PRELIMINARY YPFS DISCUSSION DRAFT |MARCH 2020 RCC – Japan Mallory Dreyer 1 March 17, 2020 Abstract Though the Japanese real estate and stock market bubble burst in the early 1990s, the ensuing financial crisis in Japan did not reach a systemic level until 1997, when four large financial institutions failed in a single month (Nakaso, p8). Because they were heavily exposed to real estate and equity markets, the Japanese banks had a nonperforming loan (NPL) problem, which was prolonged and, according to official estimates, did not peak until 2001 at 8.7 percent of GDP (BOJ 2006, p4). In response, the Japanese government created multiple asset management companies; the Resolution and Collection Corporation (RCC) was the result of the merger of two narrowly focused, semi-governmental agencies and began operations in 1999 (RCC, p12). The RCC was tasked with the purchase of NPLs from both solvent and insolvent financial institutions (DICJ 2008, p68). In 2001, its scope was expanded to include corporate restructuring and revitalization (DICJ 2008, p18). Though there was no specified sunset date for insolvent institutions, the purchase window for solvent financial institutions ended on March 31, 2005 (DICJ 2008, p25). The RCC purchased ¥4,004 billion (approximately $37 billion USD) in bad debt (book value) at a purchase price of ¥353 billion from solvent institutions by March 2005, and it collected ¥642 billion by March 2008 (DICJ 2005; DICJ 2008, p25). The RCC purchased ¥6,366 billion in assets (estimated ¥29,000 billion book value) from failed financial institutions and recovered ¥7,143 billion by the end of March 2008 (DICJ 2008, p72; Koo, p20). The RCC assisted with debt restructuring for 569 borrowers between 2001 and 2008 (DICJ 2008, p77). Though the RCC is operational as of today, its operations are no longer focused on resolving the 1990s crisis (RCC, p1). Keywords: asset management company, Resolution and Collection Corporation, RCC, Japan, nonperforming loan, corporate restructuring, corporate revitalization 1 Research Associate, New Bagehot Project. Yale Program on Financial Stability. [email protected]
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PRELIMINARYYPFSDISCUSSIONDRAFT|MARCH2020
RCC–Japan
MalloryDreyer1
March17,2020
Abstract
Though the Japanese real estate and stockmarket bubble burst in the early 1990s, theensuingfinancialcrisisinJapandidnotreachasystemicleveluntil1997,whenfourlargefinancial institutions failed in a single month (Nakaso, p8). Because they were heavilyexposedtorealestateandequitymarkets, the Japanesebankshadanonperforming loan(NPL)problem,whichwasprolongedand,accordingtoofficialestimates,didnotpeakuntil2001at8.7percentofGDP(BOJ2006,p4).Inresponse,theJapanesegovernmentcreatedmultiple assetmanagement companies; theResolution and Collection Corporation (RCC)was the result of themerger of two narrowly focused, semi-governmental agencies andbeganoperationsin1999(RCC,p12).TheRCCwastaskedwiththepurchaseofNPLsfrombothsolventand insolvent financial institutions (DICJ2008,p68). In2001, its scopewasexpanded to include corporate restructuringand revitalization (DICJ2008,p18).Thoughthere was no specified sunset date for insolvent institutions, the purchase window forsolventfinancialinstitutionsendedonMarch31,2005(DICJ2008,p25).TheRCCpurchased¥4,004billion(approximately$37billionUSD)inbaddebt(bookvalue)atapurchasepriceof¥353billion fromsolvent institutionsbyMarch2005, and it collected¥642billionbyMarch 2008 (DICJ 2005; DICJ 2008, p25). The RCC purchased ¥6,366 billion in assets(estimated ¥29,000 billion book value) from failed financial institutions and recovered¥7,143billionbytheendofMarch2008(DICJ2008,p72;Koo,p20).TheRCCassistedwithdebtrestructuringfor569borrowersbetween2001and2008(DICJ2008,p77).ThoughtheRCCisoperationalasoftoday,itsoperationsarenolongerfocusedonresolvingthe1990scrisis(RCC,p1).
The Japanese financial crisis of the 1990s wasprolonged as banks and the government wereslow toacknowledgeand respond toamassivenonperformingloan(NPL)problem.In1998,twoassetmanagementcompaniesmerged tocreatetheResolutionandCollectionCorporation(RCC),whichwastaskedwiththepurchaseanddisposalof NPLs from solvent and insolvent financialinstitutions.TheRCCbeganoperationsin1999,butitsoperationswerelimited,asthefullscaleoftheNPLproblemwasstillnotrecognized.
Thegovernmentbeganactingmoreaggressivelyto address theNPLproblem in2001byaddingcorporate restructuring to the RCC’s scope. In2002, theRCCwasable topurchaseNPLs fromsolventinstitutionsatmarketvalue.ThedeadlinetopurchasefromsolventinstitutionswasMarch31, 2005, but no deadline was set for failedinstitutions. By 2005, the RCC had purchased¥4,004 billion of loans (book value),approximately $37 billion USD, at a purchaseprice of ¥353 billion from solvent institutionsandrecovered¥642billionbyMarch2008.TheRCCrecovered¥7,143billionontotalpurchasesof¥6,366billion(estimated¥29,000billionbookvalue)fromfailedfinancialinstitutionsbyMarch31, 2008. The RCC assisted with corporaterestructuringof569borrowersbetween2001and2008.
SummaryEvaluation
ManyobserversbelievethatJapan’sbankingproblemswereprolongedinthe1990sand2000sduetotheunwillingnessofthegovernmentandfinancialsectortoadmittheextentoftheNPLproblem.TheRCC,whichthegovernmentcreatedtoaddresstheNPLproblem,hasbeencriticizedduetoitsrelativelylimitedscope:itultimatelypurchasedatotalof¥33trillioninloans(bookvalue);privateeconomistsatthetimeestimatedtheNPLproblemat¥100to¥250trillion.OthersarguethattheRCCwaslimitedin effectiveness as the purchase price offered to solvent financial institutions was often steeplydiscounted,as theRCCsought tominimizetheriskof transferring losses to taxpayers.OthershavestatedthatcorporaterestructuringwasoutsideoftheRCC’svalue-addingcapabilities.However,ithasbeenrecognizedthattheRCCrecoveredinexcessofitspurchasepriceinitsdisposalofassetsfromfailedandsolventinstitutions.
Summary of Key Terms
Purpose: “[A]ccelerate the recovery and collection of non-performing loans transferred from failed [and solvent] financial institutions through a fair and transparent process in order to minimize public costs” (DICJ AR 2004, pi). Launch Dates Announcement Date (Merger):
October 1998 Operational Date: April 1, 1999
Wind-down Dates
Expiration Date for Transfers: N/A for insolvent; March 31, 2005 for solvent Date of Last Asset Disposal: N/A
Program Size Not specified at outset Usage Solvent: ¥353 billion (purchase price)
for ¥4,004 billion (book value) Insolvent: ¥6,366 billion (purchase price) for an estimated ¥29,000 billion (book value)
Outcomes Solvent: Recovered ¥642 billion on ¥353 billion Insolvent: Recovered ¥7,143 billion on ¥6,366 billion Restructuring: 569 borrowers
Management Approach
Combination Disposition / Management
Ownership Structure
Government-owned
Notable Features
Special investigative powers to take on difficult cases such as those tied to organized crime; purchased loans at a steep discount
Japan – RCC
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Contents I. Overview...........................................................................................Error!Bookmarknotdefined.
II. KeyDesignDecisions..............................................................................................................................16III.Evaluation......................................................................................................................................................24IV.References.....................................................................................................................................................26V. KeyProgramDocuments......................................................................................................................30
Japaneserealestateandstockmarketpricestripledinthelatterhalfofthe1980s(Lincoln,p1).Thebubbleburstintheearly1990s,triggeredbyinterestratehikesbytheBankofJapan(BOJ), leading to “[a] rapiddownturn in speculative investments”which “weakenedbothdemandandassetprices,creatingadownwardspiral”(Tandon,p8).Withinthreeyears,thestockmarkethadlost60percentofitspeak1989value,andlandpricesdecreasedbymorethanhalfinthefollowingdecade(Caballero,p2).Thedeclineinstockandrealestatepriceshad the potential to create large mark-to-market losses for banks and other financialinstitutions,giventheirvolumeofequityholdingsandrealestateloans(Kanaya,p8).
Duringthefirstyearsfollowingthecollapseofthebubble,financialinstitutionfailuresweresporadicandlimitedtosmallerinstitutions(Nakaso,p3).Thelargerbanksandgovernmentdelayedrecognizingtheextentof thenonperforming loanprobleminthehopethatassetpriceswould return topre-1990 levels (Kanaya,p22;Fujii, p4).Bankswerealso slow towriteoffloanswithalowprobabilityofrecoveryduetothestricttaxguidelinesforloanlosswrite-offs, as write-offs were permitted “only after the loan loss amount had beenascertainedinbankruptcyorforeclosureproceedings"(Kanaya,p11).
member institutions which provided the initial ¥7.9 billion (approximately $74 millionUSD)2 incapitalaswellas the financing for thepurchaseofbad loans(Packer1994,p2).BankscouldsellloanstotheCCPC,which“generatedtaxbenefitsforthebanksbecauseuponthetransfertotheCCPC,thesellingbankscouldrecognizelossesimmediatelythatreducedtheir taxes” (Hoshi 2010, p405). Institutions selling a loan to the CCPChad a contingentliability;iftherewasasignificantdifferencebetweenthepurchasepriceandcollections,thedifferencewaschargedtotheinstitution;therefore,“theCCPChasrecoursetothesellerofeachloan”(Packer1994,p3).Thefirstroundofpurchasesin1993included229loanswithafacevalueof¥682billionatadiscountof33.7percent(Packer1994,p6).Themajorbanksaccountedforthemajorityofthe loanssoldtotheCCPC(Packer2000,p147). Inthefirstyearsofoperations,theCCPCwasslowtodisposeofloans,asitsoldonly88propertiesbyMarch1994(Packer2000,p146).However, loandisposalacceleratedafter1998,andtheCCPCwasliquidatedin2004(Hoshi2010,p405).Intotal,theCCPCpurchasedNPLsworth¥15.4trillioninfacevaluewith¥5.8trillioninappraisedvalue(Hoshi2010,p405).3
CreditcooperativefailuresandtheRCB(1994-1998)
TokyoKyowaCreditUnionandAnzenCreditUnion,twosignificantcreditunions,failedinDecember1994 (Nakaso,p4). In1995, theBankof Japancreated theTokyoKyodoBank(TKB),anassetmanagementcompany,toassumetheassetsofthetwofailedcreditunions(Hoshi2004,p21).InAugust1995,theTKBassumedtheassetsofadditionalfailingcreditcooperatives and a failed bank (Nakaso, p5). Private financial institutions provided ¥20billionincapital,andtheBOJprovided¥20billionincapitalfortheTKB(Nakaso,p4).TheTKBwas reorganized into theResolution and CollectionBank (RCB) in September 1996(Nakaso,p7).Aftertherestructuring,theRCBbecamea75percentsubsidiaryoftheDICJ,asitreceived¥120billionincapitalfromtheDICJ(DICJ2001AR,piii).Ultimately,theRCBtookovertheoperationsof45failedbanksandcreditunionsandworkedtocollect,recover,orsell the nonperforming loans that those institutions had extended (JT 1999a;DICJ 1998,p15).
ThejusencompaniesandtheHLAC(1992-1998)
Concurrentwiththecreditcooperativefailures,therewasahighlevelofuncertaintyaboutthequalityoflendingbythejusen,thenon-bankhousingloancorporationsestablishedbybanks in the 1970s. The jusen moved into higher risk lending in the 1980s followingderegulationandincreasedcompetitioninthehomemortgagemarket(Hoshi2010,p399).Thejusenreceivedcapitalinjectionsin1993andcommittedtorehabilitationplans;however,real estate prices continued to fall, and the Ministry of Finance (MOF), creditors andinvestorsagreedtodissolvesevenjusenin1996(Kanaya,p24).TheMOFcommissionedaspecialexaminationofthejusenanddeterminedthat74percentoftheiroutstandingloanswerenonperforming(Kanaya,p24).
In 1996, the Japanese Diet (legislature) established the Housing Loan AdministrationCorporation(HLAC)(Koo,p10).TheHLACwasanassetmanagementcompanyforthejusen,andtheassetsofsevenjusencompaniesweretransferredtotheHLACinOctober1996(JT1996).TheHLACwasestablishedasa100percentsubsidiaryoftheDICJwith¥200billionincapital(DICJ2001AR,piii).TheHLACwascreatedtodisposeoftheestimated¥4.7trillionofNPLsfromthejusencompaniesthatitassumed,andthegovernmentestimatedthattheactivitieswouldtakeuptofifteenyearstocomplete(DICJ1998,p72;JT1996).Theinitialestimateof thenumberofNPLsof the jusen companieswasapproximately200,000, andtherewasconcern“thatasmuchas¥1.2trillionoftheloans[would]beunrecoverable”(JT1996).Inadditiontoassumingtheassetsofthejusen,theHLACsoughtcivildamagesfrombanksthatactedinacriminalmanner(JT1999a).4
IncreasesinNPLvolumeduringthe1990s
During the 1990s, there were an array of factors that led to the NPL problem and itscontinued acceleration. NPLs were distributed across all types of financial institutions,thoughtheproblemwasconcentratedinrealestate,construction,andwholesaleandretailtrading(Cabinet2001a).BanksinJapanwerereluctanttorecognizelossesonNPLsduringthe mid-1990s, as there were strict tax guidelines on write-offs; banks also feared thatborrowers would view the write-off as “a signal that the banks had given up on loanrecovery”(Kanaya,p11).ThemainbanksystemoflendingfurthercontributedtotheNPLproblem. A borrowing firm’smain bankwas its primary lender; themain bankwas the“quasi-insider monitor” that identified problems before the borrowing firm becameinsolvent and assistedwith business restructuring (Tandon, p93). However, manymainbanks continued to provide loans to firms, “even when the long-term viability of theirborrowers came into question” (Tandon, p93). The continued financing of failing firms,knownas‘evergreening’,isconsideredacontributingfactortothecrisis(Caballero,p2-3).Othermacroeconomic trends, such as “the bursting of the asset price bubble, continuedweakness of the domestic economy, chronic price deflation and the rising number ofbusinessfailuresandbankruptcieshelp[to]explaintheriseinNPLs”(Fung,p11).
Duringthe1990s,thegovernmentenactedincreasinglystringentguidelinestostandardizeloanclassificationanddisclosurerequirements.Attheonsetofthecrisisintheearly1990s,“[l]oanclassificationruleswerelaxasrelatedtointernationalbestpractices”,buttheNPLvolume increased as the government began to pass legislation to enforce classificationstandards (Tandon, p129). In addition, loan disclosure requirementswere progressivelystrengthened. The new provisioning policywas based on a bank’s self-assessment of itsportfolio,whichenabledmoreflexibleprovisioningbasedonthequalityofborrowersandtheirhistoryofdefault(Nakaso,p18).In1999,comprehensiverequirementsfordisclosurewere introduced, which were considered “among the most far-reaching in the world”
4 For more information on the jusen crisis, see: Milhaupt, C. & West, M.(2004).The “JusenProblem”.InEconomic Organizations and Corporate Governance in Japan.: Oxford University Press.https://www.oxfordscholarship.com/view/10.1093/0199272115.001.0001/acprof-9780199272112-chapter-4
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(Nakaso,p19).Thegovernmentalsosoughttofurtherstrengthenloanlossprovisioningandstandardize borrower and asset classification in 2002 (IMF 2003, p6). The progressivestrengthening of standards to increase transparency and consistency in reporting is onefactorthatcontributedtotheincreasingvolumeofNPLsbeginningin1992.5
Thoughbankswererequiredtoprovidemoretransparencyaboutloansandincreaselossprovisioning, uncertainty remained regarding the total volumeofNPLs in Japan. Inmid-1995,theofficialestimateofNPLswasapproximately¥40trillion(Tandon,p18).However,there were different sources of estimates of the total amount of NPLs in Japan: privateestimates, estimates based on bank disclosures and financial statements, and officialestimates. As reflected by the fact that “[p]rivate estimates of actual bad loans [were]substantiallygreaterthanamountsannouncedbythebanksandtheMOF”,therewasnotaclear understanding of the true scope of the problem, despite the write-offs andreclassificationofNPLs(Tandon,p29).Privateestimatesforbadloansrangedfrom¥100to¥250trillion,whiletheofficialestimatewas¥36.8trillionasof2001(Lincoln,p7).
Otherresponsestotheescalatingcrisis
TheseverityofthecrisisbecameclearwiththefailureoffourlargefinancialinstitutionsinNovember 1997 (Nakaso, p8). OnNovember 3, 1997, Sanyo Securities, a firmwith ¥2.7trillion in assets, filed an application to begin reorganization proceedings, and thegovernment immediately suspended its operations. Sanyo’s failure “paralysed the entireinterbankmarket,”andYamaichiSecuritiesfailedthreeweekslater(Nakaso,p8-9).Inthecase of Yamaichi, the government proceeded with an “orderly wind-down” rather thansuspendingitsoperations(Nakaso,p9-10).HokkaidoTakushokuBankfailedonNovember17;anassumingbankwasfound,andtheBOJprovidedliquiditysupport.OnNovember26,Tokuyo City Bank failed; the government released a statement that day reaffirming itscommitmenttofinancialstabilityandassuringdepositprotection,astheDepositInsuranceActhadbeenamendedin1996toincludeatemporarysuspensionofdepositinsurancelimits(Fujii,p4;Nakaso,p11).In1998,thePrimeMinisterannouncedthenationalizationoftheLong-TermCreditBankofJapanandtheNipponCreditBank;thebankswereplacedunderspecialpublicmanagementbytheDICJ(Hoshi1999,p2;DICJ1999,p10-11).
Withthecrisisreachinganacutephase,theDietpassedtheFinancialFunctionStabilizationAct,whichallowedthegovernmenttouse¥30trillionofpublicfunds,¥17trillionofwhichwent toprotection fordepositorsof failedbanksand¥13 trillionofwhichwent tobankrecapitalization(Nakaso,p11;Fujii,p5).Thefirstpubliclyfundedrecapitalizationprogram,whichused¥1.8trillion,tookplaceinMarch1998.However,theinjectionwas“unsuccessfulin stabilizing the situation,” and there was a high level of public dissatisfaction in thegovernment’s response to the crisis (Hoshi 2010, p401). The dissatisfaction promptedleadershipchanges,astheHashimotogovernmentresignedandanewgovernmentledby
5Foradditional informationon loanclassificationstandards,seeFSA2001. InspectionManual forDeposit-Taking Institutions.https://web.archive.org/web/20060622192021/http://www.fsa.go.jp/en/refer/manual/yokin_e/y00.pdf;Kawai, M (2005). Reform of the Japanese Banking System.https://www.academia.edu/23481809/Reform_of_the_Japanese_banking_system;andNakaso(2001),p18-19
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KeizoObuchiassumedpower(Hoshi2010,p401).ThenewgovernmentpassedthePromptRecapitalization Act (also referred to as the Early Strengthening Law or the FinancialFunction Early Strengthening Law) and approved another capital injection worth ¥7.5trillion (Nakaso, p15), which seemed to calm the market, though “the problem of NPLspersistedandthecapitalshortagesoonreemerged”(Hoshi2010,p401).6
OverthecourseofthefinancialcrisisinJapan,crisismanagementandoversightauthoritychanged,andnewgovernmentalbodieswereestablished.TheFinancialSupervisoryAgencywasestablishedinJune1998,andittookoversupervisorypowersfromtheMOF(Kanaya,p31). The Financial Reconstruction Commission (FRC)was also established in 1998 andgiventheauthoritytoinspectandsupervisethebanks;itwasestablishedasanindependentadministrative body under Prime Minister to administer the new laws related to bankfailuresandcapitalinjections(Nakaso,p14).In2001,theFinancialSupervisoryAgencyandtheFRCwerereorganizedintotheFinancialServicesAgency(FSA),andtheFSAbecameanexternal part of theCabinetOffice (Fujii, p19). TheFSAhad “integral responsibility oversupervision,inspection,andplanningofthefinancialsystem”(Hayashi,p502).
Therewas a strong public outcry against using taxpayermoney to resolve the crisis. Inresponsetothejusenproblem,thegovernmentused¥685billionoftaxpayermoney,whichledto“publicoutrageovertherepudiationofthepromise”nottorelyontaxpayerassistancetoresolvethecrisis(Hoshi2010,p400).Afterthis,“anyreferencetotheuseofpublicfunds[became]almostapoliticaltaboo”(Nakaso,p20),and“[t]helegacyofthisexperiencewaslonglastingbecauseitmadethegovernmentveryreluctanttoaskforthemuchlargersumsthatwouldbeneededoncethetroublesofthecommercialbanksbecameevident”(Hoshi2010,p400).
ProgramDescription
TheResolutionandCollectionCorporation(RCC)wasestablishedthroughthemergeroftheHLACandtheRCBthroughanamendmenttotheDepositInsuranceActandtheFinancialRevitalizationAct(alsoreferredtoastheFinancialFunctionReconstructionLaw).In1998,themergeragreementwasannounced,andtheRCCbeganoperationsonApril1,1999(RCC,p12). TheRCCwas created to “accelerate the recovery and collection ofnon-performingloanstransferredfromfailedfinancialinstitutionsthroughafairandtransparentprocessinordertominimizepubliccosts”; theRCCcouldalsopurchaseNPLsfromsolvent financialinstitutions“toacceleratethedisposalofnon-performingloans”(DICJAR2004,pi).TheRCCassumedtheresponsibilitiesoftheHLACandtheRCBformanagingandcollectingtheNPLsfromthe jusenandthefailedcreditcooperatives(Kang,p66).TheRCCwouldcontinuetopursuelegalactionagainstformerexecutivesanddebtorsoffailedinstitutions(Kang,p66).TheRCCpurchasedpreferredsharesandsubordinateddebttheinstitutionsreceivingcapitalinjections,inaccordancewiththePromptRecapitalizationAct,thoughtheFRCoversawthecapitalinjectionsanddeterminedtheunderwritingtermsofthecapital(Nakaso).
TheRCCwasestablishedasawholly-ownedsubsidiaryoftheDepositInsuranceCorporationofJapan(DICJ)(RCC,p2).ThegovernmentofJapanprovidedthefundingfortheRCC,astheDICJ issued government-guaranteed DICJ bonds and injected the proceeds into the RCC(Kang,p66).WhentheRCCbeganoperations,ithad¥212billionincapital(Kang,p66).KoheiNakabo,whoservedaspresidentoftheHLACfromitsfoundinginJuly1996,becamethepresidentof theRCC(Otake1999a).TheRCCwasstaffedbythepreviousHLACandRCBemployees(Otake1999a),andtheRCChadapproximately1,900employeesinApril1999(Nakaso,p56).
Process for Solvent Institutions
TheFinancialRevitalizationActgrantedtheRCCtheabilitytopurchaseNPLsfromsolventbanksinadditiontofailedinstitutions,thoughsolventbankswerenotrequiredtoselltheirNPLs to the RCC (DICJ 2000, p5; Hoshi 2010, p405). On June 22, 1999, the RCC beganacceptingapplicationsfromthehealthybankswillingtoselltotheRCC(JT1999c).ThesebankswererequiredtofiletheirprovisionalapplicationsbetweenJune22andJuly9,andtheRCCandDICJreviewedtheapplication,exchangedopinionswiththebanks,andprovidedan offer price for the loans (JT 1999c). Banks interested in the offer then filed formalapplicationstoproceedwiththepurchase.Additionalapplicationwindowswereannouncedby the RCC over the course of its operations.When the Financial Revitalization Actwasenacted in 1998, it designated the authority to the RCC to purchase assets from soundfinancialinstitutionsthroughMarch31,2001,butthelawwaslateramendedtoextendthedeadlinetoMarch31,2004(DICJ2008,p25).InApril2003,theperiodwasagainextended,andthefinaldeadlinewassettoMarch31,2005(DICJ2008,p48).
ProcessforInsolventInstitutions
Inthecaseofafailedfinancialinstitution,theDICJ,FSA,andcourtsworkedtogetherthroughtheresolutionprocesstoensureasmoothtransferofbusinesstoanassuminginstitution.TheinstitutionsubmittedanapplicationtotheDICJforassistance,andtheDICJdeterminedthefinancialassistance,whichcouldtake“theformofamonetarygrant,loanordepositoffunds, purchase of assets, guarantee of liabilities, assumption of financial obligations,subscription for preferred shares and other capital raising instruments, or loss sharing”(DICJ2008,p44).Thepurchaseofassetswouldbeagreeduponbythefailedinstitution,theassumingfinancial institution(s)orbridgebank, theRCC, theDICJ,andtheFSA.TheDICJreleased statements detailing the financial assistance given to the failed financialinstitutions,beginningin2001.Thesestatementsdetailedthepurchasepriceandthebookvalueofassetstransferred.7
PurchasePrice
TheRCCdoesnotappeartohavedisclosedthemethodologyfordeterminingthepurchasepriceofferedforNPLs,thoughitestablishedamulti-stageprocesstodeterminetheprice.Tobegin the process, a real-estate appraisal was submitted to the RCC with the propertyvaluation;theRCCwouldthenreviewtheappraisal(Packer2000,p154).BecausetheRCC
didnothaverecoursetotheoriginatorbank,itsoughttodetermineanappropriatevalueforthe purchase price (Packer 2000, p154). The RCC,with guidance from the DICJ and thePurchasePriceExaminationBoard(anadvisoryboardoftheDICJgovernor),determinedthepurchasepriceforassetsfromsolventinstitutionsonacase-by-casebasis(Nanto,p10;DICJ2008,p25).TheRCCalsosoughtguidancefromsupervisorybodies,suchastheMOFandtheFSA(JT1999b).
When the RCC was established, it purchased assets at a steep discount to prevent therecognitionoflossesonitsportfolio;thiswasdrivenbytheheightenedpoliticalclimateandthegovernment’shesitancytousetaxpayerfundingforbankbailouts.ByOctober2001,theRCChadpaidanaverageof3.8percentoftheoriginalbookvaluefortheassetsitpurchased(JT2001a). In certain cases, theRCCwouldpay¥1 “whenpurchasingvirtually valuelesscollateraltakenonsouredloans”whichdiscouragedbanksfromaskingtheRCCtobuytheirNPLs(JT2001a).GiventhediscountthattheRCCwaspayingtopurchaseloans,concernswereraisedthatbankswerenotincentivizedtoselltheirNPLstotheRCC.Thus,onJanuary11,2002,anamendmenttotheFinancialRevitalizationActwasenactedwhichenabledtheRCCtopurchaseNPLsfrom“soundfinancialinstitutionsatmarketvalue”(DICJ2002).SomecriticsadvocatedthattheRCCbeabletopurchaseNPLsatbookvalue,butthiswasultimatelyunsuccessful,astheRCCsoughttoavoidrecognizinglossesthatwouldultimatelybeimposedontaxpayers(JT2002b).
Duringthefirstyearsofoperations,theRCChadlimiteddisposaloptions,asitsobjectivewasto “solely recover all of its loans,mainly through repayment or collateral selloff” (Otake1999a). In 2001, the government actively pursued the expansion of the RCC’s scope toacceleratethedisposalandresolutionofNPLs.TheRCCreceiveditstrustserviceslicenseinSeptember 2001, which provided “supplementary measures to dispose of NPLs, whichprivatefinancialinstitutionscannothandle”(FSA2001).ThelicenseallowedtheRCCtobe“entrustedwithaportionofthebanks’nonperformingloanassetsandusethemtosecuritizeloans and sell them to investors” (JT 2001b). The Minister of Finance stated that the“approachisexpectedtoexpediteanintensivereductionofNPLsstillremainingonbanks’balancesheets”(FSA2001).Inaddition,theRCCadoptedbulksalesasadisposalmethodin2002(DICJ2008,p19).
Political and economic pressure to address the NPL problem escalated as its scopewasrecognized.ThePrimeMinister, JunichiroKoizumi,convenedapaneltoprepareareformprogramaimedatfixingtheNPLproblem.InaspeechtotheDietonSeptember27,2001,thePrimeMinister announced that “in order to expand the functions of the Resolution and
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CollectionCorporation(RCC),wewillintroducemoreflexibilityintothepricingsystemfornonperformingloanpurchaseandpromotetheestablishmentofafundforfurthercorporatereconstruction”(Koizumi).TheCabinetcalled for theRCCtoestablishaheadquarters forcorporaterestructuringin2001“inordertofacilitatetherehabilitationoffailedcompanies”(Cabinet2001b).Thus,theRCC’sactivitiesexpandedtoincludecorporaterestructuringandrehabilitation,which included debt restructuring and rehabilitation planning, as anothermethodtodisposeofandmanageNPLs.LegalrevitalizationcaseswerethosewheretheRCCwouldutilizelegalproceedingstoenforcecivilrehabilitationandcorporatereorganization.Withtheconsentof financialcreditors,theRCCcouldwork“tomaintainthelivelihoodofdebtorsandrebuild/sustaintheirbusinessbymodifyingloanterms”(RCC,p4).TheRCCalsoused“itstrustbusinessfunctionstosupporttherevitalizationofbusinessoperatorswhenrevitalizationcases[were]broughttotheRCCbyotherfinancialinstitutions”(RCC,p11).
TheministeroftheFSA,HeizoTakenaka,alsoemphasizedtheimportanceofresolvingtheNPL problem. In October 2002, he announced the three-pillared Program for FinancialRevivalandannouncedtheworkscheduleinNovember2002(FSA2002c).Onepillar,the“NewFrameworkforCorporateRevival”,promotedtheuseoftheRCCtodisposeofNPLsandencouraged theRCCtoengage incorporaterestructuring.TheProgramforFinancialRevival reiterated the government’s goal to “normalize theNPLsproblem inFY2004byreducingmajor banks’ NPL ratio to about half” (FSA 2002b). The Program for FinancialRevivalfurtherencouragedtheRCCtodevelopamarketforloansbyacceleratingloansalesandstrengtheningitssecuritizationfunction(FSA2002b).
OutcomesByMarch31,2005,theRCCpurchasedatotalof¥4,004billion(bookvalue)ofNPLsfrom192 solvent financial institutions at a purchaseprice of¥353billion, an approximate91percent discount on the book value (DICJ 2005). As ofMarch 2008, the RCC collected acumulative¥642billionontherecoveryoftheseloans(DICJ2008,p72).
For the purchase of assets from failed financial institutions, the RCC acquired a total of¥6,366billion(purchaseprice)ofNPLsandrecovered¥7,143billionasofMarch31,2008
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(DICJ 2008, p72). The estimated book value of the NPLs purchased from insolventinstitutionsis¥29,000billion.8Ofthe¥6,366billioninpurchasesfromfailedinstitutions,theRCCpurchased¥4,576billion frombanks,¥550billion fromShinkinbanks (regionalcooperativeinstitutions),and¥1,241billionfromcreditcooperatives(DICJ2008,p73).
Purchase of assets from failed financialinstitutions 5,186.5 5,496.4
Purchase of assets frombanksplacedunderspecialpublicmanagement(theformerLong-Term Credit Bank of Japan and the formerNipponCreditBank)
1,179.8 1,646.4
Total 6,366.3 7,142.8
Source:DICJ2008
During the first asset purchasewindow for solvent banks, theRCC received applicationsfrom39financialinstitutionsforatotalassetpurchaseof¥220billion(Otake1999b).TheDICJ reported that the RCC purchased assets from solvent financial institutions onSeptember29,1999(DICJAR2002,pxv).Afterthefirstwindowclosed,thepresidentoftheRCCannouncedthathehopedtheRCCwouldeventuallybuy¥10trillionworthofloansandthathewasconfidentmoreofferswouldcomeinthenextwindow(Otake1999b).
According to the IMF, the RCC had “a minor role in reducing bank NPLs” between itsestablishmentin1999and2002(IMF2002,p22).However,withthegovernment’semphasison utilizing the RCC as a tool to dispose of NPLs, the RCC began to more aggressivelypurchaseassets. Inaddition,a2002amendmentenabledtheRCCtopurchaseNPLs fromsolventinstitutionsatmarketvalue,makingitmoreattractivefortheinstitutionstoselltotheRCC(DICJ2002).TheMinisterforFinancialServicesin2002remarkedthat“asfor[the]sellingoffofloanassetstotheRCC,thesalespriceshaveconsiderablyincreasedtothefairvalue.Theamountofsaleshasalsobeguntodemonstrateasignofincrease”(FSA2002a).
In2001and2002,themethodsavailabletotheRCCforthedisposalandcollectionofNPLsexpanded. The RCC obtained a trust license to securitize NPLs and began to engage incorporaterevitalizationin2001.Bulksaleswereadoptedasadisposalmethodin2002(DICJ2008,p19).Soonafterreceivingitstrustlicense,theRCCissued¥107.4billioninsecurities(Kang,p67).AccordingtotheDICJ,theliquidationofreceivables(bookvalue)bytheRCC
totaled ¥8,403 billion by the end ofMarch 2008 (DICJ 2008, p19). The RCC disposed of¥1,562billionofassets through individualsales,¥617billion throughsecuritization,and¥6,224billionthroughbulksalesbetween1999and2007.Thesecuritizationfunctionwasutilized between 2001 and 2005, and the bulk sales method was adopted in 2002 andbecametheprimarytoolforassetdisposal(DICJ2008,p19).
Total 95.5 166.2 593.8 1,062.2 1,706.4 2,690.1 892.4 1,196.4 8,403
Source:DICJ2008
The RCC utilized its corporate restructuring function to reorganize borrowers behindnonperformingloans.BetweenNovember2001andMarch31,2008,theRCCwasinvolvedin569casesofcorporaterevitalization,whichincludedcasesoflegalrevitalization,privaterevitalization,andprivatelyfundedrevitalization(DICJ2008,p77).
By2012,theRCChadcompletedtheclosureofjusenaccounts(RCC,p1).Theresidualassetsof the JusenAccount,worth¥11.9billion,weretransferredto thenational treasury(DICJ2013,p35).
DuringthefirstyearsoftheRCC’soperations,thefullscopeoftheNPLproblemwasnotfullyunderstood,andtheNPLproblemaccelerated.In2001,theCabinetOfficestatedthattheNPLstock continued to increase for two reasons: the NPL definition had been graduallyexpanded,andthepaceatwhichbanksdisposedofloanswasslowerthanthepaceatwhichtheyprovisionednewNPLs(Cabinet2001a).Because“[t]hegovernmentrequiredthebanksthat receivedpublic capital to increase lending” to businesses exposed to the real estateindustry,“anewsetofnonperformingloans”wascreated(Hoshi2010,p402).TheratioofNPLstototalcreditexposureatthemajorbankspeakedin2001at8.7percent.Thepeakratioforregionalbankswas8.1percentin2001(BOJ2006,p4).TheFSAbegantoconductinspections of banks and reported the gap between the banks’ disclosures and its ownassessment;inthefirstassessmentwhichevaluated2000-2001,theFSAfoundthatthegapbetweentheamountsreportedby15majorbanksandtheFSA’sinspectionwas¥12.4trillion(FSA2003).
TherewereadditionalpolicymeasuresenactedtoaddresstheNPLratioinJapan,suchasthecontinuedstrengtheningofclassificationandprovisioningstandards.Capitalinjectionswereanother key component of the government’s response (Hoshi 2010, p409). In addition,economicrecoveryiscorrelatedwithNPLratios;aseconomicconditionsimprove,firmsaremorelikelytobeabletorepaydebt(Fujii,3).TheBOJreportedin2006that“theratioofNPLstototalcreditexposureofthemajorbanks(12largenationwidecommercialandtrustbanks)declinedsignificantlyto2.9percentattheendoffiscal2004,aftertheyachievedthetargetsetbythegovernmentofhalvingtheratioasoftheendoffiscal2001withinthreeyears.Itcontinuedtodeclineto1.8percentattheendoffiscal2005”(BOJ2006,p4).TheBOJreportedthattheprogressmadebytheregionalbankswasnotasfastasthatmadebythemajorbanks.Inthe2006report,theBOJstated,“TheratioofNPLsattheregionalbanks(111localcommercialbanks)declinedto4.6percentattheendoffiscal2005from8.1percentattheendoffiscal2001”(BOJ2006,p4).TheBOJattributestheslowerdeclineintheratioofNPLsatregionalbankstothe“moderatepaceofrecoveryofthelocaleconomiesinwhichthe regionalbanksoperate, comparedwith the recoveryof themetropolitan areas” (BOJ2006,p5).Additionally,thedisposalapproachtakenbyregionalbanksmayhavebeenstifledbythe“fact that theregionalbankstend[ed]toputmorefocusonmaintaining long-termbusinessrelationshipswithborrowerfirms”(BOJ2006,p5).
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Establishment of the IRCJ
ThoughthescopeoftheRCCwasexpandedin2002toincludecorporaterevitalizationandrestructuring,theJapanesegovernmentcreatedanotherbody,theIndustrialRevitalizationCorporationofJapan(IRCJ),inApril2003,inaccordancewiththeIndustrialRevitalizationCorporationLaw,assubsidiaryoftheDICJ(DICJ2008,p69).TheIRCJwasestablishedon“thepremisethat[itwould]complementtheRCC”(Takagi,p8).AccordingtoShinjiroTakagi,thechairmanoftheIRCJ,theamendmentthatexpandedtheRCC’sscopetoincludecorporaterestructuring“[wasnot]sufficient,whichexplain[ed]theneedfortheIRCJ”(Takagi,p8).Heframedthetwobodiesasworkinginparallelandnotinconflict:“theIRCJandRCCshouldwork together to clean up debt-ridden companies and efficiently rehabilitate as manycompaniesaspossible”(Takagi,p8).TheIRCJwasestablishedtopurchaseNPLsfromnon-main bank lenders; the IRCJ would then use its status as a creditor to work with theborrower’smain bank to restructure debt or assist with corporate revitalization (Hoshi2010,p404).
The IRCJwas financed by government-guaranteed loans and fundedwith ¥10 trillion inpurchasingpowerand¥50billionincapital(Pohl,p51).Itwas“incorporatedasajointstockcompany, [which allowed] the government’s involvement in setting criteria for financialsupport”(Takagi,p2).TheassetpurchasewindowforIRCJendedonMarch31,2005,andthe IRCJ was given guidance to dispose of or manage assets within three years of thepurchasedate(Takagi,p3).Furthermore,theIRCJwasto“concentrateitspurchaseofNPLsinthefirsttwoyearsandsellthepurchasedNPLsandequitiesacquiredviadebt-to-equityswapwithin its five-year lifespan” (Takagi,p3).The IRCJcouldpurchase loansatmarketvalue,while takingthe feasibilityof therehabilitationplan intoaccount(IMF2003,p23).WhentheIRCJwasestablished,therewasnoguidanceforhowtotreatlosses(Pohl,p52).Overitslifespan,theIRCJspent¥530billiontopurchase¥970billionofdebt;atthetimeofitsclosureinMay2007(ayearearlierthanplanned),theIRCJhadrestructured41borrowerswith¥4 trillion in totaldebt (Hoshi2010,p405-406).Theborrowerscame from“awiderangeofbusinesssectors,”andtheIRCJ“playedaroleinbridgingthegapbetweenprivateand legal corporate reorganization under a scheme combined with civil rehabilitationprocedurestominimizeimpairmentofbusinessvalue”(DICJ2008,p69).
II. KeyDesignDecisions
1. At the time of the establishment of the RCC, the Japanese governmentannouncedaseriesofreformsandpackagestoresolvetheescalatingfinancialcrisis.
Over the course of 1998, the Japanese government passed several laws to address thesystemic financial crisis.TheFinancialFunctionStabilizationActwaspassed inFebruary1998whichmade¥30trillionavailabletothegovernmentforcapitalinjectionsanddepositprotection (Hoshi 2010, p401). In October 1998, the Diet, the Japanese legislative body,passedtheFinancialRevitalizationActandreplacedtheFinancialFunctionStabilizationActwith the Prompt Recapitalization Act (DICJ 2008, p22). The Prompt Recapitalization Act
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“stipulate[d] a temporary emergency measure regarding capital injection to financialinstitutions” (DICJ 1998, p13). The Financial Revitalization Committee (FRC) was alsoestablished in 1998 to oversee the bank restructuring process (Kanaya, p32). Thegovernmentapprovedtworoundsofcapitalinjection:thefirst,undertheFinancialFunctionStabilization Act, in March 1998 (¥1.8 trillion) and the second, under the PromptRecapitalizationAct,inMarch1999(¥7.5trillion)(Hoshi2010,p401-409).TheRCCcouldpurchasepreferredsharesandsubordinateddebtfromfinancialinstitutionsasapartofthePromptRecapitalizationAct, thoughthecapital injectionswereoverseenbytheFinancialRevitalizationCommittee.9TheFinancialRevitalizationActincludedtheprinciplesfortheresolution of failed financial institutions (DICJ 1998, p12). As a part of the FinancialRevitalization Act, the HLAC and the RCBweremerged to create the RCC, which beganoperationsonApril1,1999(Kanaya,p32).Concurrently,thegovernmentwasintheprocessofnationalizingtheLong-TermCreditBankandtheNipponCreditBank(Hoshi2010,p401).
2. The government expanded the scope of the RCC to include corporate debtrestructuringandcorporaterevitalizationin2001.Thegovernmentultimatelyestablished a separate assetmanagement company, the IRCJ, with a similarfunctionin2003.
Thescopeof theRCCwasexpanded in2001 to includecorporatedebtrestructuringandrevitalization.PrimeMinisterKoizumi,inapolicyspeechtotheDietin2001,statedthatthefunctionoftheRCCwouldbeexpandedandthatafundforfurthercorporaterevitalizationwouldbeestablished(Koizumi).TheFront-LoadedReformProgramincludedameasuretoreinforcethedisposalofNPLsandstatedthattheRCCwould“establishaheadquartersforcorporaterestructuringinordertofacilitaterehabilitationofcompanies”inNovember2001(Cabinet2001b).In2003,thegovernmentestablishedanotherassetmanagementcompany,theIndustrialRevitalizationCorporationofJapan(IRCJ),whichwasestablishedtoworkwiththeRCCtoaddresstheNPLprobleminJapan(Takagi,p8).TheIRCJwasgiventhepurposeofrestructuringthebadloansitpurchasedandassistingwiththecorporaterevitalizationofborrowers (Takagi, p3). The IRCJ had a purchase window of two years and focused onpurchasingbaddebt fromdistresseddebtor companies thatwereviable and likely tobesuccessfullyrehabilitated(Takagi,p2).
TheRCCwasafullyownedsubsidiaryoftheDepositInsuranceCorporationofJapan(DICJ)(DICJ 2008, p40). The function to manage, collect, and dispose of assets from bankruptinstitutions was designated to the DICJ in the Deposit Insurance Act; the DICJ was alsodesignated the authority to take action on specified difficult collection claims, includingclaimstiedtoorganizedcrime(DICJ2008,p48-49;Otake1999b).TheDepositInsuranceActwas amended in 1996 to allow the DICJ to purchase assets from failed institutions as a
method to provide funds to failed financial institutions (Koo, p9). The FinancialRevitalizationActwasenactedin1998andestablishedtheRCC,fromthemergeroftheRCBandtheHLAC,asasubsidiaryoftheDICJ(DICJ2008,p68).BeforetheRCCbeganoperations,thescopeof itsauthoritywasexpandedto includethepurchase,management,collection,anddisposalofassetsfromsoundfinancialinstitutions,whichwasdelegatedintheFinancialRevitalizationAct(Koo,p9).TheDICJdesignateddebtrecoveryandrealestatemanagementanddisposalworktotheRCC,whichperformstheseactivities“onbehalfoftheDICJ”(2002AR,pvi).
AdditionallegalauthoritywasdelegatedtotheRCCinavarietyofmeasuresintheyearsafteritsestablishment.In2001,PrimeMinisterJunichiroKoizumi,establishedasetofstructuralreformpolicies,whichincludedcorporaterestructuring(Koizumi),andthe“Front-LoadedReformProgram”of2001stated that theRCCwas toestablisha corporate revitalizationheadquarters (Cabinet2001b).Theability topurchaseassets fromsolvent institutionsatmarketvaluewasdelegated inanamendment to theFinancialRevitalizationAct in2002(DICJ2008,p18).Additionally, theRCCwasgranteda trust services license toengage insecuritization and was given the authority to participate in auctions. The Program forFinancial Revival, established by the Financial Services Agency (FSA) and introduced in2002, further reiterated that the scopeof theRCC includedcorporate restructuring (FSA2002b). Furthermore, amendments to the Financial RevitalizationAct in 2001 and 2003ultimatelyprolongedthewindowforassetpurchasesfromsolventinstitutionstoMarch31,2005(DICJ2008,p51).
Table4.TimelineofChangestoLegalAuthorityoftheRCC
Year LegalAuthorityGrantedorExtended1996 • RevisiontotheDepositInsuranceActdesignatingauthoritytotheDICJto
With the establishment of theRCC, the governmentprojected confidence in its ability toresolvetheNPLproblem.ThepresidentoftheRCCwasfrequentlyquotedinpressreleasesandarticlesintheJapanTimes.Hewasseenasastrongleaderoftheorganization(Otake1999b).WhenhebegantoleadtheRCC,hestated,“Thisnewjobisanurgentandimportanttask since the banks’ blood vessels are clogged with bad loans” (JT 1999a). Upon itsestablishment,theRCCwasdeemedto“[signal]thebirthofapowerfulstate-backedorgantocollectbadloans”(Otake1999a).Duringthefirstpurchasewindowforsolventfinancialinstitutions,thepresidentoftheRCCrecognizedthatthetotalwaslessthananticipatedbutwasconfidentthatfuturewindowswouldbemorefruitful(Otake1999b).
However, there was a “divergence between the government’s characterization of theconditionof thebanking industryand thatofoutsiders” (Hoshi2010,p401).Therewereconflicting messages regarding the scope of the NPL problem in Japan, with privateestimates, bank estimates, and official estimates varying in the estimated scale of theproblem;infact,the“officialestimatesofbadloanswereregardedasa‘lowerbound’”ofthescopeoftheNPLproblem(Tandon,p18).Inafurtherexampleofthelackofconsensus,IMFdirectorsandgovernmentofficialswerenotalignedontheurgencyofthecrisis.IMFanalystsurgedthegovernmenttotakedecisiveandaggressiveactiongiventhescaleofthecrisis(JT1999d). However, the statements released by the government contradicted the IMF – inFebruary1999,aMOFofficialstatedthatthefinancialcrisiswouldbeoverwithinamatterofweeks(Hoshi2010,p401).In addition, there was public uncertainty and distrust of the government’s reforms andinterventions,followingtheuseoftaxpayerfundingof¥685billionforthejusenproblemin1996.Thisassistancewasviewedunfavorablybythepublic,asitreflectedthegovernmentreneging on its promise not to rely on taxpayer funds to resolve the crisis. After thisexperience, it became politically unpopular to advocate for programs that would utilizetaxpayerfundsforbankassistance(Nakaso,p6).
When the government began to expand the scope of the RCC to include corporaterestructuring,atrustserviceslicense,andtheabilitytopurchaseNPLsatmarketvaluefromsolventfinancialinstitutions,thegovernmentwaspresentingamessageofconfidenceintheabilitiesoftheRCCtoworktowardstheobjectiveofresolvingtheNPLcrisis(FSA2001).TherewaspublicspeculationsurroundingtheRCC’saddedfunctionalities,includinghopethat the RCC would “have the teeth to promote disposal of the banks’ huge bad loans,followinginthefootstepsoftheResolutionTrustCorp”(Kishima).
TheformerpresidentoftheHLAC,KoheiNakabo,becamethepresidentoftheRCC(Otake1999a).TheRCCwasstaffedbythepreviousHLACandRCBemployees(Otake1999a).WhentheRCCwasestablishedinApril1999,ithadapproximately1,900employees(Nakaso,p56).According to an analysis on asset management companies published by the Bank forInternationalSettlements,theRCChad“limited”independenceinthelegalenvironmentandwasnotgrantedspeciallegalprotectionforstaff(Fung,p58).
TheDICJoversawandprovidedguidancetotheRCC,andtheFSAandBOJprovidedexternalgovernanceandoversight(Fung,p56).TheDICJprovidedtheRCC“withtheguidanceandadvice necessary to execute its recovery activities; such as uncovering hidden assets byexercisingtherighttoinspectproperties”(DICJ2004pvii).TheIMFrecognizedthattheFSA,BOJ,DICJ,andRCCalldemonstrated“ahighdegreeoftransparency”intheiroperations(IMF2003,p64).TheactivitiesoftheRCCwerereportedbytheDICJ,thoughitdoesnotappeartohavepublishedthenamesofthesolventfinancialinstitutionsfromwhichitpurchasedNPLs.TheDICJexplicitlypublishedthenamesofthefailedfirmsreceivingfinancialassistanceinpress releases and public statements. The releases portrayed the financial assistancescheme,thebookvalueoftheassetstransferredtotheRCC,andthepurchasepricefortheassets.10
The government of Japan provided all of the funding for the RCC. The DICJ issuedgovernment-guaranteedbondsandinjectedtheproceedsintotheRCC(Kang,p66).Atthetimeofitsinitialoperations,theRCChad¥212billionincapital(Kang,p66).TheRCCdidnothave recourse to the originator banks for the losses incurred when it sold collateralassociatedwithaloan(Hoshi2004,p21),andtherewasstrongpublicsentimenttoavoidincurringlosses(Nakaso,p6).Thus,theRCCpurchasedassetsatasteepdiscountfrombookvalue,onaveragea78percentdiscountfromfailedinstitutionsanda91percentdiscountfromhealthyinstitutions,makingitunlikelythattheRCCwouldrecognizelossesonthesaleorcollectionofassets(Koo,p9).
AccordingtoArticle53oftheFinancialRevitalizationAct,theeligibleinstitutionsincluded:managedfinancialinstitutions,agreementsuccessorbanks,andspecialpublicmanagementbanks(Law132).Thedefinitionof‘financialinstitution’,asdefinedintheDepositInsuranceAct,includedmajor,regionalandcitybanksaswellascreditunionsandcreditcooperatives(DIA). Other eligible financial institutions included bridge banks, the Federation ofAgricultural Cooperative Associations, and the Federation of Fisheries CooperativeAssociations(DICJ1998,p40).SpecialpublicmanagementbanksrefertobankssuchastheLong-TermCreditBankandNipponCreditBank,whichweretemporarilynationalizedbanks(Law132).
9. The RCC could purchase nonperforming and performing loans from eligibleinstitutions.
The typesofassets that theRCCcouldpurchase fromsolvent institutions included loans,suspencepayments,interestreceivablesandaccountsreceivablesforborrowersclassifiedas “bankrupt,de factobankruptor indangerofbankruptcy” (DICJ2002PurchasePrice).Loansthatwereineligibleincludedsmallloans(lessthan10million),loanstopublicwelfarecorporations, loanswith disputed claims, loans to borrowers undergoing reorganization,loanstonon-residents,andloansforoverseasrealestate(DICJ1998,p40).Forthetransferofassetsinthecaseofafailedinstitution,theassetseligibleforpurchaseweretheassetsconsideredunsuitableforthebridgebankorbanksunderspecialmanagementtohold(DICJ1998, p74-75). The NPL problem was concentrated in real estate, construction, andwholesaleandretailtrading(Cabinet2001a).Therewasnoloansizerestriction.TheDICJwasdelegatedspecialinvestigativepowersthroughtheJusenAct,theDepositInsuranceAct,andtheFinancialRevitalizationAct.ThesespecialinvestigativepowerssupportedtheRCC’scollectionofNPLs,especiallyuncollateralizedloans(DICJ2001,p5).
TheRCCwasengagedasneededforinsolventfinancialinstitutions,astheDICJwasinvolvedinoverseeingthefinancialassistanceprocess.Inthecaseofafailedfinancialinstitution,theDICJ,FSAandcourtswereinvolvedinoverseeingandmanagingtheresolutionprocess(DICJ2008,p54-55).TheFSAappointedafinancialadministrator;ifnoassuminginstitutionwasfound,theFSAfoundabridgebank(DICJ2008,p54-55).Thefailedinstitutionandassuminginstitution(s)submittedanapplicationtotheDICJforassistance,andtheDICJdeterminedwhethertoprovideassistance.Thefinancialassistancecouldtake“theformofamonetarygrant, loanordepositof funds,purchaseof assets, guaranteeof liabilities, assumptionoffinancialobligations,subscriptionofpreferredshares,etc.orlosssharing”(DICJ2008,p44).Iftherewasanassumingfinancialinstitution,theassetsthattheassumingbankdidnotwantwere transferred to theRCC.Thepurchaseof assetswouldbeagreeduponby the failedinstitution,theassumingfinancialinstitution(s)orbridgebank,theRCC,theDICJ,andthe
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FSA (DICJ 2008, p44). The purchase price and book value of assets transferred weredisclosedinpressreleasesfromtheDICJ.11
11. The RCC could purchase NPLs from solvent financial institutions, after theinterestedbankssubmittedanapplicationduringthepurchasewindow.
Forthepurchaseofassetsfromsolventfinancialinstitutions,theRCCannouncedthefirstapplicationwindowwhenitbeganitsoperations;theapplicationwindowwasfromJune22to July 9, 1999. (JT 1999c). The application window for solvent institutions“asarule[took]placefourtimesayear,”buttheRCCwasalsoabletoconsultwithindividualfinancial institutionsonthepurchase timeframe if requested(DICJ2002).Afterreceivingapplications,theRCCwouldevaluatetheapplicationsfrominterestedbanksandofferapriceto thebanks; theDICJprovidedguidanceon theofferprice (JT1999c). If interested, thebankswouldthensubmitaformalapplicationtoinitiatetheprocessandwouldworkwiththeRCCtocoordinatethepurchase(JT1999c).Thedeadlineforpurchasewasinitiallysettoexpirein2001butwasultimatelyextendedtoMarch31,2005(DICJ2008).
12. TheRCC had special investigative authority for cases considered difficult torecover,specificallythoserelatedtoorganizedcrime.
TheDICJsupportedtheRCCinthecollectionandrecoveryofassetsfrom“maliciousdebtorsandothers” including “obstructed recovery cases involving antisocial forces” (DICJ 2008,p4). Some consider the “antisocial forces”, also called the yakuza, to be a key factorcontributingtothesizeofNPLproblemaswellastheslowrecoveryanddisposalofNPLsinJapan (LA Times). Estimates for the number of loans related to the yakuza variedsignificantly,withoneestimateat80%(LATimes)andothersat10%or30%(WashingtonPost). Banks and financial institutions made loans to yakuza borrowers, some of whichbecamenonperformingafterthecollapseoftherealestateassetpricebubble.Insomecases,theyakuzapreventedbanks fromforeclosingonpropertyandpreventedauctions,as theyakuzasquattedinemptyunitsandbuildings(WashingtonPost).By2002,18%oftheloansthe RCC had purchased were yakuza-related (Bloomberg). The National Police Agencybacked the RCC to aid with the seizure of property, and the DICJ established SpecialInvestigation Divisions to enhance the recovery of assets (DICJ 2008, p26). The DICJ“reinforced support for the fair handling of collections in obstructed recovery cases byproviding meticulous guidance and advice to the RCC concerning the monitoring andanalysisofbehaviorsofdebtsintheprocessofsubsequentnegotiationonrecovery”(DICJ2008,p28).
ThePurchasePriceExaminationBoardoriginallyhadthreemembers,butitwasexpandedin2002tohavefivemembers(DICJ2002).TheRCCdidnothaverecoursetothefinancialinstitutions selling the loans; thus, the RCC established a process to ensure the price“reflectedfairvalue”(Packer2000,p154).Thedeterminationofthepurchasepricewasto“[take]intoconsiderationtheriskofassetsbecominguncollectableandtheadministrativeexpensesrequiredforpurchaseandcollectionoftheassetsinquestion”(DICJ1998,p40).The RCC established a multi-stage process for pricing the NPLs in which a real estateappraisersubmittedavaluationoftheproperty,andtheRCC,FRC,andDICJreviewedandapprovedthevaluation(Packer2000,p154).Inaddition,theRCCsoughtguidancefromtheMOFandFSAindeterminingpurchaseprice(JT1999b).ThepurchasepricealsorequiredapprovalfromthePrimeMinister,thoughtheFinancialReconstructionCommissiongrantedapproval until January 2001 (DICJ 2008, p25). In the first years of operations, the RCCpurchasedloansatasteepdiscount,payinganaverageof3.8percentoftheoriginalbookvalue(JT2001a).
ThesteepdiscounttheRCCpaidforloanswasconsideredtobeadeterrenttohealthybanksinterestedinsellingtheirNPLs.InaCabinetReportin2001,thegovernmentrecognizedthattheNPLproblemwasworseningandstatedthat“[t]hegovernmentwillalsomaketheprice-settingformulamoreflexibleinordertofacilitatepurchasesofnonperformingloansbytheDepositInsuranceCorporationofJapanandtheRCC”(Cabinet2001a).GiventheincreasingpressuretoresolvetheNPLproblem,thegovernmentpassedanamendmenttotheFinancialRevitalizationAct,effective January2002,whichallowedtheRCCtopurchaseNPLs from“soundfinancialinstitutionsat‘marketvalue’”(DICJ2002).However,somecriticsbelievedthatthiswasnotenoughandadvocatedthattheRCCshouldpurchaseloansatbookvalue(JT2002a,JT2002c).Across-partycoalitionwasestablishedtostudytheproposal,andafteranalysis,theRCCpresidentannouncedthathedidnotsupporttheplan,astheRCCsoughttoavoidrecognizinglossesthatwouldbeultimatelybetransferredtotaxpayers(JT2002b).Asanothermeasuretopromoteflexibilityinpurchaseprice,theRCCwasgiventheabilitytobidinNPLauctionsin2001(IMF2002,p22).Between1999and2005,theRCC’spurchaseprice ofNPLs from solvent institutionswas an average of 9 percent of book value (DICJ2005).Accordingtoanestimate,theRCCpurchasedassetsfrominsolventinstitutionsatanaverageof22percentofbookvalue(Koo,p9).
TheRCCcouldultimatelyutilizethefollowingmethodsfordisposalofNPLs:collection,sales,securitization,and/oroperationaland financialrestructuring(IMF2002,p20). In its firstyears of operations, the RCCwas limited in disposalmethods, and the RCCwas slow todispose of assets (IMF 2002, p22). The RCC received its trust license to securitizenonperformingassetsin2001,afterwhichitbeganissuingasset-backedsecurities(Kang,p67). The Program for Financial Revival called for the RCC to accelerate the sales andcollections of loans, which led the RCC announce their “Basic Policy concerning theLiquidationandSecuritizationofAssetsheldbytheRCC”,underwhichtheRCCwould“moreactively” consider salesand securitizationwhen themethodswereeconomically rational
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andadvantageous(DICJ2008,p18).“TheRCCadoptedamethodtosellmultipleclaimsinbulk (bulk sales) through bidding at the end of FY2002” (DICJ 2008, p19). Due to theexpandeddisposaloptions, theRCCwasmoreaggressive in itsdisposalofNPLsbetween2001and2008;itstotalbalanceofdebtdecreasedfrom¥5.8trillionto¥1.1trillion(Hoshi2010,p406).
15. The RCC was entrusted with a corporate revitalization and restructuringfunctionin2001.
The corporate restructuring function was delegated to the RCC in 2001 through anamendmenttotheFinancialRevitalizationActandtheCabinetOffice’sFront-LoadedReformProgram.TheFront-LoadedReformProgramcalledfortheRCCtoestablishaheadquartersfor financial revival (Cabinet 2001b). The RCC began operations related to corporaterestructuring in November 2001 (DICJ 2008, p18). The RCC established the “CorporateRevitalization StudyCommittee” as an advisory bodywith thepurpose of evaluating thefeasibilityofeachrevitalizationcase(DICJ2008,p18).ThecorporaterestructuringfunctionwasstronglyencouragedintheFSA’sProgramforFinancialRevival in2002aswell(FSA2002b).Corporaterevitalizationcouldtakemultipleforms:theRCCwasinvolvedinlegalrevitalization in which it utilized legal proceedings to enforce rehabilitation, and it wasinvolvedincasesofprivaterevitalizationwhichinvolveddebtorbusinessrestructuringwiththeconsentofothercreditors(DICJ2008,p77).TheRCCuseditstrustlicensetosupporttherevitalizationoffirmsforwhicharevitalizationcasewassubmittedtotheRCCbyadifferentfinancialinstitution(RCC,p11).TheRCCevaluatedcasesbasedonthefollowingcriteria:thecontinuation value of the business, the willingness of the firm to make repayments,disclosuretransparency,andtheeconomicrationalityforthecreditor(RCC,p11).BetweenNovember2001andMarch31,2008,theRCCassistedwith569casesofrevitalization(DICJ2008,p18).Overall,theRCCassistedwiththerestructuringof¥6.2trillionindebt(Hoshi2010,p405-406).
TherewasnoofficialsunsetdatefortheRCC,astheRCCcontinuestooperate(withnewcapabilities and authority) to the present date (Fung, p16, RCC). The deadline for thepurchaseofNPLsfromsolventinstitutionswasinitiallysetforMarch31,2001andwaslaterextendedtoMarch31,2005(DICJ2008,p51).
III. Evaluation
A significant factor of the environment in which the RCC operated is the definition ofnonperformingloansinJapanwasinitiallyinadequateandprovisioningstandardswerelax;theauthoritiesgraduallyrevisedtheframework,butthe“lackofadequateprovisioningandpublicdisclosureobscuredtheactualstatusoftheNPLsprobleminthefinancialsystemanddelayedtheintroductionofmuchneededcomprehensiveaction”(Nakaso,p18).
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Inpost-crisisanalysis,somescholarshavearguedthatthepurchasepriceforNPLsfromthesolvent banks was too low, which disincentivized these banks from selling to the RCC.Proponents of this argument state that the usage of theRCCwas limited as it “[offered]unattractivepricingtobanksfortheacquisitionofNPLs…owingtopoliticalreluctancetorecognizefinancialloss”(Fung,p22).ThemovetoallowtheRCCtopurchaseNPLsatmarketvaluewasseenasastepintherightdirectiontoacceleratethedisposalofbadloans.TakeoHoshiandAnilKashyaparguethattheRCCcaseillustratesthatassetpurchaseprogramsarenot sufficient to address bank solvency problems (Hoshi 2010, p412). According to anestimatefromRichardKooandMasayaSasaki,theRCCwasabletobuybadassetsata78percentdiscounttobookvaluefromfailedinstitutionsanda91percentdiscounttobookvalue fromhealthy institutions(Koo,p9). Inaddition, theiranalysisshowsthat the“totalvalueofassetspurchasedbythe[RCCfromsolventinstitutions]wasanorderofmagnitudelowerthanthatofassetspurchasedfromfailedinstitutions”whichis“areminderofhowdifficultitistoremoveassetsonwhichlargelossesmustbebookedfromthebalancesheetsofhealthyinstitutions”(Koo,p9).
OthershavearguedthattheRCCwasnotaggressiveenoughinitspurchaseanddisposalofNPLsandthattheRCCshouldhavesetperformanceandtime-boundtargetsfordisposalofassets(Kang,p76).HoshiandKashyaparguethattheRCCwasslowinsellingofftheloansitpurchased and essentially operated as a warehouse for bad loans in the initial years ofoperations(Hoshi2010,p413).By2002,theRCChad“playedonlyaminorroleinreducingbankNPLs,havingsofarpurchasedonly¥1.3trillionindistressedassets(facevalue)atanaveragediscountof96percent”(IMF2002,p22).Before2001,theRCCcouldonlycollectorsell individual loans; after 2001, the RCC was able to securitize NPLs, assist with debtrestructuring, and utilize bulk sales to dispose of loans. Due to the expanded disposaloptions,theRCCwasmoreaggressiveinitsdisposalofNPLsbetween2001and2008;thetotalbalanceofdebtdecreasedfrom¥5.8trillionto¥1.1trillionandtheRCCdisposedofmanyassetsformorethanthepurchaseprice(Hoshi2010p406).
OtherscholarsarguethattheRCCwasvaluableasitprovidedtheopportunityforbankstoremoveNPLsfromtheirportfoliosintheabsenceofdemandinthemarket(Fujii,p11).ByMarch 2005, the RCC had purchased ¥4,004 billion of NPLs (book value) from solventinstitutionsforapurchasepriceof¥353billion,andthecumulativeamountofrecoveriesasof2008was¥642billion,withnoadditionalpurchasesmade(DICJ2005;DICJ2008,p72).TheRCCpurchasedatotalof¥6,366billioninNPLsfromfailedinstitutionsandhadcollected¥7,143billionbyMarch2008(DICJ2008,p72).
WhentheRCCwasenabledtoengageincorporaterestructuring,therewascriticismthattheRCC lacked the expertise, bandwidth, and resources necessary to effectively restructurecorporatedebt.SomearguedthattheRCC“shouldfocusonassetdisposalandleavetheleadroleincorporaterestructuringtotheprivatesector”(Kang,p71).Withtheestablishmentofthe IRCJ, some were concerned that there was no “clear-cut” delineation between thefunctionsofthetwobodies;Pohlarguesthattherewereelementsof“competition”betweenthetwo(Pohl,p52).HoshiandKashyaparguethat“thedivisionoflaborbetweentheRCCandIRCJ[was]notasclearasitisoftendiscussed(Hoshi2004,p21).However,theRCCwas“ultimatelyinvolved”inrestructuring¥6.2trillioninbaddebtsfor577borrowers(Hoshi
