The credit crunch brought about by the collapse of the U.S. housing market is spreading throughout the world and has begun choking off funding to small and midsize Japanese companies.
Fearing the squeeze will accelerate bankruptcies of smaller firms, especially in rural regions, the government has drafted a bill to give it the authority to use up to ¥2 trillion in public funds to bolster the capital of any Japanese bank.
The Cabinet submitted the bill Friday to the Diet and eyes passage by the end of the month. Here are questions and answers about the bill.
What is the purpose of the bill?
The government says the bill is mainly aimed at helping credit-starved small and midsize companies. To reduce banks’ increasing reluctance to lend to smaller firms during the global crisis, the bill would allow the government to use the ¥2 trillion to inject any of them with public funds to encourage the flow of credit.
The bill was initially designed to inject capital into small regional banks with risky capital adequacy ratios, but was eventually revised to cover megabanks as a preventive measure. It’s essentially a revival of a similar law that was enacted in 2004 and expired in March. The new one will stay in effect until the end of March 2012.
Does the government have immediate plans to recapitalize banks?
Not right now. The capital injection process must begin with a request from a bank. But observers speculate that some small banks might apply for injections by the end of the year.
Is this bill aimed at stabilizing the entire financial system, like in the U.S. and Europe?
Not really. Japanese banks are relatively unscathed by the U.S. subprime-mortgage loan crisis and have not yet been hit by the full effect of the global crisis of confidence triggered by the bankruptcy of Lehman Brothers Holdings Inc. in September. The main purpose is to help resolve the credit squeeze on small and midsize firms, the government said.
The government’s intentions can probably be surmised by the size of the funds it has earmarked for the scheme, which is ¥2 trillion. This is far less than the money it spent to dig itself out of the lost decade that followed the collapse of Yamaichi Securities in 1997.
When the law on the financial restoration operation was passed in 1998, the government had allocated ¥60 trillion in public funds for the operation. Some ¥25 trillion of that was doled out to recapitalize relatively healthy banks, while another ¥18 trillion was used to nationalize failed banks.
Based on that law, the government injected ¥7.5 trillion in public funds to recapitalize 15 major banks in March 1999.
Does the bill contain any changes compared with the 2004 law?
Yes. The previous law was based on a carrot-and-stick approach, but the new bill takes away the clauses that made up the stick.
Under the 2004 law, financial institutions receiving public funds had to clarify the accountability of management, such as by replacing their presidents.
They also had to either merge with other banks or carry out drastic restructuring. But both clauses were extracted from the new bill. This was done as a response to complaints that the previous law was too strict and was preventing banks from applying for public funds.
Under the previous law, only two banks — Kiyo Holdings Inc. and Howa Bank Ltd. — applied for public funds. This resulted in the government spending only ¥40.5 billion on the program in the four-year period through April, although it was ready to inject up to ¥2 trillion.
What is the downside of the revision?
There are rising voices, even from within the Liberal Democratic Party, that banks’ top managers should be held accountable for the banks’ problems from a moral standpoint.
Instead, the government and LDP decided to set up a lighter scheme to encourage banks to take advantage of public funds while avoiding any strict conditions.
Yoshinori Ono, chief of a key LDP financial panel, emphasized Thursday that the current financial and economic environment is different from what it was in the past.
“This time, the credit crunch was caused by an outer factor . . . the U.S. financial crisis,” Ono said, noting it is too cruel to lay the blame on management, at least for the time being.
How can we be sure that lenders who take public funds will actually lend more to small companies?
That is one of the key points of the bill. There is always a possibility that the banks will hoard the injected funds to cover potential losses instead of extending loans.
Therefore, the Financial Services Agency, which oversees the bill, is expected to monitor lending by having the banks submit lending plans.
But if the banks loosen their screening criteria in order to approve more loans, they might increase the amount of nonperforming loans and cause the same problems that led to the economic malaise that followed the implosion of the bubble economy.