(provisional translation)
Basic Operating Policies for the Financial Reconstruction
Commission
Financial Reconstruction Commission
January 20, 1999
Finance plays an important function in the economy by smoothly supplying the funds
required for economic activities. For it to adequately fulfill this role, however, the
financial system must be stable and enjoy the confidence of domestic and foreign
participants. The facilitation of financial functions is therefore an indispensable
prerequisite to the revitalization of the economy, which itself is one of the most
pressing needs facing Japan.
Financial institutions sustained heavy damage during the collapse of the bubble economy
and have been left with large amounts of non-performing debts. These debts have yet to be
adequately disposed of, but institutions are already faced with even more severe economic
conditions. This has been undermining domestic and foreign confidence in the financial
system. We cannot procrastinate coming to grips with the bad debt issue any further. It
must be dealt with as quickly as possible.
Meanwhile, international financial transactions are becoming more active and financial
institutions are experiencing stiffer international competition. Japan must respond to
these developments by moving forward with its financial system reform that will create
dynamic financial markets on which free, market-based competition reigns. Accomplishing
this will require financial institutions to abandon their tendency to follow each other
and develop more distinctive business styles. Similarly, regulators will also have to do
away with “convoy-style” regulation in favor of clearly articulated rules and more
transparent administration.
The Financial Reconstruction Commission advocates that the following measures be put in
place quickly and intensively. The goal of these measures is aiming to ensure a
substantial completion of disposition of the bad debt, at least at the largest banks, by
the end of March 1999, and to rebuild the financial system into a strong, unshakably
competitive system during the period ending March 2001, i.e., during which the thorough
protection for depositors is legally committed to.
I. |
Assurance of the soundness of the financial positions of
financial institutions |
- Building firm trust in the financial statements of financial institutions is the first
step to restoring domestic and foreign confidence. Rigorous assessment of asset quality
and reserve provisions at financial institutions, coupled with timely and appropriate
disclosure, will ensure the soundness of the financial positions of financial
institutions.
- Financial institutions will be asked to clarify the exact situation of their bad debts
and carry out appropriate write-offs and provisioning so as to complete the bad debt clean
up as quickly as possible.
II. |
Early strengthening of financial functions (capital injections) |
- Institutions must have sufficient capital to proceed with the write-offs of and the
provisioning against bad debts, provide smooth flows of credit, and cope with risks that
may be encountered in the future. When it is difficult for institutions to raise this
capital on their own from the private sector, they will, under the provisions of the Early
Strengthening Law, be encouraged to use government guarantees to seek capital injections
of sufficient size.
- Restoring domestic and foreign confidence in the financial system will require the
rebuilding and restructuring of businesses and the realignment of financial institutions.
Financial institutions that fail to make these efforts will not be provided with capital
injections, while those that do endeavor to boldly rebuild their businesses and
rationalize their management will be given priority in the size and terms of capital
injections. This will improve the competitiveness and profitability of individual
financial institutions so that the government will be able to recover invested funds by
selling preferred shares and other capital instruments in the markets.
- One means of taking bad debts off balance sheets is to relinquish the credit, and there
are cases in which this is rational because it will help the borrowing company to rebuild
and therefore improve the certainty with which remaining credits can be collected. The
Commission will therefore allow capital injections to be furnished to financial
institutions that relinquish their credits, provided this is done in such a way as to
clarify the locus of managerial responsibility at the borrowing company.
III. |
Resolution of failed institutions |
- Financial institutions that are judged on the basis of objective inspections by the
authorities to be unable to achieve sound management will not be allowed to continue to
exist and, as mandated under the Financial Reconstruction Law, will be resolved in a
precise and transparent manner that conforms to global standards.
- In doing this, care will be taken to protect depositors and sound borrowers in
good-faith. Steps will also be taken to maintain the efficiency of the financial system by
transferring the financial functions and corporate value of the failed institution to
other sound financial institutions, and financial advisors as intermediaries will have a
significant role to play in this process. Meanwhile, the management of the failed
institution and bad-faith borrowers will be held to strict responsibility for their
actions.
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