The Deposit Insurance Corp. announced Thursday a guideline for allowing banks that have borrowed money for recapitalization to repay the funds earlier than scheduled. The DIC guideline was approved the same day by the Financial Reconstruction Commission. The Bank of Tokyo-Mitsubishi, which has asked to make repayments early to reduce its interest payment costs, is expected to be the first bank to take advantage of the scheme. The guideline spells out that the government will respond to requests for early repayment from banks and examine whether they will remain financially sound after repayment. For example, the government will determine whether the banks' capital adequacy ratio will remain sufficiently strong and whether the move will push their stock prices and credit ratings down. Whether early repayment will jeopardize the stability of the financial system and whether the government will suffer a great financial loss will also be considered, the DIC said. The government pumped around 1.8 trillion yen into commercial banks in March 1998 in the first phase of the bank recapitalization program. In the second phase, carried out one year later, 7.5 trillion yen was allocated. As a result, 24 banks have received funds worth 9.5 trillion yen, including smaller, additional allocations. In March 1998, the Bank of Tokyo-Mitsubishi borrowed 100 billion yen through a subordinated debt issue, but only at the request of the government and the Liberal Democratic Party. At the time, many banks were reluctant to borrow the public funds, as doing so, they thought, would stigmatize them as financially fragile. In the Bank of Tokyo-Mitsubishi's case, however, the 100 billion yen it borrowed reportedly did nothing to improve its capital adequacy. This was because international banking rules stipulate that supplementary capital items cannot be counted toward the principal capital for the portion that exceeds the amount of the principal capital that is used to compute the capital adequacy ratio. The DIC said it will "react prudently" to requests from banks that are hoping to return the money injected in the second round in March 1999. For such requests, the government needs to make sure that they are complying with their business plans, submitted to the FRC as a condition for capital injections, the DIC said, adding that it will only allow banks with an exceedingly good performance to advance the repayment schedule.
