drastic disposal of non-performing loans and thorough mandatory appraisal losses if the bank holds a larger amount of securities in comparison to other banks, and if the book value of such securities is high and from which future risks will arise. Even though the bank incurs a net loss in the March term next year, the bank pledges that it will strive to achieve so-to-speak a ''V-shaped recovery,'' and the Financial Services Agency is also of an opinion that to rid of all the problems in such a manner and then aim to achieve a V-shaped recover can be the best way of restoring confidence in the bank. Accordingly, we have let such plans announced.

Concerning a management improvement order to this bank, certainly there is a rule providing for situations where actual results have fallen short of targets by a margin of thirty percent or more and market confidence eroded, or the funds for dividend payment on preferred shares have actually run out. The bank, however, is still in the stage of projecting such results, and, as noted earlier, we are in the stage of monitoring whether the business rehabilitation schemes including stringent restructuring plans of the bank will be actually implemented, and we have no intention of issuing an management improvement order at this point. Let me point out that as far as the rules are concerned there is no such requirement.

Q.

Talking about projections of net operating profits, net profits and other profit-related plans contained in business rehabilitation schemes, banks across the board project extremely rosy figures for the periods three or four years from now. They appear to be expecting a V-shaped recovery following a couple of years of hard times, but it is questionable whether they can really achieve huge profits in three or four years from now. For example, given the current funding costs and lending rates, is it foreseeable that lending rates will rise significantly ahead of funding costs? There are a number of assumptions involved here, but didn't the Financial Services Agency have concerns that such projections are overly optimistic?

A.

Projections of profit by banks are basically dependent on two major factors; projections of net operating profits and disposal of non-performing loans. Concerning the disposal of non-performing loans, as we have a pretty good understanding of the approximate level of newly arising non-performing loans and the magnitude of existing non-performing loans, we have already have each bank compute the amount which will be required to be disposed if the policy of removing non-performing loans from the balance sheet is steadily followed.

However, as far as the amounts of non-performing loans which will newly arise are concerned, we have strongly urged banks to abide by the basic method which is linked to the average default ratio over the past three years, and how normal or general-attention loans shall be downgraded into special-attention loans and lesser categories have been strongly suggested to banks, and I would assume each bank has incorporated such treatment.

The point of your question concerns another major component, which is the projections of net operating profits. I would assume this issue will depend largely on to what degree lending rates can be diversified in proportion to lending risks and also to what extent restructuring efforts can be pursued, so to speak, in such a manner in which wet towels are wrung until they become completely dry. To answer your question directly, I will assume your question is projected net operating profits are somewhat optimistic. Basically, we have respected the judgement of each bank under the principle of self-responsibility, but I am well aware that many newspapers commented that projections are too rosy. In addition, the Koizumi cabinet positions the three-year period from now as a so-to-speak intensive adjustment period, and we feel that we will have to accept a considerably low growth rate for two or three years from now. Judging from viewpoint, each bank is projecting an upward trend in two or three years from now, and I personally feel that each bank is somewhat more optimistic than the way we view the situation.

But I want to mention one thing. In terms of diversifying lending rates in proportion to lending rates, the media frequently reports that in light of extremely excess competition and intensified competition in the financial sector, it would take time. But I personally feel things have changed significantly over the past one year. Personal conversations with bank presidents indicate that one single bank can not bring about this change, but major banks are thinking of the same thing and trying to move in the same direction. In that respect, the diversification of interest rates in proportion to lending risks has been considerably in progress. In particular, each bank appears to be considering the relations between minutely classified cautious customers and lending rates. In this regard, I would assume diversification of lending rates will progress in such a way. I understand that earnings projection of each bank is based on such scenario.