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The Supreme Court on Dec. 7 scrapped an earlier ruling that had found three former executives of the now-defunct Nippon Credit Bank guilty of window-dressing and ordered the Tokyo High Court to retry the case. The three had been convicted of submitting false financial statements for the business year ended March 31, 1998, by undervaluing bad loans and concealing an unabsorbed loss of ¥159.2 billion.

The top court’s decision highlights the confusion caused by a sudden change in the government’s policy toward banks.

Although the Finance Ministry had been tolerant of banks’ practice of postponing the disposal of bad loans, it issued new guidelines in 1997, calling on them to strictly assess their assets. The main point of the trial was whether the three executives’ decision to use the ministry’s old guidelines, instead of the new guidelines, in making the financial statements was proper.

The Supreme Court said that when Nippon Credit Bank made the financial statements, it was in a transitional period with regard to the Finance Ministry’s guidelines. It pointed out that the new guidelines were so ambiguous that use of the old guidelines did not constitute illegality. But it added that it must now be determined whether the executives’ handling of bad loans was appropriate under the old guidelines. Therefore, it ordered a retrial at the Tokyo High Court.

The bank, which accumulated a large amount of bad loans as the economic bubble burst, failed in December 1998 after some ¥4.9 trillion in public money had been injected into the bank. Investigative authorities could not arrest executives responsible for piling up the bad loans because the statute of limitations had expired. Instead, public prosecutors in July 1999 arrested the three former executives who managed the bank in the final days before it closed.

Under the principle of preventing failures of large banks, the Finance Ministry for a long time had allowed such banks to flexibly deal with the problem of bad loans. But it suddenly adopted strict guidelines, causing confusion among bankers. The Supreme Court’s decision should serve as a chance for the government to realize its share of responsibility.

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