The banking sector crisis will continue because of the “opaque” bank recapitalization bill, Motohisa Ikeda, a key member of the Democratic Party of Japan, said Wednesday. The bill, expected to be enacted Friday, will not enable accurate assessment of bank assets, sufficient injection of public funds, or ease the credit crunch, Ikeda said in an interview.”It is only prolonging the crisis,” he said, adding that the banking trouble will become worse through February.”The problem of capital-short banks will probably have to be tackled again at some point. The DPJ’s revised bill may become necessary then.”A director of the Lower House special committee on financial stabilization, Ikeda has played the leading role in the DPJ, the largest opposition party, in coping with the banking issues. He was one of the legislators from several parties who jointly drafted financial revitalization bills to handle the paralyzed Long-Term Credit Bank of Japan and other banks in case of failure.But the bank recapitalization bill, which copes with weak banks before they fail, will become law without amendments the DPJ considers necessary.Ikeda said it is “nonsense” to discuss the government’s forced capital injection, because the assessment of banks’ assets remains vague. The idea has been floated because few of the eligible banks are expected to voluntarily apply for capital injection, which could mean a declaration of poor management.Such banks could instead try to prop up their capital adequacy ratios by further tightening their lending, a nightmare for many cash-strapped firms.The ruling party-drafted bank bill, which is supported by two opposition groups, would reserve 25 trillion yen in public funds to boost banks’ capital bases. This plan is to replace the existing 13 trillion yen fund designed for a similar purpose.But Ikeda said, “I am concerned that the 13 trillion yen problem will not be solved,” referring to the capital injection of 1.8 trillion yen to 21 banks in March, based on the insufficient examination of applicant banks.All the recipient banks were judged sound at the time. But they have not carried out radical restructuring measures or eased their lending, and one of the banks, the Long Term Credit Bank, virtually failed a few months later.The Liberal Democratic Party’s bill will allow banks to opt for the cost method where their stockholdings are evaluated by purchase prices and thus do not reflect market values.Ikeda said this will artificially boost banks’ capital adequacy ratios and hide their real weakness. Capital injection based on such inadequate standards will not solve the problems, he said.The DPJ has called for mandating banks to adopt the lower of either purchase price or market price in assessing market values.Now that the recapitalization bill’s enactment is certain, the next battle for Ikeda is over a Financial Resuscitation Committee, which is to be set up as early as next month under the law enacted Monday. The independent panel will handle failed banks and have the authority to decide on capital injections to weak but viable banks.Ikeda said a state minister must not double as the committee head, although Hiromu Nonaka, chief cabinet secretary, is reportedly a candidate. Four other members of the committee must have a practical knowledge of financial issues, unlike those serving at a similar panel at the Deposit Insurance Corp., who “blindly” gave a green light to the March capital injection, he added.The DPJ will oppose any inadequate appointment of panel members as the appointment requires Diet approval, he said. He will also closely monitor the panel process of designing detailed rules so that bureaucrats do not write them to serve their own interests, he said.
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