What Happened to Japanese Banks?

BoyRacer · October 16, 2010, 10:34pm

What Happened to Japanese Banks? → imes.boj.or.jp/english/publi … 19-1-1.pdf

II. The Bad-Loan Problem
It is not easy to grasp the extent of the bad-loan problem in Japanese banking. As Hoshi and Kashyap (1999) explain in detail, there are several different definitions of bad loans, and moreover the definitions have changed over time. Currently, there are three definitions of bad loans. Two sets of bad-loan figures are reported by individual banks on their balance sheets. “Risk management loans” include (1) loans to failed enterprises; (2) loans whose payments have been suspended for three months or more; and (3) restructured loans. The Japanese banks started publishing bad-loan figures in 1993 (for fiscal 1992), but the definition included only loans to failed enterprises.
1 The definition was expanded gradually over time, and the current definition is roughly comparable to the standard used by the U.S. Securities Exchange Commission. The second set of figures consists of bad-loan figures that are required to be published under the Financial Reconstruction Act, which was one of two laws passed in late 1998 to form the basis of the Japanese government’s efforts to resolve the banking problem.

Finally, the Japanese government came up with a framework to close down weak banks and recapitalize solvent but undercapitalized banks in late 1998. The framework was backed by ¥60 trillion of public funds. The newly created Financial
Reconstruction Commission (FRC) and the Financial Supervisory Agency implemented the framework rather aggressively to resolve the banking problem in Japan once and for all. They nationalized Long-Term Credit Bank of Japan and Nippon Credit Bank in late 1998, moved much of their troubled loans to the Resolution and Collection Corporation (RCC), and sold both banks to new investors. They injected about ¥7.5 trillion of public funds into 15 large banks in March 1999. Then they
shifted the target for regional banks and used about ¥290 billion of public funds to recapitalize five regional banks. They closed down five regional banks and put them under receivers. One of them, Kokumin Bank, was cleaned up and sold to Yachiyo Bank. At the end of the year 2000, the banking crisis in Japan seems to be finally over, but Japanese banks still have to deal with the remaining bad loans and more importantly focus their attention on being competitive in the post-deregulation financial markets.

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