1. Introducing Prompt Corrective Action (PCA)
(1) Basic Approach
a. With the collapse of the "Bubble" economy, a large amount of banks' assets become bad loans. It can be said that this situation was caused by, on the one hand, banks not operating under the principle of taking responsibility, resulting in the soundness of their management being inadequate, despite increasing risks from liberalization, and on the other, traditional supervisory methods not being able to quickly find and correct Banks' unsound management in that changing environment.
b. Currently, Japan's financial administration is in the process
of being transformed into a transparent system, based the principle
of taking responsibility and market-discipline. The PCA, that
will be introduced in April 1998, is expected to be at the core
of the new financial administration.
c. The PCA is a new administrative means by which the supervisory
authority, using the objective standard of capital ratios, will
promote banks' sound management in the early stage, and issuing
necessary correction orders in a timely and proper manner to banks
whose capital ratio is below a certain level.
(2) The PCA Framework
a. According to the interim report of the Study Group on PCA, a private study group of the Director General of the Banking Bureau, Ministry of Finance, issued in December 1996, the framework of the PCA consists of the following:
(A) PCA is classified into three levels (the first step: order to make and implement a plan prepared by banks themselves to improve their management, the second: order to implement certain measures, and the third: suspension of business),
(B) As to the capital ratios, international uniform standards
(BIS standard) will be applied to those Banks that have foreign
branches; revised domestic standards, that is at a level between
international and domestic standards, will be applied to those
who do not have foreign branches.
b. As to the introduction of the concept of "discounted
present value", concerning loan loss provisions and write-offs,
the interim report left that to be addressed as a matter for future
consideration. The Business Accounting Council is currently considering
the accounting standards for financial products, including loans.
They are expected to make a final report by summer, 1998.
2. Promoting Reduction of Settlement Risk
(1) Reduction of Settlement Risk
a. As competition will be intense among banks, failure of some
banks with inadequate credibility or risk management ability will
occur. To secure the soundness of the financial system, it is
necessary to prepare arrangements by which the effect of a bank
failure on other banks and the financial system as a whole will
be minimized.
b. From this viewpoint, the smooth and prompt introduction of
RTGS for the settlement through BOJ-NET is required. Also, we
expect the private sector to promote the reduction of the risk
to the existing private clearing system, such as the Data Telecommunications
System of All Banks "Zengin System" and the Foreign
Exchange Yen Clearing System.
(2) Clarifying the Legal Validity of Close-out Netting Agreements Contracts
a. As derivatives transactions, etcetera, increase rapidly, close-out
netting agreements, a method under which all claims and obligations,
varying in currencies and value dates, are settled in masse in
case of the bankruptcy of one party, are being generally accepted
worldwide. Close-out Netting Agreements is effective at expanding
derivatives transactions, etcetera, by minimizing the effect of
a bankruptcy by one party to a transaction.
b. It is sometimes pointed out that there is some doubt as to
the validity of such agreements because of the non-existence of
any judicial precedent, though they are generally perceived as
valid under Japan's bankruptcy laws. To ensure the soundness
of the financial system and to vitalize derivatives and other
financial transactions and markets, it is appropriate to clarify
the legal validity of such agreements by legislative measures,
as was done in some foreign countries. We expect that positive
consideration will be given to submit necessary bills to the next
ordinary Diet session.