Japan: Nippon Credit Bank Capital Injection, 1997

 On April 1, 1997, the Governor of BoJ released a statement saying that Japanese financial authorities had created a restructuring package for NCB in consultation with the bank. The BoJ’s initial statement deemed NCB as a systemically important bank by virtue of its “size and range in domestic and overseas financial markets.” As a result, the Governor argued promptly that aiding NCB was essential for “domestic and international market stability” (BoJ 1997).

To enable NCB to dispose of JPY 460 billion in NPLs for the previous fiscal year, the restructuring package included a provision to recapitalize the bank by roughly JPY 300 billion. In the preceding months, the financial health of NCB waned due to the bank’s large quantity of NPLs, leading to downgrading by rating agencies, declining share prices, and difficulties raising funds through the sale of debentures (Moody’s 1997; Japan Times 1997a; Japan Times 1997b). 

During a meeting with BoJ and MoF officials in early 1997, NCB’s president offered to liquidate the bank; however, Japanese officials rejected this option due to concerns of systemic risk. Instead, the government opted for a joint private and public sector bailout. The MoF officially asked large shareholders in NCB—mainly insurance companies and large city banks—and the other two Japanese long-term credit banks to participate in the recapitalization of NCB as members of a consortium. Following a request from the government, the BoJ also agreed to use funds from the NFSF to purchase preferred shares in NCB in the event that NCB could not raise sufficient capital from the private sector (BoJ 1997; Japan Times 1997c; Japan Times 1999b; Nakaso 2001).

On April 1, 1997, the BoJ announced the capital injection to NCB as part of a broader restructuring package created in consultation with the MoF and the bank itself. The restructuring package included three provisions:

• The bank’s withdrawal from overseas business and a reduction of domestic personnel and salaries (see Key Design Decision, No. 11, Restructuring);
• The comprehensive disposal of NPLS and resolution of three nonbank affiliates (see Key Design Decision, No. 7, Treatment of Creditors and Equity Holders);
• The eventual capital infusion from the BoJ and the consortium (BoJ 1997).

On April 10, 1997, NCB announced a partnership with Bankers Trust New York Corp., one of the largest US bank holding companies with a growing global investment banking business, in which Bankers Trust would help NCB exit its international businesses and potentially offer new services to Japanese customers. In response to the announcement, NCB’s stock rose 13 percent in a single day. The agreement was limited to a small, “symbolic” cross-shareholding arrangement between both banks (Sapsford and Steiner 1997). Per Reuters, the BoJ said the tie-up between NCB and Bankers Trust would “contribute greatly to a smooth implementation of NCB's restructuring plan” (Reuters News 1997). However, a senior Bankers Trust official told the press that the Japanese financial authorities had offered “encouragement but no incentives” for Bankers Trust to cooperate with NCB (AP-Dow Jones 1997). In September 1997, Bankers Trust said it had acquired a call option to buy JPY 15 billion in NCB shares after three years at a predetermined rate (Japan Times 1997i; Japan Times 1997o).

 On March 30, 1998, NCB received an additional JPY 60 billion from the government during the first round of broad-based capital injections under the Financial Functions Stabilization Act (Nakashima and Souma 2011; Nakaso 2001). (For more information of the broad-based capital injections under the Financial Functions Stabilization Act, see Unnava [2021].) 

There was no new legislation passed to facilitate the capital injection to NCB. Although by 1997 the BoJ had “realized the need . . . for an institutional framework” to provide capital to failing institutions, the Financial Functions Stabilization Act—enabling public funds to be used for broad-based capital injections—was not passed by the Diet until February 1998 (Nakaso 2001, 8).

As Japan lacked a formal legal framework for injecting capital to failing financial institutions, the BoJ was forced to use funds from the NFSF, a special fund established six months earlier during Japan’s housing loan corporation (jusen) crisis, to provide capital to NCB. The primary account of the NFSF, entirely funded by the BoJ, was established pursuant to Article 25 of the Bank of Japan Law which gave the BoJ the power to “conduct business necessary to maintain an orderly financial system (Diet 1998, sec. 38).^FIn April 1998, revisions to the Bank of Japan Law took effect. Under the updated version of the law, Article 38 replaced Article 25 as the legal basis for the BoJ’s lender of last resort function. At the request of the MoF, the BoJ authorized JPY 80 billion in central bank funds be transferred to the primary account of the NFSF to be used to purchase new shares in NCB (Haggerty 2022; Itoh et al. 2020; Nakaso 2001).

The Banking Law gave the MoF supervisory authority over financial institutions, including the power to request information to determine the capital adequacy of the bank. In June 1998, the financial supervisory functions of the MoF were transferred to the newly-created FSA (Japan Times 1997k; Nakaso 2001; Diet 1981; Yanagisawa 2001).

The NFSF was established in September 1996 as part of the resolution of the 1995–96 Japanese housing loan corporation crisis. Initially, the fund consisted of two accounts, a primary account financed by the BoJ and a secondary account financed by private financial institutions who contributed to the fund. Both accounts were invested primarily in government bonds and yielded returns to taxpayers (Itoh et al. 2020; Nakaso 2001).

The BoJ administered the injection of JPY 80 billion in public funds from the NFSF to NCB through its role as the fund’s “special member.” The BoJ was the sole financer of the primary account and acted as a manager for the entire fund. The primary account of the NFSF was used to provide capital to financial institutions as per the fund’s objective of “enhancing the stability of Japan’s financial system” (Itoh et al. 2020, 105). Following a request from the government, the BoJ contributed JPY 80 billion to the primary account of the NFSF to be used to purchase new preferred shares in NCB to supplement the private-sector contributions (Itoh et al. 2020; Nakaso 2001).

As a monetary authority, the MoF exerted considerable “unofficial” authority and guidance over financial institutions, including ensuring private-sector participation in bailouts (Kazuo 2012, 175).^FThe MoF had organized a similar private-sector bail out of two urban credit cooperatives, Tokyo Kyowa and Anzen, which failed in December 1994. The two institutions were merged to create the Tokyo Kyoudou Bank (TKB) to which the DICJ provided capital and the MoF secured the participation of private financial institutions in providing TKB with low-interest loans (Nakaso 2001). The MoF engineered the private-sector consortium, assisting NCB in securing voluntary capital subscriptions from large existing shareholders and the other long-term credit banks. On April 3, 1997, a member of the Japanese House of Representatives said that the MoF had “gathered executives from banks, insurance companies and other financial institutions in the Banking Director General’s office” to request their support for the capital injection (Nakaso 2001; Diet 1997).

Following NCB’s temporarily nationalization, the DICJ selected six new directors and three new auditors for NCB, based on nominations from the FRC on December 25, 1998. On May 24, 1999, the FRC completed an assessment of NCB’s assets, finding roughly JPY 4 trillion in “unsuitable assets” (DICJ 1999, 7). When the Stock Price Evaluation Commission valued NCB’s shares as worthless in June 1999, their evaluation found that NCB’s liabilities exceeded its assets by JPY 3.1 trillion (DICJ 1999).

Before the capital injection, the minister of finance made statements to reassure the public that the Japanese financial authorities would support NCB. Per Japan Times, the minister said at a news conference on February 5, 1997 that the collapse of NCB would be “absolutely impossible” (Japan Times 1997a). On the day that the BoJ announced the restructuring package for NCB, head officials at the BoJ and MoF both made public statements in support of NCB. In his official statement, the governor of BoJ said the capital injection and restructuring of NCB was necessary for “maintaining the overall stability of the Japanese financial system” and that “Bank of Japan will extend necessary support with the Ministry of Finance” to ensure NCB’s recovery (BoJ 1997).

The BoJ emphasized that NCB played an active role in the construction and implementation of the restructuring package. In the initial statement by the BoJ, the governor said that NCB “will exercise maximum efforts in implementing its own restructuring plan” by pursuing new capital subscriptions from private-sector financial institutions (BoJ 1997). Moreover, the governor argued the restructuring of NCB was important as it represented voluntary action taken by a bank in preparation for the “Japanese Big Bang” financial reforms (BoJ 1997).

On April 11, 1997, a member of the Japanese House of Representatives said that the finance minister had issued a statement outlining the MoF’s request that consortium members convert subordinated debt to new shares in NCB and that the BoJ provide funds through the NFSF. We could not find the original statement from the MoF regarding the capital injection to NCB (Diet 1997).

In his initial announcement of the restructuring package for NCB, the governor of BoJ also said the central bank would continue to provide “the necessary support” in the event of a temporary liquidity shortage (BoJ 1997). Per Japan Times, the BoJ also agreed to provide loans, likely at the official discount rate of 0.5 percent, to redeem NCB’s debentures if necessary. BoJ officials worried that NCB might face difficulties raising funds via the sale of new debentures due to market concerns about the health of the bank. We did not discover whether this liquidity support was used by NCB. Communications between the MoF, NCB and private financial institutions about the capital injection to NCB were not publicly disclosed (Japan Times 1997k).

The BoJ also encouraged and publicized the partnership between NCB and Bankers Trust both to quell market concerns over the health of NCB and as evidence of Japan’s financial liberalization. On the day of the announcement, NCB’s stock went up by 13 percent. Per Reuters, the BoJ said the tie-up between NCB and Bankers Trust would “contribute greatly to a smooth implementation of NCB's restructuring plan” (Reuters News 1997). However, following widespread media speculation of a buyout, a senior official at Bankers Trust testified that the bank had “no plan to become a large shareholder of NCB” at a Diet hearing on April 16, 1997 (AP-Dow Jones 1997; Japan Times 1997j; Sapsford and Steiner 1997).

NCB’s restructuring package included the resolution of three nonbank leasing and financial services firms affiliated with NCB. On the same day as the package was announced, all three nonbanks, with liabilities totaling JPY 2.2 trillion per Teikoku Data Bank, filed for bankruptcy. Breaking from conventional practice, NCB did not assume the liabilities of the three nonbanks. Instead, creditors to the three banks, which included large agricultural cooperatives, were forced to shoulder losses in proportion to their loans. Per Japan Times, NCB’s decision caused reputational damage to the bank, with officials at other Japanese banks expressing “outrage” at the lack of prior consultation and calling the move “an act of bad faith” (Japan Times 1997d). The chairman of the Japanese Federation of Bankers association said this decision was necessitated by the ailing condition of NCB and would not become the norm (Japan Times 1997j; Japan Times 1997f; Japan Times 1997c; Sugawara 1997).

During negotiations prior to the injection, NCB and the MoF asked 21 life and nonlife insurance agencies to convert a total of roughly JPY 140 billion in subordinated loans to NCB into common (JPY 97 billion) and preferred (43.7 billion) shares in the bank. The Japanese subsidiary of Standard and Poor’s warned that this request could be considered a “default” by NCB (Japan Times 1997h). Some insurance companies were also reluctant to agree to these terms; For example, Nippon Life Insurance Co. refused to convert its subordinated loans but agreed to purchase JPY 28 billion in new shares in NCB, becoming NCB’s largest shareholder after the injection. After certain insurance firms negotiated alternate terms under which to inject capital, NCB succeeded in raising roughly JPY 167 billion in new capital through issuing new common shares, with JPY 70 billion coming from private banks and the rest from insurance companies (Nakaso 2001; Japan Times 1997g; Japan Times 1997l).

Later, following the nationalization of NCB in December 1998, the Stock Price Evaluation Committee established under the FRC, evaluated NCB shares as worthless. This evaluation wiped out a total of roughly JPY 467 billion in shareholder equity, including the JPY 80 billion in preferred shares held by the BoJ and the JPY 210.6 billion in preferred and common shares held by consortium members. Under the Financial Reconstruction Law, the DICJ acquired all shares of NCB upon nationalization, effectively bailing-in the bank’s previous shareholders (Aozora 2002; BoJ 1998; Nakaso 2001).

The two long-term credit banks, Industrial Bank of Japan and Long-Term Credit Bank of Japan, along with other banks with large shareholdings in NCB, agreed to purchase newly issued common shares. Most insurance companies in the consortium agreed to convert perpetual subordinated loans to NCB to common shares and term-specified subordinated loans to preferred shares. The BoJ also pledged to purchase preferred shares using funds via the NFSF (BoJ 1997; Japan Times 1997e; Nakaso 2001).

On June 30, 1997, NCB issued 766 million new common shares, priced at JPY 218 per share, to be bought by members of the consortium. This common share issue raised roughly JPY 167 billion in new capital for NCB, JPY 70 billion from private banks and JPY 97 billion from life and non-life insurance companies (Japan Times 1997m).

In the following month, NCB issued 386 million new third preferred shares, priced at JPY 320 per share. This preferred share issue raised roughly JPY 124 billion in new capital for NCB. Following a request from the government, the BoJ provided JPY 80 billion in public funds to the primary account of the NFSF to purchase new third preferred shares of NCB. Insurance companies purchased the remaining JPY 44 billion in newly issued third preferred stock (Aozora 2002; Itoh et al. 2020; Japan Times 1997g; Japan Times 1997m; Nakaso 2001).

As of March 1999, NCB had also set limitations on the dividends paid by these shares: Under the bank’s articles of incorporation, stockholders could not receive higher annual dividends per share than JPY 13.75 for second preferred shares, JPY 3.20 for third preferred shares and JPY 15.0 for fourth preferred shares (NCB 2000).

Following NCB’s initial announcement, the MoF organized a consortium of private-sector financial institutions to fund the capital injection to NCB. The consortium consisted of NCB’s existing shareholders—mainly insurance companies and large city banks—along with the two other Japanese long-term credit banks, as these institutions had a vested interest in the health of NCB.^FBy selecting only financial institutions with a vested interest in the health of NCB, the Japanese authorities opted for a notably different approach from the government’s response to TKB. In the latter case, the authorities requested voluntary contributions from nearly all Japanese financial institutions (the hougachou approach) (Nakaso 2001). With the support of the MoF, NCB asked private banks to subscribe to JPY 70 billion in new common shares and insurance agencies to convert roughly JPY 140 billion in subordinated loans to NCB into common and preferred equity (Japan Times 1997g; Japan Times 1997c; Nakaso 2001).

Per Nakaso, by 1997 BoJ had “realized the need for the creation of an institutional framework” to inject capital; however, BoJ decided to use NFSF funds for an ad hoc injection due to the “imminent” nature of the crisis (Nakaso 2001, 8). At the end of July 1997, NCB received an injection totaling JPY 290.6 billion in new capital, JPY 80 billion coming from BoJ through the primary account of the NFSF funded by BoJ and JPY 210.6 billion coming from private-sector financial institutions (Nakaso 2001).

The injection of JPY 290.6 billion in new capital to NCB occurred from June to July 1997, three months after the BoJ’s initial statement. This delay was due to NCB’s need to secure the cooperation of private financial institutions, some of whom were hesitant to support the injection (Japan Times 1997k; Nakaso 2001).

Seven months after the capital injection to NCB, the Japanese legislature approved a series of broad-based capital injections under the Financial Functions Stabilization Act in February 1998, through which NCB received an additional JPY 60 billion (Unnava 2021).

The capital injection to NCB was part of a larger restructuring package, with the provision of capital from private financial institutions and BoJ contingent on the “comprehensive restructuring” of the bank (BoJ 1997).

BoJ’s initial announcement listed several concrete restructuring measures, including the bank’s “withdrawal from overseas operations and . . . a major reduction in personnel and salaries” (BoJ 1997). Per Japan Times, NCB’s president and chairman, Hiroshi Kubota, said the bank would lay off roughly 900 employees and reduce employee wages by 10 to 30 percent. Per the Los Angeles Times, NCB also planned to sell off assets, including the bank’s Tokyo headquarters, to aid in financing the disposal of NPLs (Holley 1997; Japan Times 1997c).

Another provision of NCB’s restructuring plan was the resolution of three nonbank affiliates of NCB. These nonbanks allowed NCB to access other types of business, mainly leasing and lending to customers who would otherwise fail to qualify for loans and experienced serious financial trouble resulting from the bursting of the bubble in commercial real estate prices in early 1997. For more information on resolution of NCB’s nonbank affiliates, see Key Design Decision No. 7, Treatment of Creditors and Equity Holders (Sugawara 1997).

 While announcing NCB’s restructuring, Kubota said that he would consider stepping down as president and intended to “return all of his salary” for the past year. The restructuring package also reduced the size of NCB’s board and cut executive salaries by 50 percent (Japan Times 1997c).

On July 31, 1997, after the capital injection, the bank announced that Kubota would step down as president but remain as chairman to oversee “external affairs” (Japan Times 1997n). The former executive vice president, Shigeoki Togo, replaced Kubota as president on August 19, 1997. Togo resigned following NCB’s nationalization in December 1998 (Far Eastern Economic Review 1998).

In July 1999, six former NCB executives were arrested following a complaint by the new state-appointed management alleging prior management had violated the Securities and Exchange Law. Kubota, Togo, and former vice president Tadao Iwak were found guilty of concealing JPY 160 billion in bad loans in figures provided in the bank’s March 1998 earnings statement to investors. Upon retrial in August 2011, the Tokyo High Court acquitted all three. Although NCB, along with many other Japanese banks, had failed to follow the MoF’s new guidelines to assess NPLs during the 1997 fiscal year, the Court found that the bank’s self-assessment complied with the MoF’s old requirements and that 1997 was a “transitional year” between the two sets of guidelines (Japan Times 1999a; 2011; Sapsford 1999). 

Aside from the conditions of the restructuring package, we did not find any additional restrictions imposed on NCB as part of the injection.

We did not discover any additional regulatory relief by the authorities to NCB.

We did not find an exit strategy or predetermined end date for the capital injection to NCB. Following NCB’s temporary nationalization, the Stock Price Evaluation Committee evaluated NCB shares as worthless, effectively wiping out the preferred equity held by the BoJ and the preferred and common equity held by consortium members. Under the Financial Reconstruction Law, the DICJ temporarily acquired all shares of NCB upon nationalization (BoJ 1998; Nakaso 2001).