Our country is currently in serious economic difficulties, with persistent concerns of plunging into deflation-spirals. Such structural reforms as a taxation reform and stabilization of financial systems have to be carried out promptly, so as to boost domestic economy and to restore confidence.
The ultimate goal of the "Comprehensive Plan for Financial Revitalization" is to realign and strengthen financial institutions so that financial services of high quality are supplied to people. In line with this aim, the financial institutions should take concrete actions in providing future visions of financial realignment and strengthening with the aid of administrations, if necessary, so that the Japanese financial institutions can be competitive globally.
Financial institutions should assess their 2nd classified loans according to the degree of risks, set up necessary allowances, and voluntarily disclose their non-performing loans as soon as possible.
With regard to financial administration, the Financial Planning Bureau of the Ministry of Finance should take responsibility in preventing systemic turmoil from happening by putting in place the institutional framework promptly and appropriately, in collaboration with the Financial Supervisory Agency, the Bank of Japan, and the Deposit Insurance Corporation, where clarifying each role and responsibility is necessary. To this end, the establishment of the standing committee, headed by the Finance Minister, should be considered.
While "the Comprehensive Plan for Financial Revitalization" was proposed on the July 2nd, what has to be done next is to enact the bills for disposal of bad loans, concerning the Temporary Council for Coordinating Real Estate-Related Rights, Servicer Companies, Auctions, etc. in the upcoming Diet session.
The novel idea of introducing Bridge Banks has been proposed to stabilize the financial systems and to strengthen their functions. Given the people's concern over using public funds, maintaining the transparency, the objectiveness, and the equity and preventing moral hazard from happening are called for in designing the legal framework of Bridge Banks.
In putting in place the Bridge Bank-related legal framework, we recommend the followings.
Determination of bank failure by market forces can result in heavier burdens on people. The Financial Supervisory Agency should, in close collaboration with the Bank of Japan, carry out an intensive inspection of banks and determine, if any, banking failure promptly.
The scheme of Bridge Banks, which aims to protect sound borrowers in good faith, entails a possibility of borrowers' moral hazard.
The loan's classification by financial administrators and the Examination and Judgment Committee has to be compatible with the one by the financial authority. The financial authority has to design the rigid and uniform guidelines for examination of loans, so that the financial administrators and the Examination Committee can carry out lending operations appropriately. At the same time, the rule about using public funds should be made clear.
It is most essential in preventing moral hazard to abide by the principle that business operations of failed banks are to be transferred to receiver financial institutions within two years. Public bridge banks must cease to exist within due date.
To this end, introducing some incentive mechanism to facilitate transfer of business, such as acceptance of employees by receiver banks, setting up discount prices of credits, should be taken into consideration.