January 24, 2002 I. Introduction The outcry against the financial crisis is mounting again. In spite of injections of public funds into banks so far totalling 33 trillion yen twice implemented from 1998 to 1999, uncertainty induced by the financial crisis has failed to be dispelled. The Japanese government has repeatedly said that there is no uncertainty regarding the financial system, citing as a reason that major banks have kept their ratios of capital equity to assets at 10 percent or higher. This statement sounds quite optimistic as if it were announced by the military headquarters during war. However, it is obvious to everybody that this is pure fiction. Japanese economic renewal will never be realized unless the real situation of bad loans, reaching a whopping 140 trillion yen, is accounted for and the issue of undercapitalization of the financial system is promptly addressed. The responsibility of the government and the ruling party which have incurred this situation is very serious. In no way are the government and the ruling party in the position to talk about the re-injection of public funds into banks in a matter-of-course manner without reflecting upon their mismanagement of the finance so far and clarifying their accountability. The Democratic Party of Japan hereby proposes the ?巽inal Financial Reconstruction Plan? in order to address the structural reform of indirect financing system by making a healthy financial system as promptly as possible and by funneling funds into necessary areas effectively. II. Basic Posture 1. We are to solve the systemic risk as promptly as possible. This involves completing indirect financing, placing bank with debts in excess of assets under special public management (under temporary state control), and making undercapitalized banks recoverable by increasing the injection of public funds in order to make them more healthy. 2. We are to make a clear distinction between large companies and small and medium-sized companies. For large companies, we are to prompt direct write-offs, and for small companies, to give them the opportunity for self-reconstruction, holding off on direct write-offs. 3. We are to separate banks under special public management into two types of categories: one is sound banks; the other is banks whose borrowers are relatively high-risk small and medium-sized companies. Through their restructuring, we are to make the financial system healthy, and to diversify their business conditions 4. By clarifying the accountability of stockholders and management, we are to prevent moral hazards. 5. By instituting the community financial facilitation law (financial assessment law), we are to facilitate financial service in community through the necessary and effective supply of funds to small and medium-sized companies. III. Specific Procedures (measures from 1 to 3 are to be implemented as promptly as possible) 1. The completion of direct financing We are to implement an urgent across-the-board inspection and to conduct a stringent assessment of assets and make banks prepare sufficient loan-loss reserves. 2. Disposal of banks with debts exceeding assets The banks with debt exceeding assets or those with undercapitalization (capital-to-asset ratio of more than 0 and under 2 percent, in the domestic standards, more than 0 and under 1 percent) which have difficulties in self-reconstruction, are to be placed under special public management (under temporary state control ). Major companies requiring monitoring or worse are to be placed under the Resolution and Collection Company (RCC). Sound borrowers are to be transferred to new banks, and small and medium-sized companies requiring monitoring or worse, and risk-assets such as stocks and bonds, are left under the parent banks. 3. Increasing the public funds to undercapitalized banks As for the undercapitalized banks (capital-to-asset ratio of more than 2 and under 8 percent, in domestic standards, more than 1 and under 4 percent), if it is difficult for these banks to increase capitals on their own to boost their capital to asset ratio to 8 percent, in domestic standards 4 percent, the injection of public funds through common stock is to be implemented on the condition that these banks reduce their capital and clarify both criminal and civil responsibility on the part of management, and carry out restructuring such as salary cuts. As for big companies requiring monitoring or worse, their shift to the RCC is to be allowed. 4. Reorganization of Special Public Management Bank New banks with sound borrowers and old banks left with debt held by small companies requiring monitoring or worse, and risks assets such as stock and bonds are to be reorganized appropriately in each region. 5. Direct write-off of bad loans Among the major companies requiring monitoring or worse, placed under RCC, companies classified as at risk of failure or worse are to be directly written off within one year. The companies requiring monitoring are to be scrutinized to decide whether they are able to reconstruct themselves or not within one year. As for small and medium-sized companies requiring monitoring or worse, which are left in old banks, they are to be scrutinized to decide whether they will be able to reconstruct themselves. If the probability of their self-reconstruction is slim, direct write-off within three years is to be completed. 6. Privatization of new banks New banks are to be listed on the stock exchange as promptly as possible and stocks are to be sold in a prompt and step-by-step fashion. Profits accrued from the sale of stocks are to be earmarked for the write-off of bad loans incurred at new banks. 7. Privatization of parent banks Parent banks are to be recreated as specialized banks to provide loans to relatively high-risk small and medium-sized companies, and their stocks are to be sold. If it is possible to re-list their stock on the stock exchange, stocks will be sold in the same way as the new banks.
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