(Preliminary Translation)

The Summary of the Final Report of the Financial System Stabilization Committee, the Financial System Research Council

(December 22, 1995)

1. Prompt disposal of non-performing loans and the financial system of the future

It is necessary to construct a transparent financial system under which market mechanisms and the principle of self-responsibility of both banks and depositors would come fully into play. For that purpose, the supervisory authorities should encourage banks' disclosure of information and adopt new transparent measures of supervision to promote sound management of them. To take resolute steps in the process of disposing failing or failed institutions, improvements in the system and a diversification of tools in the deposit insurance system are necessary.
At the same time, we have to make the utmost effort to protect depositors and to maintain the stability of the financial system for about next 5 years. From such a viewpoint, special means beyond the ability of the current deposit insurance system should be introduced, involving the improvement of its legal, financial, and organizational structure on a temporary basis.

2. Measures for ensuring sound management of financial institutions

(1) Promotion of disclosure

The regional banks will have to disclose fully their non-performing loans as soon as possible. As for the Shinkin banks, the labor credit associations (the Rokin Banks), and the credit cooperatives, they have to complete disclosure of non-performing loans in principle by March 1998.

(2) Introduction of Prompt Corrective Action

The system of Prompt Corrective Action must be introduced, whereby the authorities would take administrative action, including issuing orders for the improvement of management, in a timely fashion based on objective criteria like capital adequacy ratios, etc.

3. Disposal of a failing or failed financial institution

(1) Basic idea

In the disposal process of a failed financial institution, what should be protected is not the institution itself, its management, its shareholders, investors, or employees; what should be protected is depositors and the stability of the financial system. Therefore, the preconditions for assistance from the Deposit Insurance Corporation would be

  1. to dismantle failed financial institutions,
  2. to make management resign and take responsibility thoroughly from civil and criminal points of view, and
  3. to impose a burden of loss on shareholders and investors. If financial assistance methods are adopted, both the concerned and interested parties must implement comprehensive rationalization measures and get maximum support from the related financial institutions.
Furthermore, the existence of borrowers as parties deeply concerned with management failures should not be forgotten, and it is important to make thorough efforts to collect outstanding loans.

(2) A disposal procedure for a failed financial institution and improvement in the deposit insurance system.

To facilitate smooth disposal operation, the following legislative measures should be taken.

  1. Improvements in legal system of disposal procedure as follows are necessary.
    1. Giving supervisors the authority to apply for the initiation of the bankruptcy procedure
    2. Establishment of a disposal procedure based on the procedures in the Corporate Reorganization Law
    3. Giving the Deposit Insurance Corporation a function as agent for depositors
  2. In order to diversify the disposal measures, it is necessary to introduce the system of deposit purchase, under which the Deposit Insurance Corporation, outside of a court procedure, would provide depositors with an amount of money equivalent to what they are expecting to be paid after the conclusion of the court procedurre, or it pays an equivalent amount of deposit insurance payment or the purchasing price for deposits to the take-over banks in the form of new deposits, so that the same disposal procedures as the P & A in the U.S. could be taken.
As for the issue on the inclusion of interests on deposits in the deposit insurance coverage, there is a problem that moral hazard on the part of both depositors and management of financial institutions is likely to be amplified by expansion of the insurance coverage. It is appropriate, therefore, that reform should not be made on this issue at this time.

(3)Interim framework for disposal of a failing or failed financial institution

Interim frameworks as follows are necessary:

  1. A special fund should be established at the Deposit Insurance Corporation as a temporary and exceptional measure for the next five years, so thatfinancial assistance will be made to fill the gap that cannot be covered by the pay-off method.
  2. Financial resources for establishing a special fund should be collected in a way that a special premium will be added to the ordinary premium. The total premium would have to be raised up to 7 times, which can be broken down into 4 times in terms of the ordinary premium, and 3 times in terms of the special premium.
  3. Two special accounts should be established separately: One a special account for ordinary financial institutions (called provisionally the Special Account for Ordinary Financial Institutions), and the other the Special Account for Credit Cooperatives (which is also a provisional name).
It is appropriate that the function as a capital subscriber be given to the special funds, which would thus enable them to make subscription to transferee financial institutions.

4. Issues concerning credit cooperatives

(1) Conversion of credit cooperatives into ordinary financial institutions For credit cooperatives that choose to pursue business development in the same manner as ordinary financial institutions, appropriate measures should be taken to enable the cooperatives to be converted into ordinary financial institutions, according to legal provisions.

(2) Strengthening inspection and supervision of credit cooperatives To ensure closer cooperation between the national and local supervisory authorities and the former's timely guidance to the latter, it is appropriate to establish regular meetings between them and to clarify conditions for requests by local authorities concerning joint inspections, and to make joint inspections an effective tool for prompt corrective action.

(3) Ensuring sound management of credit cooperatives, etc.

  1. As for rules on concurrent positions of board members of credit cooperatives, it is appropriate to amend the law and basically prohibit concurrent positions for full-time board members. Even if concurrent positions are admitted, it is appropriate to disclose the following items on business reports and disclosure documents:
    1. Situations of concurrent positions of full-time board members
    2. Situations of investment or loans made by the cooperatives to the companies at which the board members in concurrent positions are working, as well as to the members themselves.
  2. With regard to the introduction of external audits and the appointment of non-cooperative-member auditors for Shinkin banks, labor credit associations (Rokin banks), or credit cooperatives, it is appropriate to amend the law and cover institutions that are larger than a certain size with a certain proportion of deposits from non-cooperative members.

5. Disposal of failed credit cooperatives

(1) Public Funds
  1. Under current circumstances -- where a number of financial institutions are burdened with a large volume of non-performing loans and thus there exist financial uncertainties -- preparations should be made for financing disposal costs that exceed the maximum financial support available from the financial community, in order to protect depositors and maintain financial stability. Tax payers should be asked to bear the burden of the cost as indirect beneficiaries for the maintenance of the stability of the financial system.
  2. In view of the fact that most of the recent cases of bank failures are credit cooperatives, the use of public funds should be limited to the special account for financial cooperatives at the Deposit Insurance Corporation. Namely, after five years' of operation, if the special account for credit cooperatives is in deficit, despite the transfer of any surplus from the special account for ordinary financial institutions, it will be appropriate for the government to take appropriate fiscal measures. Since tax payers should not be asked lightly to share the cost, it is appropriate to review the premium for the special accounts three years later, taking into consideration the financial situation of the accounts and the financial institutions.
  3. Although financial assistance from the local prefectural governments should be made on a case-by-case basis, it is hoped that the such assistance be continued in the future.
(2) Establishment of the Resolution and Collection Bank
  1. As a temporary institution to facilitate the smooth disposal of any failed credit cooperatives during the next five years, it is appropriate to restructure the current Tokyo Kyodo Bank and convert it into a Resolution and Collection Bank (provisional name).
  2. The Resolution and Collection Bank will collect loans rigorously and promptly, utilizing every measure possible, including legal measures. The Bank will have a close cooperation with prosecutors and police authorities.
(3) The Deposit Insurance Corporation should give any necessary advice on management to the Resolution and Collection Bank, while at the same time providing funds from its special account.

6. The Jusen Problem

The problem of the Jusen companies should be addressed urgently in order to retain confidence in the financial system of Japan, to protect depositors, and to facilitate the recovery of the Japanese economy. The Council accepts the government's decision regarding the Jusen problem including the injection of public funds based on the agreement reached between the government and the government parties. However, the following measures should be taken in order to promote a better understanding among the Japanese People.
  1. It is necessary to clarify the responsibility of the Jusen companies and related financial institutions.
  2. With a view to pursuing the responsibility of the borrowers, the utmost effort will be made to dispose the collateral real estate and collect the loans.
  3. The authorities, based on the reflection of the policies in the past, should change their financial administration drastically to introduce a new financial system based on transparency and market discipline. The Council will continue to watch closely whether the disposal scheme decided by the Cabinet on December 19 will be implemented appropriately.