(Summary)

By the end of March 2001, a strong and unshakably competitive financial system should be rebuilt, including regional finance. To achieve this objective, financial institutions should basically complete the disposal of bad debts and subsequently ensure sufficient capital. Basically taking the same approach as in the cases for the fifteen banks, the Financial Reconstruction Commission (FRC) will make use of the capital injection scheme under the Financial Function Early Strengthening Law as early as possible

I . Basic Viewpoints

• Capital injections must be commensurate with local conditions. Sufficient consideration will be given to the provision of funds to local corporations in medium and small size.
  
  

• Capital injections must promote smooth flows of credit, thereby contributing to revitalization of the regional economy, i.e., improvements in business activity and employment.
  
  

• Capital injections must contribute to greater efficiency for the financial system by triggering new realignments of regional financial institutions.
  
  

• Financial institutions which meet the following will be given preferential treatment ragarding the size of and conditions on the capital injections:

-	those playing a major role in the provision of credit in the region;
-	those necessary for assuring appropriate competition in the local financial market;
-	those adapting to financial realignment in the region.

• The specific contents of the plan for restoring sound management will correspond with the conditions of the regional financial institutions. Applications will be examined in a timely manner whenever received.
  
  
  

II. Amount of Capital Injections for Regional Financial Institutions, etc.

• Capital injections will be of an amount sufficient for basically completing the disposal of bad debts, obtaining full confidence of the financial markets, and contributing to the stability of the local financial system. For the banks which is not internationally active, too, capital injections will aim not only the minimum levels of capital but those enough to cope with the possible future risks.
  
  

• Capital injections will be predicated on necessary and sufficient write-offs and provisioning according to the Practical Guidance of the Japanese Institute of Certified Public Accountant. Unrealized losses on securities will be taken account of. Posted tax effect will be compared with the forecast sum of tax payment for the next five years.
  
  

• If the applicant is an undercapitalized bank, the FRC's examination will consider its financial soundness, the potential for disposing of the acquired shares, and the impact on the local economy, since the capital injection is not for rescuing an individual institution.
  
  

• A crucially undercapitalized bank will be eligible only when its existence is indispensable for the local economy, which will condition that its share of loan outstanding is substantial in the region, and that the local business community is willing to cooperate to ensure its continued existence, for example, by subscribing to its capital raising on its own.
  
  
  

III. Terms for Underwriting Shares of Regional Financial Institutions

(provisional translation)

Basic Policies for Capital Injections for Regional Financial Institutions

Financial Reconstruction Commission
June 10, 1999

Depositors in Japan will be fully protected only until the end of March 2001, and by that time it will be necessary to rebuild a strong, unshakably competitive financial system, including regional finance. Achieving this objective will require that financial institutions obtain the full confidence of their depositors and markets, which will be realized when they basically complete the disposal of bad debts and subsequently ensure sufficient capital.

It is therefore desirable that regional financial institutions as well as larger financial institutions make use of the capital injection scheme under the Financial Function Early Strengthening Law as a supplement to their own self-help efforts so that necessary capital consolidation will be attained as early as possible.

Basically, the Financial Reconstruction Commission (FRC) takes the same approach to the capital injection for regional financial institutions as in the cases for the fifteen banks that applied in March 1999. However, it will also give special consideration to the following points.

I . Basic Viewpoints

• Capital injections must be commensurate with local conditions, for example, the importance and presence, etc. of the regional financial institutions in the region it serves. The FRC will give sufficient consideration to the role that the applicant financial institution plays in providing funds to medium-and-small-sized corporations in the region.
  
  
• Capital injections must promote smooth flows of credit though the regional financial institutions, thereby contributing to revitalization of the regional economy, i.e., improvements in business activity and employment.
  
  
• Capital injections must contribute to greater efficiency for the financial system by triggering new realignments suited to the current conditions of regional financial institutions, in addition to the general financial realignment that will accompany the financial system reform.
  
  
• In light of these considerations, the FRC will accord regional financial institutions preferential treatment regarding the size of and conditions placed on the capital injections in the following circumstances.

-	The applicant financial institution plays a major role in the provision of credit to the region and the capital injection can be expected to stimulate the local economy.
-	The continued existence of the applicant financial institution is necessary from the perspective of assuring appropriate competition in the local financial market and the capital injection can be expected to stimulate the local economy.
-	The capital injection will trigger financial realignment (i.e., merger or tie-up).

• The specific contents of the plan for restoring sound management will correspond with the conditions of the regional financial institution. Further, the timing of underwriting the shares, etc., associated with the capital injection will not be limited to the end of each accounting period; the FRC will examine applications in a timely manner whenever they are received.
  
  
  

II. Amount of Capital Injections for Regional Financial Institutions, etc.

• Capital injections will be of an amount sufficient to enable applicant financial institutions to basically complete the disposal of bad debts, obtain the full confidence of the financial markets, and contribute to the stability of the local financial system. In this respect, even for applicant financial institutions which is not internationally active, the FRC will aim to inject capital at such levels that will enable them to cope with risks that could be encountered in the future, rather than just providing the minimum levels necessary to meet the capital adequacy requirement applied to these banks.
  
  
• It is important in this regard that financial institutions basically complete the disposal of their non-performing loans through sufficient write-offs and provisioning therefor. Capital injections will be predicated, after the accounting period ending at September 1999, on necessary and sufficient write-offs and provisioning according to the recently revised Practical Guidance of the Japanese Institute of Certified Public Accountants.
  
  
• Examinations of capital injections will take account of unrealized losses on securities even if such losses have not actually been disposed of under current accounting standards.
  
  
• In accounting for tax effects, the FRC will examine the reasons why should the tax effect posted for taxable reserves, etc. exceed an amount calculated by multiplying the total forecast taxable income of the institution for the next five years by the effective tax rate for the corporate taxes and the like.
  
  
• The capital injection scheme is not for the purpose of rescuing individual financial institutions but for the purpose of stabilizing local financial systems. Therefore, if the applicant financial institution is an undercapitalized bank or in similar circumstances, the FRC’s examination will consider, from such a viewpoint, the soundness of the institution’s financial position, the potential for disposing of acquired shares, etc., and the impact on the local economy, etc.
  
  
• If the applicant is a critically undercapitalized bank, the examination will consider whether the continued existence of the institution is indispensable for the local economy. This will condition that the applicant institution accounts for a substantial part in terms of loan outstanding in the region, and that the local business community is willing to cooperate to ensure the continued existence of the institution, for example, by subscribing to its capital raising on its own.
  
  
  

III. Terms for Underwriting Shares of Regional Financial Institutions

• Underwriting will be conditional upon dividend yield, etc. in accordance with "Basic Policy for Dividend Yield of Preferred Stock"  (December 17, 1998).
  
  
• The same viewpoints as articulated in "Basic Viewpoints to the Capital Injections and Results of the Examinations of Applicant Banks"  (March 12, 1999) will apply in relation to the measures for business restructuring, rationalization, and adaptation to financial realignment proposed in the plans for restoring sound management. For example, the plans will be assessed in terms of their ability to improve the institution’s profitability and financial position by merger, spin-off of subsidiaries, and formation of capital and business alliances, etc. The results of these assessments will in turn be reflected in dividend yield, etc.
  
  
• For regional financial institutions, the assessments will also consider the institution's contribution to the local economy, paying due attention to its share of loan outstanding and its presence in the local financial market. The results of theses assessments will also be reflected in dividend yield, etc.