Key Liberal Democratic Party lawmakers criticized Financial Services Minister Heizo Takenaka’s controversial bad-loan disposal plan on a Sunday talk show.
The ruling party leaders said tackling deflation should be given priority over the cleanup of the banking sector.
“When land prices fall, nonperforming loans increase,” said Hideyuki Aizawa, head of an LDP panel tasked with discussing ways to fight deflation, on TV Asahi.
“We now must think about what to do with the deflationary condition,” he said.
Taro Aso, chairman of the LDP’s Policy Research Council, agreed. He said on the same program that banks have now finished disposing of bad loans created after the bursting of the asset-inflated bubble economy in the late 1980s.
The banks, however, have seen new bad loans continually cropping up in their portfolios because deflation has continued, he explained, stressing the need to stop the falling prices of goods and services.
Aizawa lashed out at Takenaka’s proposals to get tough with banks. He said if all of his proposals were implemented, banks would see their equity capital further eroded.
“A study has shown that the banks would see their own capital (adequacy ratios) fall to around 4 percent,” Aizawa said, adding that now is not the time to force banks into a corner.
Takenaka’s bad-loan disposal proposals come in roughly three forms: tightening the accounting methods used by banks, toughening banks’ loan portfolio assessments and introducing a discount cash-flow system for banks.
Most at stake is a change in accounting rules that would drastically limit the deferred tax assets that banks can now count as equity capital.
If the change were implemented, many banks would see their capital-to-asset ratios fall below 8 percent, the level required by global regulators to run banking businesses internationally.
Banks short of capital would have to accept the injection of public funds to maintain their capital-adequacy ratios, but the acceptance of taxpayer money may lead to temporary nationalization.
Under the discount cash-flow system, banks will have to calculate their loan value by estimating the profitability of future borrowers. This could force them to set aside more loan-loss reserves.