July 2, 1998
Government-Ruling Party Conference to Promote the Comprehensive Plan for Financial Revitalization

I INTRODUCTION

It is of highest priority and urgency for the Government of Japan to address the non-performing assets problem. We must grapple with the problem in a comprehensive manner, while quickly implementing necessary measures starting with those that are feasible.
From this viewpoint, the Government-Ruling Party Conference, announced on June 23 measures centering around the liquidation of land and loan assets and the promotion of effective utilization of land in the first report on the Comprehensive Plan for Financial Revitalization. We expect financial institutions to aggressively promote, hereafter, the disposal of bad loans by taking advantage of the conducive environment created by such measures. On the other hand, it is also very critical for the reconstruction of our economy to ensure the stability of the financial system and its restructuring by having financial institutions and others concentrate on the fundamental settlement of bad loans, thus securing confidence both at home and abroad.
Based on these considerations, the Conference has drafted the following measures.
These initiatives represent a system and mechanism that are both comprehensive and detailed, constructed around such pillars as (a) aggressive disposal of bad loans, (b) prompt restructuring of financial institutions, (c) improvement of transparency and disclosure, and (d) strengthening of bank supervision and prudential standards, to work toward the resolution of the non-performing loan problem.
We will make every effort to implement the measures as soon as possible, including, in particular, promptly submitting the necessary bills to the Diet.

II SPECIFIC MEASURES

1. Creating Systematic Framework to Promote Aggressive Disposal of Bad Loans

(1) Establishing Secondary Market for Bad Loans, etc.

To facilitate the marketing of bad loans by banks, it is critical to establish a secondary market with depth through the use of such methods as bulk sales and securitization. Aiming at promptly creating such a market, we will:

• promote the prompt disposal of bad loans held by private banks and the Cooperative Credit Purchasing Company (CCPC) at fair market prices;
• expand CCPC's functions and have it quickly resume its business of purchasing bad loans;
• promote the prompt disposal of bad loans held by the Resolution Collection Bank (RCB) and the Housing Loan Administration Corporation (HLAC) as well as make every effort to thoroughly collect claims on such assets, while having recourse to the obligation of both lenders and borrowers, and make appropriate arrangements for asset sales; and
• clarify cases in which principals of maximum hypothec are determined to facilitate the transfer of claims with maximum hypothec held by financial institutions to the CCPC as well as to promote the disposal of bad loans, and at the same time, take legislative measures to simplify the registration process for the determined principals of maximum hypothec.

(2) Enhancing Infrastructure to Facilitate Disposal of Bad Loans

The Law on Securitization of Specified Assets by Special Purpose Companies (or SPC Law) was approved by the Diet in the previous session to serve as a legal infrastructure to facilitate the disposal of bad loans by financial institutions through securitization. In preparation for its implementation on September 1 this year, we will continue to make the necessary preparations, such as working out the details of the Plans on Securitization of Assets. At the same time, we will promote the improvement of infrastructure for the disposal of bad loans by taking such actions as submitting to the next Diet Session bills to establish the Temporary Council for Coordinating Real Estate-Related Rights (tentative name).

2. Improving Transparency and Disclosure

To secure confidence both at home and abroad in Japan's financial institutions, a standard equivalent to the SEC standard has been adopted for the disclosure of bad loans since the accounting year ending March this year. Furthermore, the Financial System Reform Law, enacted in the last Diet Session, mandates, through sanctions, that all financial institutions disclose, following the standard equivalent to the SEC standard, their financial information on a consolidated basis starting from the accounting period ending March next year. Furthermore, as part of the initiative to adopt international standards on accounting and disclosure, we will aim to introduce mark-to-market accounting for financial instruments from March 2001.
In line with such developments, financial institutions and others will increasingly need to make their management styles more responsive to the market. Thus, financial institutions and others are expected to promote voluntary and aggressive disclosure to attract investors in the market.

3. Strengthening Bank Supervision and Prudential Standards

(1) Creation of a Financial Supervisory Agency

The Financial Supervisory Agency (FSA) was created on June 22 as a body to perform transparent and fair financial supervision based on clear rules, ensuring the move from oversight based on ex ante discretionary guidance to ex post facto checking oversight based on laws and regulations.

(2) Intensive Inspection of Major Banks

In accordance with Article 24 of the Bank Act, the FSA has already issued an order requiring financial institutions to report the results of their self-assessment of asset quality. Following these reports, the FSA will immediately carry out an intensive inspection of 19 major banks, in collaboration with the Bank of Japan, and further examine the current situation at these institutions.

(3) Strict Measures based on Prompt Corrective Action

Based on the results of the inspection, strict measures will be taken, if necessary, according to capital-adequacy-ratio classifications, including the use of Prompt Corrective Action ranging from implementation of management improvement plans to suspension of operations.

(4) Strengthening of Organizational Structure for Inspection, Surveillance, and Supervision

Inspection manuals and checklists incorporating external expertise will be adopted for government inspections, and made public by the end of this year. Also, follow-up on the improvements made after the inspection and monitoring, including continued analysis of financial statements, will be conducted, with the aid of a computer system to be set up for this purpose.
To strengthen and reinforce inspections in a wider sense, we will ensure that government inspections, internal inspections by financial institutions, and external auditing by certified public accountants are efficiently coordinated. We will also promptly decide upon a new mechanism for third-party operation of government inspections and introduction of private-sector expertise.
Regarding the inspection, surveillance and supervision functions of the FSA, we will systematically improve the organization, including substantial expansion, through a prompt review taking into account the organizational structure of financial inspection and supervisory authorities in other countries.

4. Stabilizing and Strengthening the Functions of the Financial System

While the administration will be transformed into one based on rules founded on market principles and the principle of self-responsibility, there may be cases where some financial institutions fall into trouble during the process of aggressively disposing of bad loans. Should such cases arise, it would be necessary to ensure the protection of depositors and the stabilization of the financial system, while at the same time taking appropriate measures for good-faith and sound borrowers.

(1) The Introduction of Bridge Bank

a. Basic perspectives

(i) In order to ensure the stability of the financial system and protection of depositors, it is important to strengthen the framework to deal with failure of banks promptly and effectively, particularly by expanding the existing scheme to cover those cases where no private receiver bank exists to assume operations of the failed banks, thereby restoring the confidence in the financial system as soon as possible.

(ii) It is also necessary to prepare a framework that contributes to providing appropriate measures for dealing with sound borrowers in good faith who cannot find new lenders in such a case.

(iii) For this purpose, an institutional scheme will be introduced for publicly administering the business of failed banks promptly after the failure of the banks. In addition, an institutional framework will be introduced that enables establishment of new public banks as bridge banks to maintain loans to sound borrowers in good faith even if no private receiver bank appears. In this case, the fundamental objectives should be to stabilize the financial system and to protect depositors by smoother resolution of failed banks through this framework, and from such standpoints, the Deposit Insurance Corporation (DIC) will be utilized.

(iv) A checking system for strict examination of borrowers and loans will also be established.

b. Concrete aspects of the scheme

The scheme is consisted of the following two stages and taken together, the scheme will be virtually equivalent to the bridge bank scheme in the U.S.

(i) Business management of failed banks by financial administrators (receivers)

• In case of failure of banks, the Commissioner of the Financial Supervisory Agency (FSA), if deemed necessary, will promptly appoint a financial administrator (receiver) who takes charge of administering business and management of assets of a failed bank.
  (Note) Measures should be put in place for recruiting persons qualified to be financial administrators.
• Rights related to representation, execution of business, management and disposal of assets will belong exclusively to the financial administrator. The financial administrator will make the details and circumstances for failure of banks to be clear.
• Failed banks will make loans to sound borrowers in good faith upon approval by the financial administrator, while paying due consideration to maintaining the soundness of the assets.
• Financial administrators will do their best to transfer the business of failed banks to private receiver banks as soon as possible, otherwise will transfer the banks to public bridge banks only in inevitable cases.
  From this standpoint, a legal framework for ensuring smooth transfer of the business of failed banks will be put in place (such as special provisions in case a shareholders meeting to decide the transfer of the business cannot be convened, and those for facilitating transfers of fixed mortgage (maximum hypothec)).

(ii) Establishment of public bridge banks

• The DIC will establish the "Heisei Financial Revitalization Corporation (HFRC: tentative name)" (which will be a bank holding company) by using public funds.
  (Note) The DIC will utilize \13 trillion public funds secured for stabilizing the financial system (earmarked for financial crisis management).
• The HFRC will establish and organize public bridge banks as its subsidiaries that assume the necessary financial functions of failed banks in accordance with the decision of the Examination Board of Financial Crisis Management (EBFCM).
  (Note) The bridge banks will not only receive public funds but also be available for capital subscription by the private sector.
• The Examination and Judgment Committee (tentative name) organized under the EBFCM, in accordance with appropriate standards decided by the EBFCM, will classify the assets of failed banks into loans to sound borrowers in good faith which are to be transferred to public bridge banks and those not to be transferred.
• In order to complement financing of public bridge banks, upon the decision of the EBFCM, the DIC will make loans to public bridge banks if necessary by utilizing the above-mentioned \13 trillion in public funds through the HFRC, and also cover losses borne by operations of pubic bridge banks.
• Public bridge banks will continue providing loans for a certain period to sound borrowers in good faith they take over from failed banks, upon approval by the Loan Examination Committee (tentative name) organized under the HFRC.
• Governmental financial institutions may provide necessary loans including those to sound borrowers in good faith on a case-by-case basis, upon recommendations of the public bridge banks.
  (Note) Funds for mitigating the credit crunch appropriated in the fiscal 1998 budget will be utilized.
• Public bridge banks are fundamentally transitional and temporary, and they will transfer the assets and liabilities which they take over from failed banks to other private banks within two years (with the possibility of up to three one-year extensions), by the transfer of business, for example.

(iii) It is necessary to make effort to maintain transparency in establishing and operating this scheme.

(iv) In order to establish this institutional framework, necessary bills will be brought in the next Diet.

(2) Utilizing the 13 Trillion Yen Fund of Government Financial Institutions to Cope with the Credit Crunch

Governmental financial institutions have secured an appropriation amounting to about 13 trillion yen for FY 1998, in order to cope with the credit crunch, and will continue to actively and properly handle the credit demands of small and medium-sized enterprises, middle-ranked corporation, and others.

(3) Merger, Acquisition, and Resolution, and Restructuring of Financial Institutions through Utilization of 30 Trillion Yen Secured by Two Laws for Financial Stabilization

In the course of the merger, acquisition and, resolution of the financial institutions, the stability of the financial system and the protection of depositors are indispensable. More specifically, thorough protection of depositors will be sought by utilizing the 17 trillion yen appropriated under two laws for financial stabilization, and restructuring of the financial institutions will be sought through timely and appropriate resolution of failed banks.
Furthermore, it is critical also that private financial institutions aggressively engage in resolution and restructuring. Therefore, complete implementation of the Plan for Ensuring Sound Management, including the appropriate disposal of assets, such as write-offs, allowance of reserves, and sales as well as restructuring, will be necessary to utilize the 13 trillion yen in public funds. We strongly expect that merger, acquisition, and resolution of the financial institutions and restructuring of the financial system will be accomplished through these measures.

(4) Preventing the Bailing out of Managers and Shareholders of Failed Banks

When resolving failed banks, it will be ensured that the managers are not bailed out but resign and are subject to prosecution in accordance with civil and criminal codes, and that the shareholders suffer the loss.

III. Summary

In preparation for the substantial reform of the financial system, Japanese financial institutions have to promptly dispose of their bad loans. The measures set out above, together with the concepts described in our first report on the comprehensive plan, present overall measures for the revitalization of the Japanese financial system.
We expect that the measures set out above will bring about the vitalization of the financial system and, further, the prompt recovery of the economy.