Following Friday’s passage of key financial reform bills in the Lower House, the Liberal Democratic Party presented its plan to recapitalize financial institutions to four opposition parties.Negotiations between the LDP and the opposition camp over the measures, which would replace the current bank recapitalization law, are expected to start Monday.Although the LDP hopes to have the new legislation enacted during the current Diet session, its prospects remain uncertain due to opposition lawmakers’ concerns about the plan.The initiative calls for creating a new system to strengthen banks’ capital bases through government purchases of banks’ common or preferred shares. Specifically, for those banks that have weak capital bases, a Japanese version of the U.S. Resolution Trust Corp., an entity to be created under the new financial stabilization scheme, could purchase their common shares and force the managers to take responsibility, according to the LDP proposal.In dealing with banks with a capital adequacy ratio at 8 percent or more, the entity could purchase only their preferred stocks and only when there is an imminent danger of a deflationary spiral or other financial crisis.Banks subject to the scheme will have strict conditions imposed in return for aid. For example, they will be required to carry out drastic restructuring and fully clarify managers’ responsibility.Shareholders would be required to take responsibility in the form of capital reduction. To fund the scheme, the LDP plan calls for utilizing loans from the Bank of Japan.

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