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A joint task force of the government and the ruling Liberal Democratic Party agreed Tuesday to create a government-backed special bank to expedite disposal of bad loans held by commercial banks.

The task force for resuscitation of the nation’s financial system intends to map out details on the scheme by July 8, a deadline set recently by Prime Minister Ryutaro Hashimoto and Koichi Kato, secretary general of the LDP.

Earlier in the day, Masaharu Hino, commissioner of the newly launched Financial Supervisory Agency, said the agency will inspect about six major banks intensively by mid-August to scrutinize their problem loans.

In an interim report, the joint panel also decided to strengthen the function of the Cooperative Credit Purchasing Co., an organization charged with the task of purchasing bad loans and recovering them.

A package of all these measures is being put together with the intention of quickly solving the bad loan problem, which is considered the primary drag on the Japanese economy, and thus a potential threat to the global economy as well. At an emergency meeting here Saturday of the Group of Seven industrialized nations and Asian economies, the government pledged to take swift action.

The state-backed special bank would help by providing loans to sound borrowers left in a lurch by bank failures while those banks are forced to clean up their bad assets.

Several options for setting up the entity have been floated, with one calling for expanding the powers of the Resolution and Collection Bank, a public entity set up in 1996 to take over the operations of failed credit cooperatives.

Other options include the use of government-affiliated financial institutions and the creation of a new national bank. Such a bank may take the form of a “bridge bank,” or a Japanese version of the U.S. Resolution Trust Corp. The U.S. Federal Deposit Insurance Corp. authorized the RTC in 1987 to take over the assets and liabilities of collapsing savings and loan associations.

The task force will consider the risk of taking over lending, funding for a special-purpose bank, and moral hazards for borrower firms, participants said. Moral hazard in this context means the risk that borrower firms may ask the government to dispose their bad debts for them, even if there’s a chance they can be repaid.

There was no discussion on funding at the meeting, the participants said. But Kiichi Miyazawa, a former prime minister and one of the LDP members on the joint task force, told reporters that the 30 trillion yen package being prepared to rescue banks and protect depositors would be large enough.

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