Press Conference by the Minister for Financial Services

(Excerpt)

November 29 , 2003

Today, the Ashikaga Bank, Ltd. reported its financial condition at the semiannual settlement of accounts as of end-September 2003 to the Financial Services Agency (FSA), and submitted a notification of the fact that ''the assets of the bank are insufficient to clear outstanding debts and there is a risk of ceasing to repay deposits and other debts based on the business or financial condition'' in accordance with the Article 74.5 of the Deposit Insurance Law.

Considering this situation, we held a meeting of the Financial System Management Council a while ago. Based on a decision by the Council, we made a determination on the necessity to take a measure for the Ashikaga Bank in accordance with the Article 102.1.(3) of the Deposit Insurance Law, and at the same time, decided that the Deposit Insurance Corporation (DIC) will acquire all the shares of the bank, namely the commencement of special public management.

The bank has a large number of depositors and borrowers including small- and medium-sized companies mainly in Tochigi prefecture. In light of the size of the bank and its extremely large lending market share in the prefecture, it is indispensable to maintain its financial operations in the region under the current financial circumstances. Taking all of these into account, we determined to take the measure in accordance with the Article 102.1.(3) of the Deposit Insurance Law in order to prevent any critically significant disturbances in the maintenance of orderly functioning of the financial markets in the region.

Under the new management team selected hereafter, the Ashikaga Bank is to undertake management reforms, while ensuring orderly operations as a special public management bank whose 100 percent of shares are held by the Deposit Insurance Corporation. Furthermore, when it is necessary for continuation of the bank's operations such as the repayment of deposits, the Bank of Japan (BOJ) is to provide liquidity based on the Article 38 of the Bank of Japan Law.

Under this framework, after the determination on the commencement of special public management, the Ashikaga Bank continues its businesses as usual and all types of debts including deposits will be fully protected and will be repaid at the due date without any problems.

As for lending, due consideration will be paid to bona fide and sound borrowers in view of high demand for loans towards the yearend.

In addition, we will establish an inter-agency liaison council on this matter as soon as possible, in order to ensure the stability of finance and economy of the region where the bank is operating.

We hope all of its depositors, customer companies and others would feel secure and calmly respond to the situation.

The existing management team of the Ashikaga Bank will resign and a new management team will be appointed as soon as possible. In this regard, we want to invite the new one from outside the bank.

We will request the Ashikaga Bank to make a management plan under the new management team. In order to ensure the transparency and appropriateness of the management, the plan should include establishing an audit committee to audit the progress of operations such as lending and asset disposal and the committee should consist of legal and accounting experts chaired by an outside director. Moreover, the plan should include transferring to a company with corporate governance committees after the ordinary general meeting of shareholders in June 2004.

Today, the FSA established ''Monitoring Team of the Management of the Ashikaga Bank'' to prevent the lack of governance until the management stabilizes under the newly selected management team, and is making utmost efforts to maintain the compliance of the Ashikaga Bank.

The Government will continue its commitment to making double assurance on the stability of the financial system and also on the protection of depositors and maintenance of orderly functioning of the financial markets in close cooperation with the BOJ.

Reporter: Could you tell us the amount of capital deficit and the capital adequacy ratio of the Ashikaga Bank at the end of September?

Director-General of the Supervisory Bureau: Its capital adequacy ratio was minus 3.7%, and its amount of capital deficit was 102.3 billion yen.

Reporter: When the Ashikaga Bank becomes a special public management bank, how much financial assistance will be provided?

Minister: The measure based on the Article 102.1(3) of the Deposit Insurance Law is a scheme that the Government steadily manages and revitalizes the bank properly and then transfers it to a new bank which accepts the former Ashikaga Bank. The amount of financial assistance will be determined when transferring the Ashikaga Bank to the new bank from the Government, but it is difficult to specify the exact amount at this stage, considering some precedents. In any case, the objective of the measure based on the Article 102.1(3) of the Deposit Insurance Law is that the Government steadily manages and revitalizes the bank and transfers it to the new management. In the meantime, deposits will be fully protected and the impact on the region will be minimized. As the measure based on the Article 102.1(3) of the Deposit Insurance Law seems to minimize credit crunch and credit withdrawal, we will firmly implement the measure in line with its objectives.

Reporter: This has been the first failure of a bank in one year and eight months since the end-March 2002. Is this an extremely particular case, or is the failure of banks likely to occur again in the future, due to systemic problems of regional financial institutions?

Minister: The Prime Minister mentioned the current status of Japanese financial sector very accurately. As you know, the amount of non-performing loans (NPLs) of major banks is steadily decreasing and regional financial institutions are also on the right track towards sound conditions in the context of relationship banking.
The Ashikaga Bank has been in a particular situation among regional financial institutions in Japan, in terms of various information from its financial statements. For example, its NPL ratio was 13.3%, which was about twice the average of regional banks and it had the second largest amount of NPLs among regional banks. In addition, the ratio of shareholdings to Tier I capital was 164% which was the highest among regional banks whose average ratio was 49%. Moreover, it extremely relied on deferred tax assets. Its ratio of deferred tax assets to Tier I capital was 186%, the highest among regional banks whose average ratio was 26%. According to the released figure as of end-March 2003, its capital adequacy ratio was 4.5%. This was the lowest among regional banks whose average ratio was 9.5%. Under these circumstances, I recognize that the Ashikaga Bank was in a particular situation while the overall financial sector is improving as a whole.

Reporter: All shares of the Ashikaga Bank are to be acquired by the DIC under the special public management. How will you deal with the common stocks and the preferred stocks of the listed holding company?

Director-General of the Supervisory Bureau: In conjunction with the acquisition of the Ashikaga Bank's shares by the DIC, the bank will be separated from the Ashikaga Financial Group, Inc. The Ashikaga Financial Group will only have the remaining subsidiaries. Therefore the assets of the holding company will decrease because of the separation of Ashikaga Bank's assets. The value is being calculated now. Even if there are excess assets, the amount of the assets is likely to be very few, so the value of the Ashikaga Financial Group's shares is expected to fall dramatically.

Reporter: In that case, will the public funds which have been injected so far be impaired?

Director-General of the Supervisory Bureau: In practice, 105 billion yen public fund injected in the form of preferred shares is largely impaired.

Minister: In this case, the existence of the holding company makes the matter slightly complicated. In any case, the large impairment of the value of its shares is truly regrettable, considering the shareholders' sentiment. However, the bank is insolvent and the value of its assets is negative. We are to strengthen our financial administration and the governance of banks within the current framework in order to prevent such events like this.

Reporter: What about the responsibility of the auditing firm? There was a large gap between the results of the bank's self-assessment and those of the FSA's inspection as of end-March 2003. In short, the bank has been in insolvent conditions. Is this merely due to the differences in perspective?

Minister: The auditing firm has responsibly conducted an audit based on timely information. Of course, when inspections are conducted, the results of the inspection will be different from those of the banks' self-assessment of assets. It is our current, ex-post-facto administrative style to narrow the gap by publicizing it. Taking these into account, the auditing firm approved the semiannual settlement of accounts as of end-September, 2003 and we recognize that the auditing firm has fulfilled its responsibility.

Reporter: What caused such a huge difference between the bank's self-assessment and FSA's inspection?

Director-General of the Inspection Bureau: According to the latest inspection, the estimated amount of additional provisioning to be written off proved to be considerable. This is due to a number of factors, such as the failure to accurately evaluation the actual condition of some debtors in loans, the inaccurate valuation of real estate and other assets mortgaged for loans, and the underestimation of the loan loss rate, which is used for calculating the allowance for loan loss as the estimated amount of future losses on loans. The combination of these factors led to a huge difference.

Reporter: In regard to the establishment of an inter-agency liaison council, please specify the participant government organizations and work schedule of the council.

Minister: No official decision has been made on the inter-agency liaison council in regard to your concern. In my personal opinion, the Cabinet Office, the FSA, the Ministry of Public Management, Home Affairs, Posts and Telecommunications, the Ministry of Finance, the Ministry of Health, Labour and Welfare, the Ministry of Agriculture, Forestry and Fisheries, the Ministry of Land, Infrastructure and Transport, and the Ministry of Economy, Trade and Industry should participate in the council. Furthermore, the participation of the BOJ and the Tochigi prefectural government is also required. There are various issues to be discussed. Especially, I think that we have to discuss the utmost utilization of government financial institutions, smooth financing to SMEs, utilization of various employment policies and measures for recovery of the region. As the entire Cabinet will deal with this matter, we have to consult with other Ministries and Agencies. I hope the council will properly deal with these matters in close cooperation with other Ministries and Agencies.