A highly anticipated report spelling out measures to accelerate the disposal of bad loans held by Japan’s banks was postponed Tuesday as hard-talking Financial Services Minister Heizo Takenaka apparently encountered stiff opposition from politicians.
Takenaka was poised to release an interim report proposing stricter rules for calculating major banks’ finances and for injecting public money into those institutions found short of funds to accelerate their disposal of nonperforming loans.
The report, which is being drafted by a team led by Takenaka, must now await further talks between the minister and Taro Aso, the policy affairs chief of the ruling Liberal Democratic Party.
LDP sources said that the release of the interim report would likely come by Friday but that the timing depends on the discussions between Takenaka and Aso.
Under the plans envisioned by the team on banking system reform, banks would be required to calculate loans to heavily indebted companies at fair market value and to beef up their reserves against potential losses.
The guidelines for this calculation, which were also to be included in the report, would call for new techniques that would weigh interest income generated by the loans against the risk of losses, according to sources close to the matter.
The task force was also expected to recommend stiffer rules for how banks account for deferred tax assets in their capital. Under existing accounting practices, banks are allowed to book taxes on future loan repayments as capital assets now.
Because such deferred tax assets constitute around 40 percent of their equity capital, analysts say this practice artificially inflates the banks’ capital-to-asset ratios so they can meet the 8 percent minimum required for them to continue international operations.
By forcing banks to set aside more of their earnings against loan losses, and at the same time preventing banks from inflating their capital with tax-effect assets, the new measures would reduce the capital of many major banks below the minimum needed under international regulations. This means that another injection of public funds would put the banks under government control.
Suggestions that regulators might change the rules has drawn howls of protest from bankers.
“It’s like playing soccer, where you can’t use your hands, and then having someone tell you that what you’re supposed to be playing is American football,” said Masashi Teranishi, chairman of the Japanese Bankers Association and president of UFJ Holdings Inc. “Existing rules reflect existing realities” that differ between Japan and other countries.
Injecting public funds into banks that have not yet collapsed is only possible under the Deposit Insurance Law, which allows for an injection of up to 15 trillion yen when the prime minister declares a financial crisis.
Banks that have previously received public assistance have promised to establish business targets, but an inability to reach those targets leads to their effective nationalization when the government converts its preferred shares in the banks into common stock.
According to sources, Takenaka has also decided to strengthen the state’s debt-collection body, the Resolution and Collection Corp., so it can promote the restructuring of businesses unable to fulfill their loan obligations.
The task force, charged with finding ways to clean up the nation’s banks, has said it will compile a final report by the end of the month.