(Provisional Translation)
November 7, 2005
Financial Services Agency

The Outline of a Draft Revision to the Ministerial Notification of Capital Adequacy Ratio in Connection with the Proper Regulatory Treatment of Deferred Tax Assets

1. Background

The tax effect accounting, which began to be used in the fiscal year ended March 1999, is designed to adjust the differences between business accounting and tax accounting. These differences result from timing differences between the recognition of revenues and expenses for business accounting purposes and the profit and loss recognition in taxable income calculations. In the recent years, deferred tax assets have ballooned, due in part to the accelerated disposal of non-performing loans (NPLs), mainly among the major banks.

In this situation, a Financial System Council report (June 2004) stated that the fragility of deferred tax assets cannot be overlooked from the point of view of depositor protection and that it would be appropriate to introduce a proper regulatory treatment of deferred tax assets in calculating capital adequacy ratios. Accordingly, the FSA has been studying the specifics of such a rule.

2. Banks Subject to the New Rule

In view of the history of examination since the Program for Financial Revival was launched, the ''major banks'' will be subjected to the new rule. The major banks met their Program-stipulated goal of halving their NPL ratios in the fiscal year ended March 2005. The environment is thus believed to be ripe for implementing the proper regulatory treatment of deferred tax assets.

(Note) The ''major banks'' consist of the following banks and bank holding companies:
Mizuho Financial Group, Inc., Mizuho Bank, Ltd., Mizuho Corporate Bank, Ltd., Mizuho Trust & Banking Co., Ltd., Mitsubishi UFJ Financial Group, Bank of Tokyo-Mitsubishi, Ltd., UFJ Bank, Ltd., Mitsubishi UFJ Trust and Banking Corp., Sumitomo Mitsui Financial Group, Sumitomo Mitsui Banking Corp., Resona Holdings, Inc., Resona Bank, Ltd., Mitsui Trust Holdings, Inc., The Chuo Mitsui Trust and Banking Co., Ltd., and The Sumitomo Trust & Banking Co., Ltd.

3. Timing of Implementation

The Notifications Concerning the Capital Adequacy Ratio of Banks and Bank Holding Companies will be revised. In addition, separate notifications will be issued that specifies banks and bank holding companies that will be subjected to the revision.

When solicitation of opinions regarding the proposal is completed, it will be published in the Official Gazette and implemented hopefully starting with the end of March 2006.

(Phased Implementation)
The percentage (upper limit) of deferred tax assets booked in the Tier 1 of the equity capital will be gradually reduced in calculating capital adequacy ratios. The upper limit will be 40% starting with the end of March 2006; 30% starting with the end of March 2007; and 20% starting with the end of March 2008.