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The initial mission of the new financial watchdog that began operations Monday will be to inspect the nation’s 19 major banks to determine the extent of their problem loans, officials of the agency said.

The Financial Supervisory Agency, designed to forge a transparent relationship between the government and financial institutions, takes over the bank inspections and supervisory operations of the Finance Ministry.

The FSA plans to start the inspections soon after the banks finish their annual shareholders’ meetings this week and finalize their earnings reports for the year that ended March 31, agency officials said.

The FSA intends to play a role in expediting the disposal of bad loans, which have been internationally recognized as the biggest problem undermining Japan’s economy, FSA head Masaharu Hino said at a news conference.

During the bank inspections, the agency will verify the amount of bad loans and mandated loan-loss reserves to determine whether banks have taken adequate action to write off bad loans and whether they should set aside more reserves to handle future loan problems, the officials said.

Hino pledged to make the sour loan problem his priority, but in meetings with reporters he remained cautious about commenting on the plan to swiftly inspect the 19 banks.

He said further disclosure of banks’ bad loans is necessary to expedite their disposal. The FSA is considering use of a new benchmark to determine and disclose the exact amount of bad assets. Disclosure of bad loans as assessed by individual banks would be misleading because they use different standards in categorizing their bad assets, he said.

The actual amount of problem loans is believed to be much greater than currently disclosed, based on objective standards similar to those used in the United States.

The 19 major banks had reported a total of 22 trillion yen in problem loans as of March 31.

The agency is in charge of inspecting the operations of brokerages and insurance firms in addition to banks, and is allowed to impose administrative punishments on financial institutions. The FSA, which falls under the Prime Minister’s Office, is staffed with 403 officials, 373 of whom came from the Finance Ministry.

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