Press Conference by the Commissioner

(Excerpt)

27 May, 2002

Q.

The other day seven major financial groups released their account statements for the term ending in March 2002, in which it was revealed that the balance of non-performing loans (NPL) held by them has expanded up to 27 trillion yen in total, each bank has used up their resources and, in some cases, even tapped their reserves, thus causing their financial conditions to deteriorate.

If the deflationary economy continues on in the future, phenomena like corporate bankruptcy or business stagnation might be further spurred and it is also easily predictable that more NPLs would continue to be newly generated. In the meantime, banks have announced, as their forecast for the current year, that the NPL disposal could be confined within the amount of their net operating profit. Mr. Commissioner, I would like to hear your view on this based on these circumstances.

A.

In line with what you've just mentioned, the announcement of the 13 major banks last Friday showed that the NPL balance held by them as of the end of March 2002 skyrocketed by 6.1 trillion yen compared to September of last year, or by 8.8 trillion yen compared to March of last year. Analyzing these loans in the respective categories of ''Needs special attention'' and ''In danger of bankruptcy or below'' for further observation, it can be seen that the amount increased is approximately 4.9 trillion yen in the loans categorized as ''Needs special attention'' and approximately 3.7 trillion yen in those categorized as ''In danger of bankruptcy or below''. What are the main factors for these increases? Well, I gather that there are roughly three factors.

The first factor is the fact that the underlying economy deteriorated to a large extent towards March of this year, owing to the deflationary conditions. The second one stems from the application of the stricter criteria for loan categorization under ''Needs special attention'', as can be seen from the occurrence of the large increase in the loans categorized as ''Needs special attention.'' The third factor lies with the implementation of the special inspections, and let me explain why this is so. The special inspections were not simply concerned with the 149 companies alone because the chief characteristic of the inspections rests with doing asset appraisal on a real-time basis. In other words, based on the special inspections or the prospect for the implementation thereof, the 13 major banks quite thoroughly re-appraised assets associated with other loans on a real-time basis as well. In my opinion, no one could possibly deny the significant impact of the preemptive effect arising from such a process. The bottom line is that the preemptive effect of this sort has led to the increase in the NPL balance. I believe that these three factors are the reasons behind what happened.

Let me turn here to the forecast announced by the 13 major banks concerning losses from NPL disposal towards March of next year, which was calculated as 2.5 trillion yen. According to their explanations, the largest factor behind such a forecast was the fact that the NPL disposal associated with sizeable problem companies had come into sight, thanks to the special inspections. Another factor cited is that they applied the most recent loan loss ratio in making the forecast. On top of that, they also maintain that they have properly calculated additional losses and final disposal costs which are expected to arise as a result of writing off NPL from their balance sheets. I was given an explanation that the figure of 2.5 trillion yen had been obtained, based on the points that I have just described, by simply adding up the results accumulated individually for the 13 major banks, and I consider this to be a reasonable explanation in its own way.

However, each bank will naturally have to operate under the evolving economic conditions. Put in another way, whether the forecast turns out to be true or not will depend on how many loans will have to be newly classified as NPLs in the future. Considering that each bank has, as a matter of course, put aside resources in preparation for such a prospect, what is important here is for the economy to take an expected course during the current year, the course as charted in the ''Reform and Perspectives'' announced by the Cabinet Office in January of this year. I believe that this would be an important precondition for the forecast.

Q.

I assume that the Financial Services Agency has written a scenario for the NPL disposal based on such precondition presented by the Cabinet Office, but what do you think about the necessity at this point of time to review the scenario of solving the NPL problem by March 2005, or the lack of necessity thereof for that matter?

A.

The Financial Services Agency drew up the ''Provisional Estimate Concerning the NPL Problem Solution'' and presented it to the Council on Economic and Fiscal Policy in August of last year, but it is a stark fact that the actual development during FY2001 turned out to be quite wide off the mark envisaged at that time, and off in an upward direction. Well, is the scenario going to go awry on account of this alone? I don't think so. As I mentioned earlier, considerable weight of the preemptive actions is contained in the development during FY2001 and, for that reason, I believe that if one is to consider the whole matter based on the development taking place during FY2001, FY2002 and FY2003 as a whole, it is not necessary at this point of time to alter the scenario written in the Provisional Estimate. I do believe that it will be possible to solve the NPL problem by FY2004 and that we have to make the best effort to make it happen.

Specifically speaking, if banks were to exert themselves under the imperative to ''write off from balance sheets the majority of NPLs associated with borrowers categorized as 'In danger of bankruptcy' within, in principle, two years'' and under another further imperative to ''immediately write off NPLs relating to the results of special inspections without allowing two years to elapse,'' both of which were presented by the supervisory authority after August of last year, the process of write-off should go a long way and it should also become possible, in my opinion, to rapidly curtail NPLs that currently stand at 26.8 trillion yen.