Press Conference by the Commissioner

(Excerpt)

17 September, 2001

Q.

At the end of last week, major supermarket operator Mycal Corporation applied for court-mandated rehabilitation, which was followed by an announcement yesterday by Mizuho Financial Group consisting its main financing bank Dai-Ichi Kangyo Bank that the group would suffer from massive losses due to the increase in non-performing loans.

How will financial institutions be affected by Mycal's bankruptcy?

A.

At this stage, the details of its rehabilitation plan remain undecided. The company just applied to the court for the commencement of corporate rehabilitation procedures, to which the district court issued a preservative attachment order in response. Its rehabilitation plan is to be decided in the future.

So, we cannot say anything for sure at this point, but the Financial Services Agency is monitoring major banks about the preservative attachment status with respect to Mycal and the losses likely to be incurred as a result of Mycal's bankruptcy. We are carefully working out how the bankruptcy would affect the banks' capital adequacy ratio, and we may say that banks in the Mizuho group would suffer limited impact from Mycal's losses.

As a matter of course, loans to Mycal include those extended by other institutions as well, such as regional banks. As far as our findings are concerned, the amount of regional banks' loans is a couple of billion yen at most, so we expect the impact on the health of regional banks to be fairly limited.

Q.

Mycal had been in the ''needs attention'' category before being forced to go through reorganization proceedings under the law. Will this affect the treatment of companies in the ''needs attention'' category, including the administration of such companies and the criteria for provisions?

A.

Certainly, this incident has certainly posed a major issue.

In March, the banks had assessed the loans to Mycal on their own responsibilities. As you stated, however, if Mycal was really classified in the ''needs attention'' category, how could it go bankrupt just 5 or 6 months later? It is natural for you to be suspicious of the banks' self-assessment results. From our point of view, however, this is a highly unusual case, which may be referred to as ''sudden death''. As you already know, Mycal's accounts are closed in February and August every year, and its rating as of this February was BBB-. Although Mycal certainly had a large amount of interest-bearing liabilities, the company made a new mid-term, three-year plan to reduce those interest-bearing liabilities, based on which the company was rated BBB-. This might well have been followed by the banks' self-assessment in March, in which the banks put Mycal in the ''needs attention'' category, taking also into account the fact that, the company had more assets than liabilities as of March. Assuming that Mycal did not have more liabilities than assets, and also that its rating was BBB-, I would not think it was irrational for the banks to put the company in the ''needs attention'' category.

As you know, however, a lot happened to the company after that. In short, Mycal was downgraded from BBB- to B+ in the beginning of June -a dramatic 4-level downgrade, which I believe was primarily due to the failure of its new mid-term, three-year plan. As distribution businesses are based on customers' confidence and suppliers' credit, the downgrade rapidly undermined the terms and conditions for settling bills, and the company had to make more operating funds available on settlement day. Mycal went bankrupt under these circumstances, caused by cash flow problems. If the banks assessed Mycal in their own self-assessment when the company was about to go bankrupt, it surely should have been in the ''in danger of bankruptcy'' category.

The problem was that under the existing accounting system, banks were required to conduct self-assessment in March and September, and the self-assessment system was not capable of detecting dramatic credit contraction which had happened in such a short period. In that sense, I believe that Mycal's bankruptcy has urged us to consider how the accuracy of self-assessment should be assured by incorporating changes in external ratings as well as events arising between year-end and interim closing of accounts, and how banks should increase the provisions accordingly, so that the general public will have genuine faith in self assessments.

As Minister for Financial Services Hakuo Yanagisawa and I have already explained, we already ordered banks to increase the frequency of self-assessment, incorporating market signs such as share prices and external ratings in the process. We would not deny that the way in which we should tackle this could become an issue, and we acknowledge that. I regard Mycal's case as highly unusual, partly because it belongs to the distribution industry, and was due to the extreme ''sudden death'' scenario. In a sense, though, I think the accounting system under the commercial code, the practitioners' guidelines set forth by the Japanese Institute of Certified Public Accountants, and FSA's inspection manual are not necessarily sufficient in dealing with unusual cases such as this, including the rapid changes in the economic environment and this sort of rapid deterioration of credit in the private sector. As I have stated before, I believe the issue is how to maximize the accuracy of self-assessment by incorporating share prices, external ratings and other signals from the market.