1. The Financial Supervisory Agency ("the Agency") acknowledges that the non-performing assets problem in our country is deeply rooted in the lack of confidence in the financial condition of financial institutions as well as its public disclosure. Under the circumstances, the Agency has already undertaken a series of actions to remedy the situation fundamentally in conformity with a principle to pursue transparent and fair financial supervision based on clear rules. Specifically, we have issued an order for financial institutions to report the results of their self-assessment of asset quality according to relevant laws and regulations. Following the reports, we will conduct intensive urgent inspection, in collaboration with the Bank of Japan, of the 19 major banks. Based upon the results of the inspection, we will take, if necessary, strict remedial measures as required by the Prompt Corrective Action. The Agency believes that to respect fully this sort of definitive move, from the old oversight of the so-called "convoy system" to ex post facto checking oversight based on clear rules, will be an essential part to revitalize the financial system through securing confidence at home and abroad in the soundness of financial insitutions in Japan as well as inducing financial institutions to fully abide by market disciplines.
2. On the basis of the basic perspectives as mentioned above, the Agency believes that the following steps, including disposal of bad loans, should be taken for the financial revitalization. Public disclosure based on standards comparable to those set by the Securities and Exchange Commission (SEC) in the United States, and enforcement of market disciplines among financial institutions by the supervision of the Agency, together with various measures set out in the Comprehensive Plan to Enhance the Liquidity of Real Estate and Bank Loan Assets published on April 23, 1998, will facilitate the removal of bad loans from the balance sheet. In parallel with this, the reorganization of financial institutions is expected to advance through market mechanism. The Agency will make its utmost effort to stabilize the financial system utilizing, if necessary, the framework of public funds backed by the Two Acts for Financial Stabilization, and to minimize social and economic cost incurred by the failure of financial institutions through the utilization of the Bridge Bank system to be introduced.
3. On the other hand, securing confidence at home and abroad in
financial supervision is integral to the rejuvenation of the financial
system. While the Agency intends to take all possible measures
to fulfill its duties, it is essential to strengthen and reinforce
the organizational structure of the Agency. The Agency will immediately
start discussion towards realizing a new system for more effective
inspection, off-sight monitoring and supervision, as set out in
the Second Report of the Comprehensive Plan for Financial Revitalization
published today. For this purpose, we will make public an inspection
manual and carry out continuous off-sight monitoring of financial
institutions. Furthermore, we plan to introduce a new method aiming
to improve the quality of inspection by taking advantage of external
expertise, and to expand the personnel base of the Agency. Through
these efforts, we will establish an administrative organization
necessary for reconstructing the financial system.
[ Provisional Translation ]
July 2, 1998
Government-Ruling Party Conference
to Promote the Comprehensive Plan
for Financial Revitalization
I INTRODUCTION
It is of highest priority and urgency for the Government of Japan to address the non-performing assets problem. We must grapple with the problem in a comprehensive manner, while quickly implementing necessary measures starting with those that are feasible.
From this viewpoint, the Government-Ruling Party Conference, announced on June 23 measures centering around the liquidation of land and loan assets and the promotion of effective utilization of land in the first report on the Comprehensive Plan for Financial Revitalization. We expect financial institutions to aggressively promote, hereafter, the disposal of bad loans by taking advantage of the conducive environment created by such measures. On the other hand, it is also very critical for the reconstruction of our economy to ensure the stability of the financial system and its restructuring by having financial institutions and others concentrate on the fundamental settlement of bad loans, thus securing confidence both at home and abroad.
Based on these considerations, the Conference has drafted the following measures.
These initiatives represent a system and mechanism that are both comprehensive and detailed, constructed around such pillars as (a) aggressive disposal of bad loans, (b) prompt restructuring of financial institutions, (c) improvement of transparency and disclosure, and (d) strengthening of bank supervision and prudential standards, to work toward the resolution of the non-performing loan problem.
We will make every effort to implement the
measures as soon as possible, including, in particular, promptly
submitting the necessary bills to the Diet.
II SPECIFIC MEASURES
1. Creating Systematic Framework to Promote
Aggressive Disposal of Bad Loans
(1) Establishing Secondary Market for
Bad Loans, etc.
To facilitate the marketing of bad loans by banks, it is critical to establish a secondary market with depth through the use of such methods as bulk sales and securitization. Aiming at promptly creating such a market, we will:
(Note) Maximum hypothec is one
type of hypothec, which secures a series of both existing and
future credits within the contracted amount so that the amount
covered by the lien changes from time to time.
(2) Enhancing Infrastructure to Facilitate
Disposal of Bad Loans
The Law on Securitization of Specified Assets
by Special Purpose Companies (or SPC Law) was approved by the
Diet in the previous session to serve as a legal infrastructure
to facilitate the disposal of bad loans by financial institutions
through securitization. In preparation for its implementation
on September 1 this year, we will continue to make the necessary
preparations, such as working out the details of the Plans on
Securitization of Assets. At the same time, we will promote the
improvement of infrastructure for the disposal of bad loans by
taking such actions as submitting to the next Diet Session bills
to establish the Temporary Council for Coordinating Real Estate-Related
Rights (tentative name).
2. Improving Transparency and Disclosure
To secure confidence both at home and abroad in Japan's financial institutions, a standard equivalent to the SEC standard has been adopted for the disclosure of bad loans since the accounting year ending March this year. Furthermore, the Financial System Reform Law, enacted in the last Diet Session, mandates, through sanctions, that all financial institutions disclose, following the standard equivalent to the SEC standard, their financial information on a consolidated basis starting from the accounting period ending March next year. Furthermore, as part of the initiative to adopt international standards on accounting and disclosure, we will aim to introduce mark-to-market accounting for financial instruments from March 2001.
In line with such developments, financial
institutions and others will increasingly need to make their management
styles more responsive to the market. Thus, financial institutions
and others are expected to promote voluntary and aggressive disclosure
to attract investors in the market.
3. Strengthening Bank Supervision and Prudential
Standards
(1) Creation of a Financial Supervisory
Agency
The Financial Supervisory Agency (FSA) was
created on June 22 as a body to perform transparent and fair financial
supervision based on clear rules, ensuring the move from oversight
based on ex ante discretionary guidance to ex post facto checking
oversight based on laws and regulations.
(2) Intensive Inspection of Major Banks
In accordance with Article 24 of the Bank
Act, the FSA has already issued an order requiring financial institutions
to report the results of their self-assessment of asset quality.
Following these reports, the FSA will immediately carry out an
intensive inspection of 19 major banks, in collaboration with
the Bank of Japan, and further examine the current situation at
these institutions.
(3) Strict Measures based on Prompt
Corrective Action
Based on the results of the inspection, strict
measures will be taken, if necessary, according to capital-adequacy-ratio
classifications, including the use of Prompt Corrective Action
ranging from implementation of management improvement plans to
suspension of operations.
(4) Strengthening of Organizational
Structure for Inspection, Surveillance, and Supervision
Inspection manuals and checklists incorporating external expertise will be adopted for government inspections, and made public by the end of this year. Also, follow-up on the improvements made after the inspection and monitoring, including continued analysis of financial statements, will be conducted, with the aid of a computer system to be set up for this purpose.
To strengthen and reinforce inspections in a wider sense, we will ensure that government inspections, internal inspections by financial institutions, and external auditing by certified public accountants are efficiently coordinated. We will also promptly decide upon a new mechanism for third-party operation of government inspections and introduction of private-sector expertise.
Regarding the inspection, surveillance and
supervision functions of the FSA, we will systematically improve
the organization, including substantial expansion, through a prompt
review taking into account the organizational structure of financial
inspection and supervisory authorities in other countries.
4. Stabilizing and Strengthening the Functions
of the Financial System
While the administration will be transformed
into one based on rules founded on market principles and the principle
of self-responsibility, there may be cases where some financial
institutions fall into trouble during the process of aggressively
disposing of bad loans. Should such cases arise, it would be necessary
to ensure the protection of depositors and the stabilization of
the financial system, while at the same time taking appropriate
measures for good-faith and sound borrowers.
(1) The Introduction of Bridge Bank
a. Basic perspectives
(i) In order to ensure the stability of the
financial system and protection of depositors, it is important
to strengthen the framework to deal with failure of banks promptly
and effectively, particularly by expanding the existing scheme
to cover those cases where no private receiver bank exists to
assume operations of the failed banks, thereby restoring the confidence
in the financial system as soon as possible.
(ii) It is also necessary to prepare a framework
that contributes to providing appropriate measures for dealing
with sound borrowers in good faith who cannot find new lenders
in such a case.
(iii) For this purpose, an institutional
scheme will be introduced for publicly administering the business
of failed banks promptly after the failure of the banks. In addition,
an institutional framework will be introduced that enables establishment
of new public banks as bridge banks to maintain loans to sound
borrowers in good faith even if no private receiver bank appears.
In this case, the fundamental objectives should be to stabilize
the financial system and to protect depositors by smoother resolution
of failed banks through this framework, and from such standpoints,
the Deposit Insurance Corporation (DIC) will be utilized.
(iv) A checking system for strict examination
of borrowers and loans will also be established.
b. Concrete aspects of the scheme
The scheme is consisted of the following
two stages and taken together, the scheme will be virtually equivalent
to the bridge bank scheme in the U.S.
(i) Business management of failed banks by financial administrators (receivers)
(Note) Measures should be put in place for recruiting persons qualified to be financial administrators.
From this standpoint, a legal framework for ensuring smooth transfer of the business of failed banks will be put in place (such as special provisions in case a shareholders meeting to decide the transfer of the business cannot be convened, and those for facilitating transfers of fixed mortgage (maximum hypothec)).
(ii) Establishment of public bridge banks
(Note) The DIC will utilize \13 trillion public funds secured for stabilizing the financial system (earmarked for financial crisis management).
(Note) The bridge banks will not only receive public funds but also be available for capital subscription by the private sector.
(Note) Funds for mitigating the credit crunch appropriated in the fiscal 1998 budget will be utilized.
(iii) It is necessary to make effort to maintain
transparency in establishing and operating this scheme.
(iv) In order to establish this institutional
framework, necessary bills will be brought in the next Diet.
(2) Utilizing the 13 Trillion Yen Fund
of Government Financial Institutions to Cope with the Credit Crunch
Governmental financial institutions have
secured an appropriation amounting to about 13 trillion yen for
FY 1998, in order to cope with the credit crunch, and will continue
to actively and properly handle the credit demands of small and
medium-sized enterprises, middle-ranked corporation, and others.
(3) Merger, Acquisition, and Resolution,
and Restructuring of Financial Institutions through Utilization
of 30 Trillion Yen Secured by Two Laws for Financial Stabilization
In the course of the merger, acquisition and, resolution of the financial institutions, the stability of the financial system and the protection of depositors are indispensable. More specifically, thorough protection of depositors will be sought by utilizing the 17 trillion yen appropriated under two laws for financial stabilization, and restructuring of the financial institutions will be sought through timely and appropriate resolution of failed banks.
Furthermore, it is critical also that private
financial institutions aggressively engage in resolution and restructuring.
Therefore, complete implementation of the Plan for Ensuring Sound
Management, including the appropriate disposal of assets, such
as write-offs, allowance of reserves, and sales as well as restructuring,
will be necessary to utilize the 13 trillion yen in public funds.
We strongly expect that merger, acquisition, and resolution of
the financial institutions and restructuring of the financial
system will be accomplished through these measures.
(4) Preventing
the Bailing out of Managers and Shareholders of Failed Banks
When resolving failed banks, it will be ensured
that the managers are not bailed out but resign and are subject
to prosecution in accordance with civil and criminal codes, and
that the shareholders suffer the loss.
III. SUMMARY
In preparation for the substantial reform of the financial system, Japanese financial institutions have to promptly dispose of their bad loans. The measures set out above, together with the concepts described in our first report on the comprehensive plan, present overall measures for the revitalization of the Japanese financial system.
We expect that the measures set out above
will bring about the vitalization of the financial system and,
further, the prompt recovery of the economy.