A government advisory panel on financial affairs approved Monday a subcommittee draft report on public fund injections for ailing banks and on banks’ deferred tax assets.
But the panel failed to reach a consensus on two major issues and simply included opposing opinions in the report.
The Financial System Council, an advisory panel to Prime Minister Junichiro Koizumi, failed to reach agreement on the establishment of a new legal system for injecting ailing banks with taxpayers’ money.
It also put off a decision on whether to cap the amount of banks’ deferred tax assets, or future tax credits.
The Financial Services Agency is planning to submit a bill for the new system to the next extraordinary Diet session, expected to convene in autumn, in the hope of gaining its passage by the end of next March.
But the growing possibility of a general election in the fall, along with the advisory panel’s failure to reach a consensus on the new system, make it certain that the FSA will be forced to drop the plan.
The report says a new system should be crafted to legitimize public fund injections into troubled but still viable banks as a pre-emptive measure. At the same time, however, it urges them to strengthen their corporate governance as a precondition for receiving the funds.
Numerical targets should be set for a bank that receives taxpayers’ money in order to carry out bailout measures more effectively, it says.
But the report also includes an opposing view — that a new system is unnecessary and that the current legal framework is enough to cover such steps.
Advocates of such a cautious approach say the government was able to pump 1.96 trillion yen in public funds into Resona Bank under the current system as a means of replenishing the bank’s depleted capital base.
They are also concerned that a new legal framework might see crippled banks use public funds in order to muddle along with little hope for a financial turnaround, according to panel members.
“It’s very hard to reach a consensus on this issue. We think all talking points should be opened to public debate,” said Tetsuya Katada, head of the council subcommittee that drafted the report.
The report also urges banks to step up the disclosure of information on their deferred tax assets, including data to back up the assets’ inclusion in capital, amid growing criticism that they are padding their capital by calculating such assets as capital to an excessive degree.
Resona Bank requested a government bailout after its capital adequacy ratio stood at 2.07 percent as of March 31, below the 4 percent required for banks operating domestically, because its auditor refused to recognize some of the deferred tax assets counted by the bank as capital.
The report says there is a vulnerability in terms of deferred tax assets being counted as capital and that banks need to improve the quality of their capital.
But the council held off on placing a ceiling on the amount of banks’ deferred tax assets, saying there are both “positive” and “cautious” opinions on the matter.
Among other issues, the report advocates revising the trust business law so that corporations outside the trust banking industry may enter the trust business.
Patent and other intellectual properties should also be included in the scope of trust business under a revised law, it says. Under the current system, trust operations are restricted to management of such financial instruments as cash, securities and real estate, while trust banks are virtually the only entities that are allowed to conduct trust operations.
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