A Bank Crisis in a Bank-Centered Financial System 
- The Japanese Experience since the 1990s -
October 2002
Akiyoshi Horiuchi **
(University of Tokyo)
Abstract
Relationship banking makes banks’ loan assets opaque to outsiders. The
opaqueness of loan assets accounts for the delayed process of disposing
non-performing loans by obscuring the critical situation of the Japanese banking
sector since the early 1990s. We have observed that capital market mechanism
cannot develop so promptly as to compensate for degeneration of relationship
banking. Then, should we hurry to dispose of non-performing loans? Only if the
quick disposition will lead to a quick reconstruction of relationship banking, the
answer to this question is “yes.”

This is a revised version of the paper presented at the International Financial
Symposium Overcoming Financial Crisis: Financial Reform in Asia organized by
the Korean Deposit Insurance Corporation and Asia Pacific Economic Association
held on October 25 th , 2002 in Seoul. The author acknowledges helpful comments
given by Yung Chul Park, Yoon Je Cho, and Ralph Byun on the original version
of this paper
**
E-mail address: horiuchi@e.u-tokyo.ac.jp
Introduction
Japan has suffered from the ill-effects of a long-lasting bank crisis that
began in the early 1990s. Table 1 summarizes the data regarding non-performing
loans of Japanese depository institutions (i.e., the banks and the cooperative
financial institutions) since March 1998, when they first began to disclose figures
based on comprehensively defined ‘risk management loans.’ The definition of risk
management loans is comparable to the definition of non-performing loans
adopted by the SEC in the United States. Table 1 shows that during the last few
years the amount of non-performing loans has increased to ¥53 trillion, around 10
percent of GDP. The portion of non-performing loans not covered by the reserves
for loan losses was 3.7% of the total loans in March 1999, which almost doubled
to 7% in March 2002. 1
According to Table 2, which shows the annual number of bank failures,
more than 170 depository financial institutions have gone bankrupt since 1992
because of the increasing amount of non-performing loans. Up until the end of
fiscal year 2001 (March 2002), the Deposit Insurance Cooperation (DIC) spent
more than ¥22 trillion to deal with the failed institutions (Table 3). The
government injected almost ¥10 trillion of the public funds into major banks to
1
On May 24, 2002, all of the Japan’s major banks (13 banks) reported the
amount of non-performing loans existing at the end of March 2002. According to
the reports, the total amount of those banks’ non-performing loans increased to
around ¥27.2 trillion on the consolidation bases, which was 47% larger than that
observed one year ago. To dispose of the bad loans, the major banks spent more
than ¥8.0 trillion, which was more than twice of their current earnings from
１
help strengthen their capital bases in 1998 and 1999.
In addition to the injection of public fund, the Japanese government has
taken various policy measures in an attempt to resolve this bothersome problem.
In particular, the government has expanded the capacity of the Deposit Insurance
Corporation (DIC) to promote banks’ disposition of their non-performing loans.
At present, the DIC not only financially supports the process of dealing with
failed banks, but also purchases loan assets through the Resolution and Collection
Corporation (RCC) to help banks restructure their balance sheets.
However, Japan has not yet succeeded in regaining financial stability. Even
now there exists a great degree of uncertainty as to whether many banks will be
able to maintain capital reserves in the face of a continual increase in the amount
of bad loans and a decline in the value of bank shareholdings. On September 18 th ,
in a somewhat astonishing policy announcement, the Bank of Japan (BOJ)
announced it would purchase shares from major banks that have suffered capital
losses caused by the recent drop in share prices. The unconventional policy
adopted by the BOJ symbolizes Japan’s policy makers’ impatience to restore
stability to the banking sector. 2
Why has Japan suffered from the non-performing loan problem for such a
long time? Why has the Japanese government failed to settle the non-performing
businesses.
2
In my view, this BOJ’s policy will have no significant influence on share prices.
The aim of the BOJ is reported to criticize the government’s noncommittal
attitude toward the banking sector and insisting a drastic policy to force banks to
remove the non-performing loans from their balance sheets as soon as possible.
２
loan problem in the banking sector quickly? We can answers this issue from
various angles. For example, we should note the fact that the Japanese economy
lost growth potential in the early 1990s. Demographic factors, such as a rapidly
aging society, could account for some of this loss of growth potential. Also the
over-capacity accumulated during the so-called ‘bubble period’ of the 1980s may
have depressed the industrial sector’s incentives for new investment. The sharp
decline
in
growth
potential
may
have
triggered
successive
bouts
of
non-performing loan problem. The government’s policy of forbearance might be
responsible for the persistence of the banking crisis.
This paper investigates this issue from the perspective of a theoretical
analysis of Japan’s financial system. Historically, Japan has depended on a
bank-centered financial system where the intimate relationship between banks and
their client firms dominates the process of financial inter-mediation and where the
capital mechanism plays a relatively unimportant role. Many scholars point out
the merits of relationship banking in that it mitigates various difficulties
associated with the agency problem stemming from information asymmetries
between fund-suppliers (ultimate savors) and fund-raisers (i.e., borrower firms).
Fundamentally, relationship banking needs no trading of information about
borrowers and keeps the quality of banks’ loan assets mostly undisclosed. This
can be a merit because the information is a ‘lemon’ which is difficult to trade.
Moreover, some firms prefer relationship banking because they are not required to
disclose information which they want to conceal from rival firms. In con trast to
relationship banking, the capital market mechanism is based on the market trading
of information. However, the trading of information incurs higher cost without an
３
infrastructure built around a reliable auditing system that ensures adequate. The
infrastructure is costly to be built up. 3 Thus, it would be impossible to transform
the financial system based on the relationship banking to the capital market based
system in a short period.
The merit of the relationship banking, however, deprives the banking sector
of resilience when most banks are suffering with bad loan problems. It is costly
for the government to assess the quality of loan assets held by individual banks.
The opaqueness of banks’ loan assets hinders the government from timely
intervening into bank management. Moreover, the opaqueness of banks’ loan
assets obscures the government policy regarding a bank crisis so that people
cannot accurately assess whether or not the government policy is appropriate. This
paper discusses how those features of the relationship banking have influenced
specific processes of disposing of non-performing loans and have hindered quick
resolution of Japan’s banking crisis.
In the next section, I summarize the theory behind relationship banking in
section 2, which stresses the opaqueness of banks’ loan assets peculiar to
relationship banking. In section 2, I explain specific developments since Japan ’s
banking crisis began in the early 1990s. A key conclusion is relationship banking
has influenced Japanese government decision-making regarding the bank crisis.
3
For example, rating agencies are important producers of information about
fund-raising firms in the capital market mechanism. It would take a long time to
establish a well-functioning rating system in the financial system because the
rating information is also a lemon good. Rating agencies need a long time to build
up the reputation as reliable sellers of information.
４
Section 3 examines how the Japanese government has been influenced by specific
features of relationship banking. Section 4 discusses what we should do at present
to deal with the bank crisis based on this paper’s analysis.
2. Relationship Banking: A Theoretical Overview
Current economic theory defines the function of banks as a social institution
to reduce the agency costs associated with financial inter-mediation occurring
under information asymmetries. In particular, banks can closely monitor borrower
firms and precisely control the risk of corporate management through long-term
relationship with their clients. In Japan banks are allowed to hold shares of their
client firms, thereby unifying interests of debt holders and those of equity holders.
This financial unification could reduce the agency costs caused by the conflicts of
interests between creditors and shareholders (Stiglitz (1985)). It can also enhance
banks’ capacity in monitoring client firms. Thus, the essential function of banks
can be defined as collecting information and assessing information regarding the
client firms (e.g., Diamond (1984), Hellwig (1989) and Rajan (1992, and 1998)).
Information processing in relationship banking: Aoki (1994) describes the
Japanese traditional ‘main bank system’ as a banks’ monitoring mechanism during
the three stages of the loan contract with firms, i.e., at the ex ante stage
(examining the firms’ credit worthiness), at the interim stage (watching
borrowers’ management in order to prevent their opportunistic behavior), and at
the ex post stage (determining the possibility of future recovery of funds from
５
financially distressed borrowers). Japan’s main bank system is a sort of
relationship banking where the repeated transactions between banks and firms
could be effective in transferring specific information regarding borrowers ’
management.
The most conspicuous feature of relationship banking is that it makes
information about the borrowers’ management relatively opaque to outside parties.
As a result, it is difficult for agents outside the relationship to assess the value of
the borrowers’ debt. The opaqueness will be convenient for fund-raising because
it prevents dissemination of information firms want to keep from their rivals.
More importantly, information is a ‘lemon’ which is traded in the market only
with high costs. Relationship banking avoids this costly process by unifying
producers and end-users of information in a single unit, i.e., a bank (e.g.,
Campbell and. Kracaw (1980)).
Needless to say, relationship banking is not unique to the Japanese financial
system. We observe similar (sometimes stronger) relationship between major
banks and major companies in Germany called as the ‘Hausbanken’ (Edward and
Fischer (1994), and Baums (1994)). Even in the United States the relationship
banking has played an important role particularly in financing small and medium
size businesses (Pertersen and Rajan (1995), Kroszner and Strahan (1999), and
Bodenhorn (2001)).
The function of a financial system based on the capital market forms a sharp
contrast to that of relationship banking. The financial system based on the capital
market fundamentally depends on information traded through open markets and
on reliable rules of disclosure. Market prices of individual firms’ debt and equity
６
are supposed to reflect the information regarding the quality of the firms ’
management. Compared with relationship banking, the open capital market
disseminates the relevant information of the fund-raising firms, and thereby makes
it easier for investors in general to assess the quality of debt and equity issued by
the firms. 4
Relationship banking is based on a bilateral monopolistic transaction
between the bank and its borrower firms. The long-term relationship with a
specific firm helps the bank to monopolize information on the firm. The banks
could take the future business opportunities of the firm into account when they
determine loan pricing (Sharpe (1990), and Rajan (1992)). Furthermore, the banks
play a particularly important role when the borrower firms fall into financial
distress. Since nobody has information of the quality comparable to that possessed
by the relationship bank (‘the main bank’ in Japan), the bank is almost inevitably
involved in dealing with firms that fall into financial distress. Theoretically, the
bank should rescue firms by extending additional credit when the possibility of
their recovery is estimated to be sufficiently high. But when the firms are hopeless,
the bank should liquidate them in the most efficient way (Rajan (1992)). 5
4
The efficient dissemination of information is so crucial to the capital
market-based financial system that misbehavior of essential agents such as
auditing companies seriously disturbs the capital markets model. This is what we
have observed in the US since last year.
5
In the United States, the legal doctrine of ‘equitable subordination’ makes
banks’ stakes of distressed firms subordinate to other creditors’ stakes when the
banks make a commitment to rescuing those firms. Thus, this doctrine prevents
US banks from being active in rescuing distressed firms. See Prowse (1995).
７
Thus, the pricing with respect to credit risk in relationship banking is
substantially different from that of the open capital market where the estimated
default risk of individual borrowers is simply incorporated into the interest rate
margins of ‘risk premium.’ The banks must consider the contingency where they
will intervene into programs of dealing with their client firms in financial distress.
In practice, since the client firms’ debts are not traded in the relationship banking
system except for a few large companies, banks cannot depend on the market
information to assess client firms’ credit risk.
Loan pricing in relationship banking: Because of the banks’ indispensable
role in the process of dealing with financially distressed firms, the default risk of
borrower firms is not a pure exogenous variable but a controllable one for the
bank. In other words, the banks’ attitude and judgment on a specific distressed
firm crucially determines whether or not the firm will be able to survive. Since
relationship banking prevents dissemination of the relevant information of
borrower firms, we cannot obtain any reliable assessment regarding the firms from
capital markets. In particular, debts of small and medium size firms are scarcely
traded in a bank-centered financial system. Thus, it may be reasonable that the
loan pricing in relationship banking does not explicitly incorporate the borrowers ’
credit ratings which are exogenously given by the capital market.
Banks treat credit risk in a quite different way in the United States where
relationship banking is not prevalent and banks tend to keep ‘arm’s-length
relationships’ with their clients. Banks are rarely involved into the process of
disposing of distressed firms. Thus, the credit rating of an individual firm is given
８
to banks both by rating agencies and by well-functioning corporate debt markets.
The so-called ‘junk bond’ market is helpful in informing market perception of
small scale enterprises’ risk to lenders. Bank managers regard the probability of
the borrower as being exogenously given, which they can explicitly integrate into
the risk-premium they will charge the borrower firm. 6
Some economists are blaming Japanese banks for not explicitly taking
credit risk into account and are insisting that banks should impose higher loan
interest rates on their clients in order to improve profitability of the loan business.
However, as Stiglitz and Weiss (1981) argue, the higher interest rates do not
necessarily improve banks’ profitability because the higher interest rates are
likely to induce borrowers’ moral hazard behavior. In particular, since banks face
serious asymmetries of information associated with non-performing loans, it may
be wise for them not to raise loan rates.
Limitations of the relationship banking: I have described some features of
relationship banking compared with capital market-based financial mechanisms.
In short, relationship banking could efficiently mediate between fund suppliers
6
For example, Saunders (2000: pp. 225-38) details how spreads between risk-free
discount bonds issued by the government and discount bonds issued by corporat e
borrowers of differing quality reflect perceived credit risk exposures of corporate
borrowers in the future. Banks would make use of the perceive credit risk when
they determine loan-pricing. Recently, Japanese major banks reportedly struggle
to follow the similar system of credit risk assessment without significant success.
In my view, if the banks really adopt the US style credit risk assessment, it would
imply abandonment of relationship banking. I do not think it is good news for
９
and fund raisers while keeping the relevant information about the fund raisers
opaque to agents outside the relationship. Most scholars agree that the Japan ’s
traditional main bank relationship is a typical case of relationship banking (Aoki
and Patrick (1994)).
Did the Japan’s relationship banking system enhance the efficiency of
financial inter-mediation? Although this paper will not be able to tackle this issue,
I would like to say a few words about it. I would like to say a few words about it.
First, we should note that the economic theory predicts a defect of relationship
banking. For example, Rajan (1992) shows that the strong bargaining power of
banks which monopolize information about their client firms might be a
disincentive to bank managers’ effort, and decreasing the social surplus under
relationship banking.
Second, the mere relationship between banks and firms does not ensure
efficient financial inter-mediation. As Aoki (1994) and Prowse (1995) claim, the
efficient function of relationship banking requires an effective mechanism to
discipline banks to ensure prudent monitoring of client firms. This is the issue of
‘who monitors the monitor.’ In my view, Japan has not succeeded in resolving this
important issue in the postwar period (Hanazaki and Horiuchi (2001)). The failure
of resolving this issue was at least partially responsible for the fragility of the
banking sector, which has been clearly revealed by the huge amount of
non-performing loans that have emerged since the early 1990s.
Third, all Japanese firms do not prefer relationship banking to the arms ’
Japan’s SMEs.
１０
length relationship provided by the capital markets. Some major firms have
overcome the informational difficulty as they have established a wide reputati on
for good fund-raisers. To those firms relationship banking is no longer
indispensable. They can use various financial services supplied by international
capital markets if they want to do so. Actually, the Japan’s major firms belonging
to the manufacturing industries have substantially reduced their dependence on
bank borrowing since the late 1970s (Hanazaki and Horiuchi (2000)). In contrast
with this, small and medium-sized enterprises (SMEs) and newly born firms
strongly need relationship banking in order to reduce the agency costs. Thus, in
Japan, the relationship banking is important mainly for SMEs (Petersen and Rajan
(1995)).
During the period from the 1980s to the early 1990s, the Japan’s financial
system based on relationship banking was highly admired for its efficiency in
stimulating the postwar industrial development (e.g., Hoshi, Kashyap, and
Scharfstein (1991), and Aoki and Patrick (1994)). I think the admiration went too
far (Hanazaki and Horiuchi (2000)). However, after the banking crisis su rfaced
during the 1990s, many scholars have argued for drastic policy measures that are
likely to endanger viability of relationship banking in Japan. I think those
arguments go too far as well. The following sections will explain why I think so.
3. Disposition of Bad Loans in Relationship Banking
The previous section stressed that relationship banking tends to keep the
information regarding borrower firms opaque to outside parties. This opaqueness
１１
of banks’ loan assets prevents the financial authority, i.e., the MOF until the late
1990s and the Financial Services Agency (FSA) thereafter, from precisely
assessing individual bank soundness. Moreover, it gives banks and the FSA
substantial room to manipulate disclosed figures of non-performing loans. This
possibility of manipulation has been the basis of the government ’s policy of
forbearance. Bank managers, suffering from an increasing amount of the
non-performing loans, have incentives to conceal the actual situation. If they
honestly recognize the increasing amount of non-performing loans, they are
required to put aside loan loss reserves according to the guideline given by the
FSA. 7 This decreases the banks’ equity capital and reveals both the fragility of
the banks and their managers’ incompetence. A decrease in the capital adequacy
ratio might trigger off intervention of the FSA into banks’ management following
the prompt corrective action (PCA) rule that came into operation in April 1998.
This rule requires the FSA to order banks to restructure or to stop their business
when the capital adequacy ratios of the banks fall below prescribed levels. Thus,
it is understandable that banks would try to underrate the amount of their
non-performing loans as much as possible. In order to force the banks to quic kly
7
The FSA’s guideline requires banks to classify their loan assets into the
following five categories: (1) sound assets, (2) the assets to be carefully treated,
e.g., the claims to the firms recording negative profits, (3)the assets to be treated
with high caution, e.g., the claims to the firms that delay interest payment longer
than three months, (4) the claims to the firms that are highly likely to default, e.g.,
those being in excess of liabilities over their assets, and (5) the claims to the
virtually or actually bankrupted borrowers. The guideline prescribes the ratios of
loan loss reserves for the respective categories of assets. Table 3 presents the
１２
dispose of non-performing loans, the FSA should prevent this underrating by
means of rigorous inspections. However, it is extremely costly even for the FSA
to uncover manipulation on the part of banks due to the opaqueness of their loan
portfolio.
Moreover, we should note that to force banks to severely assess their loan
assets does not necessarily produce good results. The severe assessment of loan
assets is likely to lead the banks to abandon helping firms in distress but with
good potential. Severe inspection practice by the FSA may wipe out the merit of
relationship banking. Although many people loudly insist that the FSA should
make severe inspections on banks, in my view, it takes very subtle skills to
determine what the optimal level of severity in assessing banks’ loan assets is.
As I will discuss in detail below, the Japanese government had a motive to
be soft on the banks’ self assessment of loan assets. Most Japanese people sensed
the existence of implicit collusion between banks and the FSA to underrate the
amount of the non-performing loans. They were skeptical about the disclosed
non-performing loans. But they were unable to verify that FSA’s shirking from
rigorously supervising banks’ management because they have no access to the
relevant information regarding banks’ loan assets either. The criticism against the
FSA’s soft attitude towards bank management did not effectively prevent this
defect.
Why is the BIS capital adequacy ratio unreliable in Japan?: The opaqueness
prescribed loan loss reserve ratios.
１３
of quality of banks’ loan assets makes the BIS capital adequacy ratio unreliable as
a policy target in Japan. As I have already pointed out, the opaqueness gives bank
managers some room for manipulating accounting figures regarding their own
capital. The banks are induced to underrate the non-performing loans in order to
conceal substantial declines in their capital adequacy ratios. It is difficult for
outsiders to precisely assess the actual state of individual banks’ capital adequacy
ratios.
We have observed some cases where banks continued to show sufficiently
high levels of BIS capital adequacy ratios just before they abruptly went bankrupt.
For example, at the end of March 1997, the Hokkaido-Takushoku Bank’s
disclosed BIS capital adequacy ratio was 9.34%. That ratio was the highest of the
capital adequacy ratios of all the city banks’ existing at that time. But
Hokkaido-Takushoku all too soon went bankrupt in October 1997. The BIS capital
adequacy ratio of Long-Term Credit Bank of Japan, which went bankrupt in
October 1998 and was thereafter temporarily nationalized, was 10.36% at the end
of March 1998 – sufficiently higher than the 8% level required of banks that
operate internationally. The Nippon Credit Bank’s disclosed BIS capital adequacy
ratio was 8.25% at the end of March 1998 and 8.19% at the end of September
1998 respectively. But the bank failed in December 1998 with large excess
liability. Nobody could have anticipated those banks’ failure by only watching
their disclosed capital adequacy ratios.
Generally speaking, with the opaque nature of relationship banking, BIS
capital adequacy ratio and any other accounting figures that are utilized as a
measure of bank soundness are not as reliable as policy makers might expect. This
１４
is unfortunate particularly because the government started a rule of prompt
corrective actions (PCA) based on the official figures of BIS capital adequacy
ratios in April 1998. Specifically, when a bank’s BIS capital adequacy ratios fall
below 8%, the FSA will automatically intervene into the banks’ management
affairs with a view to prevent the banks’ excess liability from growing too large.
But if the BIS capital ratio is unreliable, the PCA rule is a blunt instrument.
Table 4 shows to what extent failed banks were found to underrate t heir
non-performing loans immediately before their failure. The table deals only with
bank failures after the introduction of the PCA rule, which formally gives the FSA
strong authority to supervise bank management. According to this table, the
FSA’s assessment of the failed banks’ non-performing loans was greater than the
banks’ self assessment by 40% on average, suggesting underrating of
non-performing loans by banks. Even after the start of the PCA rule, the FSA have
not succeed in amending the failed banks’ underrating of their non-performing
loans.
Why were Japanese banks inactive in selling their loan assets? : Loan sales
are one of the important methods of banks’ credit risk management (e.g. Saunders
(2000: Chapter 27)). If banks, burdened with a large quantity of non-performing
loans, could sell their bad loans off, they would be able to liberate resources tied
up in tedious and backward-looking projects and redirect them to more positive
activities. Thus, the possibility of loan sales would enable banks troubled with
non-performing loans to quickly restructure their businesses. By means of loan
sales, banks could retain their jobs of originating loan assets while avoiding credit
１５
risk.
According to a report published by the Bank of Japan (2002), the major
banks removed non-performing loans amounting to ¥5.1 trillion from their balance
sheets during the year from April 2001 to March 2002. That was around 25% of
their non-performing loans and 1.5% of the total loan assets recorded at the end of
March 2001. However, only a third of the loan assets that were removed were
sales of loan assets to outside agents. Although exact statistics are unavailable, I
think that Japanese banks were quite inactive in using loan sale mechanisms to
dispose of bad loans until the beginning of the new century. We may say that loan
sales by banks have only just started in Japan.
An efficient loan sales mechanism requires us to resolve the informational
difficulty regarding the quality of bank loans. Outside investors would hesi tate to
purchase loan assets originated and sold by banks unless they were confident of
their own capacity to assess quality of specific loans. Banks could sell the loan
assets they regard as good at ‘appropriate’ prices if outside investors can assess
their quality as precisely as the banks themselves. However, as I have stressed,
relationship banking has not facilitated the dissemination of relevant information
regarding borrowers to outside investors. Even loans asset of high quality would
be sold only at deeply discounted prices. It is particularly difficult for banks to
inform the quality of non-performing loans to outside investors. This provides a
disincentive for banks to pursue loan sales. This is the phenomenon of adverse
selection. The difficulty of loan sales has forced banks to continue holding a large
amount of bad loans and hindered them from quick restructuring.
At a relatively early stage of the no-performing loan crisis (i.e., in 1993),
１６
Japan established a semi-public organization, the Cooperative Credit Purchasing
Corporation (CCPC), to purchase bad loans from banks. The CCPC operated until
March 2001. One purpose of the CCPC was to promote banks’ writing off of bad
loans by purchasing the loans at discount prices. Another purpose was for the
CCPC to collect debts from borrowers who had defaulted in place of the lender
banks. During the seven years from March 1993 to March 2001 the CCPC
purchased bad loans amounting to ¥581 billion which was 38% of their book
value amounting to ¥1,538 billion and collected the bad loans of ¥465 billion. The
divergence of ¥116 between the CCPC’s purchase of ¥581 billion and the loan
collections of ¥465 billion was reimbursed by the banks that sold the bad loans to
the CCPC. In other words, banks sold the loans to the CCPC with recourse. In this
sense, the CCPC was not a device to remove credit risk from banks ’ balance
sheets.
The RCC’s purchase of bad loans: The government established the
Resolution and Collection Corporation (RCC) affiliated to the Deposit Insurance
Corporation in April 1999. The legal status of this RCC is the same as a bank. Its
major function is to purchase bad loans from both failed and sound banks to
promote restructuring of the banking sector. Thus, the RCC was expected to help
banks remove bad loans from their balance sheets. But the RCC has not played
such an important and significant role as was initially expected. The reason for
this disappointed result of the RCC is also related to the informational difficulty
associated with relationship banking. The RCC was constrained by law to
purchase bank loans at sufficiently low prices to avoid capital losses. Thus, under
１７
the information asymmetries, the RCC had to purchase bank loans at extremely
low prices. Table 5 presents both the book value and purchase prices of the loans
sold by banks to the RCC. This table shows that the purchase prices were on the
average only 7% of the loans’ book value. This discouraged banks to sell their
loan assets to the RCC.
Japan’s traditional relationship banking did not need the open market
trading of loan assets originated by banks. Banks were conceived to be able to
deal with their client firms in financial distress efficiently while retaining claims
to the firms in their own balance sheets (Hoshi, Kashyap, and Scharfstein (1990),
and Sheard (1994)). In other words, relationship banking was conceived to
promote efficient restructuring of financially distressed firms. However, once
banks themselves got into financial difficulties, relationship banking was found to
be inefficient in coping with the financially distress firms. On the one hand, banks
tend to keep more or less hopeless borrower firms alive because if they decide to
liquidate those firms it will deplete their own capital adequacy rati os. On the other
hand, the retaining of hopeless firms in the loan portfolio crowds out the good
firms, particularly small and medium size firms, that have neither established
intimate relationship with the banks nor have access to capital markets. Thus,
relationship banking in financial distress tends to distort fund allocations in the
financial system. That is, the inefficient borrowers continue to be supplied with
credit thanks to their long-term relationships with banks while relatively efficient
firms or the firms with high potential face rationing of credit. This financial
distortion might undermine the long-term growth capability of the Japanese
economy.
１８
4. The Noncommittal Attitude of the Government
In a bank-centered financial system, the relationship between the
government and the banking sector profoundly influences how the financial
mechanism works. The Ministry of Finance (MOF) used to manage almost all
aspects of Japan’s financial system in order to retain the status quo built up during
the high growth period after World War II (Hamada and Horiuchi (1987)). The
MOF’s principle was to bail out virtually insolvent banks by arranging mergers
with a healthy bank. Meanwhile, all of depositors and other investors into banks ’
debt were protected from any burdens associated with the de facto bank failures. 8
This MOF’s policy obscured who were responsible for the troubles and how the
cost of the failure was shared by related parties and the general tax payers. Due to
the MOF’s active intervention into the process of bailing out default banks, the
DIC established in as early as 1971 was useless until 1992 when the DIC operated
for the first time to help a regional bank to merge a small mutual bank.
However, after the burst of ‘bubble’ in the early 1990s, the MOF was
unable to continue the traditional policy of keeping the status quo in the Japanese
8
The MOF belatedly started to burden some debt-holders and shareholders with
bankruptcy costs of failed banks around the mid 1990s. When Kosumo, one of the
largest credit cooperatives, went bankrupt in July 1995, some financial institutions
lending to the credit cooperative were forced to bear some of its bankruptcy costs.
When Hyogo Bank and Taiheiyo Bank were reorganized into new banks after their
bankruptcy in 1995 and in 1996 respectively, the shareholders’ equity of the old
１９
financial system. In particular, the MOF was bitterly criticized for its failure to
discipline bank managers for careless risk management. The MOF’s traditional
method was abandoned and instead the DIC appeared on the stage. The DIC ’s
appearance has contributed to making the cost of bank failures much more
transparent. Table 6 shows how the DIC’s financial support became important in
coping with bank failures since the mid-1990s. 9
Thus, the government changed the policy framework to deal with bank
failures as the bank crisis got more serious in the mid 1990s. However, the
government policy continued to be noncommittal in the sense that it required
banks to dispose of non-performing loans quickly on the one hand, but also seeks
to keep the status quo of the banking sector as much as possible. The ambivalent
and noncommittal attitude of the government seems to have hindered a resolution
of the non-performing loan problem in Japan. In my view, the government attitude
also seems to be a derivative of Japan’s relationship banking.
First, the opaqueness of relationship banking allowed the government to
hold wishful thinking about the soundness of the banking sector and delayed its
recognition of the critical situation. After injecting public funds into major banks,
the government became the most important de facto shareholders in those banks.
The government is also given strong legal authority over bank management.
Therefore, under the current governance structure of bank management, the
government is particularly responsible for preventing banks’ manipulation of
banks was reduced.
9
Table 7 is a short chronology of the Japanese deposit insurance since the
２０
figures relating to non-performing loans. Nevertheless, it was not easy even for
the regulators to precisely assess the quality of specific loan assets of individual
banks under relationship banking. The informational asymmetry between bank
managers and outsiders regarding the value of loan assets hindered the regulators
from fulfilling the official role of rigorously monitoring bank soundness. The
government could not assess accurately to what extent the bank crisis was
deteriorating. 10
Second, in the financial system crucially dependent on relationship banking,
the quick disposal of a large amount of non-performing loans is likely to bring
forth destructive impacts on the industrial sector. If the government orders banks
to dispose of non-performing loans quickly, it will lead to liquidation not only of
hopeless firms but also of promising firms which are just temporarily in financial
distress. Banks would desire to keep claims to the latter firms in their loan assets.
But the opaqueness of the relationship banking will hinder it. The banks hardly
succeed in communicating their precise assessment of the borrowers to the
regulators. Thus, concerned with destructive effects of quick disposition, the
government prefers the banks’ wait and see policy.
Of course this concern of the government may be exaggerated. But it should
commencement of the DIC at 1971.
10
Being bitterly criticized for a weak attitude toward bank management, the FSA
started to be rigorous in inspecting major banks’ non-performing loans in late
2001 through the special inspection. This change in the FSA’s attitude accounts
for a substantial increase in the amount of non-performing loans in March 2002.
２１
be noted that the fragile banking sector is more destructive to the real economy in
a bank-centered financial system than in a financial system with well developed
capital markets. In the latter system, efficient capital markets could easily take the
place of the banking sector in financial inter-mediation. Thus, the government
would be able to take the policy of drastically reorganizing the banking sector
without serious concern about its aftermath.
11
The reorganization would
substantially reduce the financial capacity of the banking sector at least
temporarily. But the government could expect the capital markets to fill the
vacancy created by a sharp decline in the banking power. However, it would take
a long time to make the transition from a bank-centered financial system to a
capital market oriented one. Thus, the opaque nature of relationship banking
enhances not only bank managers’ incentives but also the government’s incentive
to postpone disposal of non-performing loans.
Political pressures on the government: We should also take the political
pressures on the government into account when discussing the drawn out process
of disposition of non-performing loans in Japan. The government cannot confine
its attention to the policy issue of how to deal with the non-performing loan
11
The opaqueness of specific loans implies that the quick disposal of dubious
loans might be destructive in the sense that banks are forced to sever a credit
relationship with a promising but temporally distressed borrower firm. There may
be a trade-off between quickly disposing of banks’ non-performing loans and
２２
problem. The Japanese economy has undergone long-lasting stagnation since the
burst of ‘financial bubble’ at the beginning of the 1990s. So, the government has
needed to take a rather ambivalent stance toward bank management. On the one
hand, the government wanted banks to quickly recover their financial stability by
disposing of their non-performing loans. To regain financial stability, banks must
be conservative enough to strengthen their capital bases and to decrease the
amount of non-performing loans. But, on the other hand, the government wants to
financially stimulate the Japanese economy. Under a bank-centered financial
system, the banking sector has to be active in supplying credit and taking risk in
order to stimulate the economic expansion. Obviously these two policy targets are
inconsistent with each other.
The noncommittal attitude of the government is evident in the injection of
public funds into banks. The government purchased preferred stocks issued by
some big banks to strengthen their capital. The government gave the financial
support to those banks on the condition that they would increase credit supply to
small and medium size firms by more than promised percentages. As this policy
suggests, the government was concerned not only with the quick recovery of the
financial stability of banks, but also with not damaging the banking system so
much as to destroy its inter-mediating capability.
keeping constructive bank-firm credit relationships.
２３
The government’s stealthy measures: The government has taken the policy
measures to help bank managers to overcome the difficulty of declining capital
bases. These measures obviously contradicted with another policy objective of
providing effective disciplines to bank management. For example, the MOF
allowed banks to sell subordinate loans to life insurance companies at the start of
the BIS capital adequacy rule in the late 1980s. During the first half of the 1990s,
the MOF allowed banks to issue subordinate debt in foreign capital markets. This
policy induced some Japanese banks to issue a substantial amount of subordinate
debt. The main purchasers of the banks’ subordinate bonds were the firms with
which the issuing banks had kept long-term relationships. The issuance of
subordinate loans and bonds helped Japanese banks to keep their BIS capital
adequacy ratios above the prescribed minimum level during the early stages of
BIS capital adequacy regulation (Horiuchi and Shimizu (1997)).
In March 2000 the government amended the accounting rules to allow banks
to book deferred tax assets (DTAs). When banks dispose of non-performing loans,
they need to increase the specific reserves that are not tax deductible under the
Japanese taxation rules. The accounting rule amendment permits banks to book
DTA on the assumption that they will benefit from a lower tax charge when a
formal default occurs and the size of the final loss is determined. Banks can
record the DTA as part of their shareholders’ equity. Thus, the capital of banks
２４
rather abruptly increased due to this accounting reform as of March 2000. 12
Even the recent revision to the Commercial Code, which makes it possible
for banks to restructure their businesses using a holding company arrangement,
has contributed to mitigating banks’ difficulty of satisfying capital adequacy
requirements. The holding company system allows banks to tap into legal reserves
to pay dividends. Thus, the banks that adopted holding company structures were
able to increase their capacity to pay dividend in spite of negative current profits.
This has an important implication for the managers of those banks that accepted
public fund as capital injections in the late 1990s. If they could not pay dividends
to preferred stocks held by the government, the government would acquire voting
rights in the banks, and therefore strengthen its control on bank management vis-à
-vis the incumbent managers. Increased capacity of dividend payment is important
for bank managers.
12
According to a foreign securities company located in Tokyo, tax deferred
assets accounted for more than half of major banks’ capital which was ¥17.3
trillion at March 2002. The policy of allowing banks to record the DTAs is in
itself reasonable. However, recording the DTAs is based on the assumption that
the banks will earn taxable profits in the future. If they are unlikely to gain
positive profits in the near future, it is problematic for the banks to record the
DTAs in parallel with disposing of non-performing loans. Some are criticizing
banks for overestimating DTAs because the increasing amount of non-performing
loans makes it less likely that the banks will be able to earn enough profits to
justify the recorded DTAs.
２５
Mistaken policy sequences: We should point out the government’s mistakes
in the sequence of policies adopted regarding the non-performing loan problem. In
this regard, we need to differentiate between two policies. The first is the policy
to resolve the current bank crisis and to restore the stability of the financial
system. The second one is to re-establish the regulatory framework that will
effectively work to prevent excessive risk taking on the part of banks. The first
policy is an emergency measure, and the second is the preventive measure, which
is necessary after the stability of the banking sector is restored. If th e financial
system is confronted with the systemic collapse due to an increasing amount of
non-performing loans, we should give priority to emergency policies to rescue the
banking sector from the swamp of non-performing loans. 13
After the banking
system becomes stable again, we should stringently require banks to behave
prudently and should strengthen our capacity of supervising them in order to
prevent their excessive risk-taking.
If we require some depositors and other investors to share the burden of
bank failures by narrowing the scope of the financial safety net, we could expect
the capital markets to discipline bank managers (e.g., Calomiris (1999)). Before
narrowing the financial safety net, however, we should restore banking system
stability. Otherwise, the capital market could exert destructive influence on fragile
banks and may, contrary to our intentions, exacerbate the crisis. In short, before
13
Needless to say, this implies neither rescuing every distressed banks nor
２６
strengthening prudential regulations, which are preventive measures, we should
deploy emergency measures to settle the crisis in the banking system. This is a
commonplace principle of the desirable policy sequence.
Should we postpone the ‘pay-off’?: However, the Japanese government
committed an error not to differentiate the emergency policy measures from the
preventive ones. A notable example was the commencement of the so-called
‘pay-off’ of bank deposits in the midst of serious bank crisis in April 2002. The
pay-off implies the limited deposit insurance in that the DIC will not protect all
the depositors from the failure of their banks. The start of the pay-off has
triggered an exodus of a substantial amount of deposits from fragile banks. In the
midst of a bank crisis, this is destabilizing rather than stabilizing and adds further
confusion to Japan’s financial system.
In my opinion, the government should have started the pay-off much earlier,
say in the mid-1980s when the Japanese banking system was really stable.
Narrowing the safety net in the mid 1980s would have been effective in
preventing or mitigating the ‘financial bubble’ caused by an excessive bank credit
increase in the latter half of the 1980s. Unfortunately, the Japanese government
decided to start the pay-off after the banking sector fell into the mud of
non-performing loans. This is clearly an incorrect policy sequence.
protecting all depositors from the crisis.
２７
In 1998 the government promised to start the ‘pay-off’ in April 2001. But
with conservative politicians arguing strongly for postponement of the ‘pay-off’
in late 1999, the government decided to start a limited pay-off in April 2002. That
is, the deposit insurance protects time deposits up to the maximum of ¥10 million,
but protects all current deposits without limit. The decision to postpone was
accompanied with another promise that the full-scale pay-off (i.e., the system of
limited deposit insurance protection) would be started in April 2003. Now,
another political debate is taking place whether or not the start of the pay-off
should be postponed again. 14 Theoretically, as I have argued, starting limited
deposit insurance protection in the midst of a bank crisis represents an incorrect
policy sequence. So, it should be postponed. However, the repeated policy
changes will surely decrease the credibility of government policy and dilute the
disciplinary impacts on bank managers that the ‘pay-off’ should eventually be
expected to exert.
The regulation of banks’ shareholding: Japanese banks are permitted by
statute to hold up to 5% of the stocks of their client firms. Under this statute,
banks extended the network of mutual shareholdings with their client firms.
However, the banks’ shareholdings have become a headachy problem for the
Japanese government because the increasing volatility in stock prices has been
14
At the beginning of this month (October 2002), the prime minister Koizumi
２８
undermining sound bank management. Thus, in November 2001 the Diet passed a
bill that requires banks to keep their holding of stocks under the amounts of tier I
capital until September 2004. Obviously, the purpose of the bill is to stabilize the
banking system by forcing banks to reduce their stock holdings. However, in my
opinion, this is also a mistimed policy because it will force some banks to sell
stocks out and thereby exerting a downward pressure on stock prices. I suspect
this will not contribute to settling the Japanese bank crisis. 15
5. Concluding Remarks – What Should We Do?
This final section discusses the emergency policies for the bank crisis that
are now being hotly debated in Japan.
The recent decision by the prime minister Jun-ichiro Koizumi to dismiss
Hakuo Yanagisawa from the financial matter minister and to appoint Heizo
Takenaka as a Yanagiwasa’s successor signals the cabinet’s intention to take more
declared that the full-scale pay-off will be postponed once again until April 2005.
15
As I explained at the beginning of this paper, the BOJ announced that it will
purchase shares held by major banks and will hold them for a limited time period.
Will this BOJ’s policy be effective in sustaining Japan’s stock prices? I do not
think so. Investors will rationally take long-term perspectives when they evaluate
stock prices. If the BOJ’s temporarily holding of the shares were effective in
raising their prices, then investors would expect the stock price falls when the
BOJ resell the purchased shares in the future. The investor’s rational expectation
will prevent stock prices from significantly rising in spite of the BOJ ’s policy.
２９
drastic emergency policy measures to more quickly settle the non-performing loan
problem. It is well-known that Mr. Yanagisawa was hesitant to immediately inject
the public finds into the bank sector, and Mr. Takenaka has been advocating the
emergency policy measures of de facto nationalization of the banking sector.
Mr. Takenaka is reportedly planning the policy to force banks, particularly
major ones, to reassess their loan assets more stringently, and to increase loan loss
reserves in order to clean up bad loans from their balance sheets immediately.
This reassessment would substantially deteriorate the banks’ capital bases. In
order to continue their business, the banks would have to ask the government
another round of capital injections.
16
The policy would increase the government
stakes in those banks, approaching to the full-scale nationalization of the Japan’s
major banks. Not a few people agree with this Takenaka’s policy plan, because
they believe the quick disposal of non-performing loans will force the hopeless
borrower firms to exit, and will turn the resources liberated from those exiting
borrower to more productive firms and sectors. In the process of reallocation, the
banks will be able to recover their capacity to increase credit to promising firms.
On October 3, Mr. Takenaka summoned a special project team consisting of
five people who are eager for the quick disposal of non-performing loans to
16
We need to reform the present legal framework before directly injecting
public funds into the ‘sound’ banks. Under the present legal framework, only after
the prime minister declares the ‘financial systemic crisis’ the government will be
able to take the policy of financially helping surviving banks to enhance their
３０
realize his policy scenario. Quite interesting was the stock market response to this
summons of the project team. The stock prices sharply fell. The NIKKEI 225 went
down below ¥9,000 for the first time since 1983. Of course, the Takenaka’s policy
of quick disposal of non-performing loans would make the business prospects of
major banks and the distressed firms worse and, consequently, it would be quite
naturally that the stock prices of those banks and firms go down. However, at
least according to the Takenaka’s scenario, the other firms’ business prospects
should be improved by the quick disposal policy. The stock prices of those firms
should go up and canceling out negative influence of stock prices of banks and
fragile borrower firms on the average stock price. In reality, however, we have not
yet observed significant positive responses of stock market to the Takaenaka ’s
policy. In short, the Japan’s capital market does not seem to believe in the
scenario advocated by Mr. Takenaka.
In my opinion, the sharp divergence between the stock market responses
and Mr. Takenaka’s scenario suggests that the Japanese economy has not yet
prepared industrial sectors that have high potential to fill the vacancy that the
Takenaka’s policy would create by forcing weak firms to exit. Thus, the stock
market investors expect that the immediate disposal of non-performing loans
would exacerbate the current deflation. Should we take the policy which is
capital bases (Article 102 of the Deposit Insurance Law).
３１
expected to result in a hard landing? I do not think so. 17
I should also point out that, in the long-term perspective, the nationalization
scheme would not be able to solve the most fundamental issue for the Japanese
financial system, i.e., the issue of how to develop new business models in the
banking and to restructure the system to be more-capital market oriented. The
government has no expertise useful to solve this issue. Thus, in my opinion,
injecting public funds would be only a policy to gain time.
We need to recognize that to solve a bank crisis in a bank-centered financial
system is a complicated task. It is particularly so because the bank crisis tend to
synchronize with the slowdown of the real economy. 18 In order to stimulate the
17
The FSA is reportedly proposing the policy of enhancing the capacity and role
of the RCC in preference to directly injecting public funds into major banks.
According to the FSA’s plan, the RCC is going to purchase bad loans from banks
at book value. The policy would surely help banks remove their bad loans from
their balance sheets and at the same time strengthen their capital bases. This is a
plan of implicitly giving financial support to banks without increasing the
government’s stakes in the banking sector. Most bank managers would welcome
this FSA’s idea, because this policy would preserve the institutional status quo
and would not require accountability of the current bank managers. I would
myself prefer the scheme of direct injection of public funds to the FSA ’s plan,
because the former plan would require accountability of bank managers.
18
At present, most Japanese banks are reluctant to extend credit to SMEs because
of their fragile capital bases. As Table 1 shows, the banks are sharply decreasing
loan supply. Table 1 shows that for four years from March 1998 to March 2002,
the loan supply of ‘All Bank’ decreased by 15% from ¥553 trillion to ¥473 trillion.
Instead, they are increasing holdings of government bonds which are regarded as
３２
depressive economy, the banking sector needs to actively supply their credit in the
bank-centered financial system. In particular, as this paper suggests, they should
financially support SMEs through traditional relationship banking. The drastic
nationalization scheme would not ensure the effective supply of relationship
banking services.
So, the emergency policy must take into consideration how it would
influence the banks’ loan supply to SMEs. In this regard, the drastic policy of
nationalizing major banks would not in itself be constructive. If the major banks
retreat from the international banking business, they need not pursue 8% capital
adequacy ratios any more, but need to satisfy less stringent ratios of 4% domestic
capital adequacy. Then, they will concentrate on business with SMEs without
seriously worry about the shortage of capital. What about their clients of large
companies? In my view, they have already prepared for transactions in the capital
market-based financial system. So, they do not need financial support particularly
from relationship banking.
The Japanese banks could restructure their business responding to current
crisis by utilizing the holding company system. Specifically, the holding company
established by a bank divides the banking business that use to be integrated in the
bank into a retail banking operated by a regional bank (whose capital adequacy
ratio is not 8% but 4%) and an investment banking operated by the small number
risk-less assets according to the BIS rule.
３３
of officials with excellent expertise of international finance. The business
transformation under the holding company system like this will effectively retain
the merit of relationship banking in Japan.
In sum, I recognize the current critical situation of the Japanese banking
sector. It is possible that the government will have to inject the public funds into
the banking sector to avoid a full-scale financial systemic crisis in the near future.
But the present legal framework has adequately prepared for such a systemic
crisis. The scheme of immediate disposal of non-performing loans and the
consequent virtual nationalization of major banks would not be particularly
constructive as an emergency policy.
３４
Table 1: Non-performing loan disclosures (All banks: ¥ trillion)
All banks
(a) Total amount of risk
management loans
(b) Specific reserves for
loan losses
(a) – (b)
Total loans
March
1998
March
1999
March
2000
March
2001
March
2002
29.76
(5.38)
15.93
(2.88)
13.83
(2.50)
553.13
(100.0)
29.63
(5.85)
11.23
(2.22)
18.40
(3.63)
506.60
(100.0)
30.37
(6.12)
8.46
(1.69)
22.00
(4.43)
496.17
(100.0)
32.52
(6.58)
7.24
(1.47)
25.27
(5.11)
494.19
(100.0)
42.03
(8.88)
7.89
(1.67)
34.14
(7.21)
473.24
(100.0)
Cooperative bank
(a) Total amount of risk
management loans
(b) Specific reserves for
loan losses
(a) – (b)
9.03
11.00
10.93
11.02
(6.66)
(8.27)
(8.26)
(8.28)
3.57
3.13
2.80
2.49
(2.63)
(2.35)
(2.12)
(1.87)
5.46
7.87
8.13
8.53
(4.03)
(5.92)
(6.15)
(6.41)
Total loans
135.56
133.04
132.27
133.13
(100.0)
(100.0)
(100.0)
(100.0)
(Notes) The risk management loans constitute four categories of bad loans: (1)
loans to bankrupted borrowers, (2) past due loans, (3) loans past due more than 3
months, and (4) Restructured loans.
３５
Table 2: The number of bankrupted depository institutions a)
Banks b)
Shinkin banks
Credit cooperatives
Total
1990
0
0
0
0
1991
1
0
0
1
1992
0
1
0
1
1993
0
1
1
2
1994
1
0
4
5
1995
1
0
5
6
1996
2
3
3
8
1997
5
0
7
12
1998
3
1
31
35
1999
5
6
15
26
2000
1
5
27
33
2001
1
9
37
47
Total
20
26
130
176
Notes: (a) This table contains not only the cases of bank failures dealt with the
government, but also those privately disposed. For example, in October 1994,
Mitsubishi Bank rescued Nippon Trust Bank at the brink of bankruptcy on its own
initiative. The government did not provide any financial support in this case. B ut
this table contains it. (b) This column includes city banks, regional I and II banks,
trust banks and long-term credit banks. (c) Until November 2001.
３６
Table 3: The FSA’s guideline of loan loss reserve ratios for the respective
categories of loan assets.
Categories of the assets
Required reserve ratios
(1) Normal assets
Around 0.2%
(2) The assets to be carefully treated
Around 5%
(3) The assets to be treated with high
Around 15%
caution
(4) The claims to the firms highly
Around 70%
probable to go bankrupt
(5) The claims to the borrowers
100%
virtually or actually bankrupted
(Source) FSA
３７
Table 4:
Disparities of assessment of NPL between failed banks and the FSA
(¥ 1.0 billion)
Assessment of Assessment of
NPLs by the
NPLs by the
Name of failed
Date of the
failed banks
FSA
Divergence
banks
bank failure
(A)
(B)
(A – B)
Kokumin
April 1999
149.7
198.2
48.5 (32.4)
Kofuku
May 1999
428.1
527.5
99.4 (23.2)
Tokyo-Sowa
June 1999
420.8
690.6
269.8 (64.1)
Namihaya
Aug. 1999
381.8
556.6
174.8 (45.8)
Niigata-Chuo
Oct. 1999
234.4
335.3
100.9 (43.0)
Ishikawa
Dec. 2001
167.3
214.3
47.0 (28.1)
Chubu
March 2002
78.9
96.5
17.6 (22.3)
1,861.0
2,619.0
758.0 (40.7)
Total
(Source) FSA and the Japanese Bankers Association
(Note) Figures in parentheses present percentages of (A-B)/A.
３８
Table 5: The purchase prices and the book value of the loans bought by the RCC
Total of purchase
Total of the book
prices of the loan
value of the loans
Fiscal year
bought by the
bought by the
(A/B)
RCC (billion yen) RCC (billion yen)
%
(A)
(B)
1999
21.7
451.0
4.8
2000
12.6
522.2
2.4
2001
20.6
330.2
6.2
2002*
89.0
690.1
12.9
Total
143.9
1,993.5
7.2
(Note) * Until the second quarter of 2002 fiscal year
(Source) Deposit Insurance Corporation
３９
Table 6 : The financial support given by the Deposit Insurance Corporation
(¥1.0 billion)
The
]
number of
Purchase of Loans and
Fiscal year
cases
Grants
bad loans
others
Total
~1995
9
709
0
8
717
1996
6
1,316
90
0
1,406
1997
7
152
239
4
395
1998
30
2,685
2,682
0
5,366
1999
20
4,637
1,304
0
5,941
2000
20
5,191
850
0
6,041
2001
54
2,069
503
0
2,571
Total
146
16,758
5,668
12
22,438
(Source) Deposit Insurance Corporation
４０
Table 7: A short chronology of the Japanese deposit insurance
1971
Deposit Insurance Corporation (DIC) was established. The insurance
coverage was limited to ¥3.0 million.
1986
The Law of Deposit Insurance was amended so as to extend DIC’s
capacity to giving subsidy to those banks that absorbs failed banks.
1992
DIC operated for the first time since its establishment to bail out a
small regional mutual banks.
1995
DIC reform under consideration. DIC had two duties: ¥10 million per
July
depositor payout should a bank fail, help facilities M&A between
troubled banks and healthy banks.
1995
First postwar bank collapse (Hyogo Bank) and Kizu Credit Cooperative
Sept.
was also shuttered after a run on deposits. Commitment of DIC funds to
these schemes depleted its coffer, requiring it to draw on a ¥500 billion
credit line from BOJ.
1996
The insurance premium rate was increased sevenfold. At the same time,
the government promised to keep unlimited compensation through
March 2001.
1997
The DIC begins taking a larger role in bank rescues by taking problem
loans from failed banks. Later in the year the LDP vowed to introduce
the so-called ‘payoff’ system, capping compensation at ¥10 million per
deposit account, and raised the DIC’s BOJ’s borrowing limit to ¥10
trillion from ¥2 trillion.
1998
The MOF outlines a planned legislative change aimed at, among other
Jan.
things, ensuring full deposit repayments in the event of bank failure till
the end of March 2001.
1999
LDP decides to extend for another year the deposit insurance system.
Dec.
2002
Step one of deposit insurance reform is enacted. The government limits
April
payoff for time deposits at ¥10 million.
(Source) Financial Services Agency
４１
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