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The head of the Japanese Bankers Association indicated Tuesday that Resolution and Collection Corp., the government’s debt collector, should purchase bank loans at above-market prices.

Masashi Teranishi, who is also president of UFJ Holdings Inc., was supporting a politically loaded proposal that would see more public money risked in an effort to help the nation’s debt-ridden banks.

“It is desirable” to purchase debt at prices set by subtracting the amount of loan-loss reserves set aside by the bank from the loan’s book value, Teranishi said.

The RCC purchases banks’ delinquent loans on the assumption that debtors will fail, he said. Loans are transferred to the RCC for prices well below banks’ assessments, resulting in huge losses on banks’ balance sheets.

In the three months between July and September, projections show the RCC purchasing bad loans from banks at roughly 11 percent of their book values.

Meanwhile, banks hope to recover between 70 percent and 85 percent of the total “substandard loans” — loans past due for more than three months or loans with revised lending conditions — at the end of March.

“The losses of both the borrower and the lender, as well as the social cost, is too high,” Teranishi said, adding that it is desirable to have a flexible pricing system that reflects a company’s value on the assumption it will continue to operate.

The proposal would enable banks to sell bad loans to the RCC at prices well above current levels.

The government has thus far failed to follow suit on the Bank of Japan’s plans to buy up some of banks’ shareholdings and has yet to offer concrete measures aimed at speeding up the resolution of the bad-loan problem.

Lack of clarity in government policy contributed to selloffs on the Tokyo Stock Exchange on Friday and Tuesday.

The benchmark Nikkei average ended 159.44 points down at 9,321.64, after flirting with the 9,200 line.

The idea of having the RCC purchase banks’ loans above market value has been floated since February, with Taku Yamasaki, secretary general of the Liberal Democratic Party, the latest supporter.

But the proposal has met fierce opposition, not least because losses incurred by the RCC, a subsidiary of Depositors’ Insurance Corp., are passed on to taxpayers.

Banks have said that they have set aside adequate reserves against possible losses on their loans, and the move would confirm the doubts surrounding banks’ finances.

“It is necessary to continue debate about how the public and private sectors can shoulder” the losses, Teranishi said.

His statement indicates support for the proposal of Finance Minister Masajuro Shiokawa that the losses could be covered in part by banks’ deposit insurance payments to the DIC — funds set aside to protect deposits.

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