The Resolution and Collection Corporation of Japan

Over the course of 1998, the Japanese government passed several laws to address the systemic financial crisis. The Financial Function Stabilization Act, passed in February 1998, made ¥30 trillion available to the government for capital injections and deposit protection (Hoshi and Kashyap 2010). In October 1998, the Diet, the Japanese legislative body, passed the Financial Revitalization Act and replaced the Financial Function Stabilization Act with the Prompt Recapitalization Act (DICJ 2008). The Prompt Recapitalization Act “stipulate[d] a temporary emergency measure regarding capital injection to financial institutions” (DICJ 1999). The Financial Reconstruction Committee was established in 1998 to oversee the bank restructuring process (Kanaya and Woo 2000).

The government approved two rounds of capital injections: the first, under the Financial Function Stabilization Act, in March 1998 (¥1.8 trillion) and the second, under the Prompt Recapitalization Act, in March 1999 (¥7.5 trillion) (Hoshi and Kashyap 2010). The RCC could purchase preferred shares and subordinated debt from financial institutions as a part of the Prompt Recapitalization Act, though the capital injections were overseen by the Financial Reconstruction Committee.^FFor more information on the 1998 and 1999 capital injections, see the forthcoming cases on the broad-based capital injections in Japan in the Journal of Financial Crises.

The Financial Revitalization Act included the principles for the resolution of failed financial institutions (DICJ 1999). As a part of the Financial Revitalization Act, the HLAC and the RCB were merged to create the RCC, which commenced operations on April 1, 1999 (Kanaya and Woo 2000). Concurrently, the government was in the process of nationalizing the Long-Term Credit Bank of Japan and the Nippon Credit Bank (Hoshi and Kashyap 2010).

The scope of the RCC was expanded in 2001 to include corporate debt restructuring and revitalization. Prime Minister Koizumi, in a policy speech to the Diet in 2001, stated that the function of the RCC would be expanded and that a fund for further corporate revitalization would be established (Koizumi 2001). The Front-Loaded Reform Program included a measure to reinforce the disposal of NPLs and stated that the RCC would “establish a headquarters for corporate restructuring in order to facilitate rehabilitation of companies” in November 2001 (Cabinet Office 2001a). In 2003, the government established another agency, the Industrial Revitalization Corporation of Japan, which was intended to work with the RCC to address the NPL problem in Japan. The IRCJ was given the purpose of restructuring the bad loans it purchased and assisting with the corporate revitalization of borrowers. The IRCJ had a purchase window of two years and focused on purchasing bad debt from distressed debtor companies that were viable and likely to be successfully rehabilitated (Takagi n.d.).

The RCC was a fully owned subsidiary of the Deposit Insurance Corporation of Japan. The function to manage, collect, and dispose of assets from bankrupt institutions was designated to the DICJ in the Deposit Insurance Act; the DICJ was also designated the authority to take action on specified difficult collection claims, including claims tied to organized crime (DICJ 2008; Otake 1999b). The Deposit Insurance Act was amended in 1996 to allow the DICJ to purchase assets from failed institutions as a method to provide funds to failed financial institutions (Koo and Sasaki 2010). The Financial Revitalization Act was enacted in 1998 and established the RCC, from the merger of the RCB and the HLAC, as a subsidiary of the DICJ (DICJ 2008). Before the RCC began operations, the scope of its authority was expanded to include the purchase, management, collection, and disposal of assets from sound financial institutions, which was delegated in the Financial Revitalization Act (Koo and Sasaki 2010). The DICJ designated debt recovery and real estate management and disposal work to the RCC, which performed these activities “on behalf of the DICJ” (DICJ 2003).

Additional legal authority was delegated to the RCC in a variety of measures in the years after its establishment. In 2001, Prime Minister Junichiro Koizumi established a set of structural reform policies, which included corporate restructuring (Koizumi 2001), and the Front-Loaded Reform Program of 2001 stated that the RCC was to establish a corporate revitalization headquarters (Cabinet Office 2001a). The ability to purchase assets from solvent institutions at market value was delegated in an amendment to the Financial Revitalization Act in 2002 (DICJ 2008). Additionally, the RCC was granted a trust services license to engage in securitization and was given the authority to participate in auctions. The Program for Financial Revival, established by the Financial Services Agency and introduced in 2002, further reiterated that the scope of the RCC included corporate restructuring (FSA 2002). Furthermore, amendments to the Financial Revitalization Act in 2001 and 2003 ultimately prolonged the window for asset purchases from solvent institutions to March 31, 2005 (DICJ 2008).

The DICJ supported the RCC in the collection and recovery of assets from “malicious debtors and others” including “obstructed recovery cases involving antisocial forces” (DICJ 2008). Some considered the “antisocial forces,” also known as organized crime or the yakuza, to be a key factor contributing to the size of the NPL problem as well as the slow recovery and disposal of NPLs in Japan. Estimates for the number of loans related to the yakuza varied significantly, with one estimate at 80% and others at 10% or 30% (Holley 1996). Banks and financial institutions made loans to yakuza borrowers, some of which became nonperforming after the collapse of the real estate asset price bubble. In some cases, the yakuza prevented banks from foreclosing on property and prevented auctions, as the yakuza squatted in empty units and buildings (Sugawara 1995). By 2002, 18% of the loans the RCC had purchased were yakuza-related (Bremner 2002). The National Police Agency backed the RCC to aid with the seizure of property, and the DICJ established Special Investigation Divisions to enhance the recovery of assets. The DICJ “reinforced support for the fair handling of collections in obstructed recovery cases by providing meticulous guidance and advice to the RCC concerning the monitoring and analysis of behaviors of debts in the process of subsequent negotiation on recovery” (DICJ 2008).

The RCC had the mandate to “accelerate 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 2005a). The government later expanded the RCC’s scope and mandate to include corporate restructuring, a trust services license, and the ability to purchase NPLs at market value from solvent financial institutions.

With the establishment of the RCC, the government projected confidence in its ability to resolve the NPL problem. The president of the RCC was frequently quoted in press releases and articles in the Japan Times. He was seen as a strong leader of the organization (Otake 1999b). When he began to lead the RCC, he stated, “This new job is an urgent and important task since the banks’ blood vessels are clogged with bad loans” (Japan Times 1999a). Upon its establishment, the RCC was deemed to “[signal] the birth of a powerful state-backed organ to collect bad loans” (Otake 1999a). During the first purchase window for solvent financial institutions, the president of the RCC recognized that the total was less than anticipated but was confident that future windows would be more fruitful (Otake 1999b).

However, there was a “divergence between the government’s characterization of the condition of the banking industry and that of outsiders” (Hoshi and Kashyap 2010). There were conflicting messages regarding the scope of the NPL problem in Japan, with private estimates, bank estimates, and official estimates varying in the estimated scale of the problem; in fact, the “official estimates of bad loans were regarded as a ‘lower bound’” of the scope of the NPL problem (Tandon 2005). In a further example of the lack of consensus, IMF directors and government officials were not aligned on the urgency of the crisis. IMF analysts urged the government to take decisive and aggressive action given the scale of the crisis (Japan Times 1999d). However, the statements released by the government contradicted the IMF—in February 1999, an MOF official stated that the financial crisis would be over within a matter of weeks (Hoshi and Kashyap 2010).

In addition, there was public uncertainty and distrust of the government’s reforms and interventions, following the use of taxpayer funding of ¥685 billion for the jusen problem in 1996. This assistance was viewed unfavorably by the public, as it reflected the government reneging on its promise not to rely on taxpayer funds to resolve the crisis. After this experience, it became politically unpopular to advocate for programs that would utilize taxpayer funds for bank assistance (Nakaso 2001).

When the government began to expand the scope of the RCC to include corporate restructuring, a trust services license, and the ability to purchase NPLs at market value from solvent financial institutions, the government was presenting a message of confidence in the abilities of the RCC to work toward the objective of resolving the NPL crisis (Yanagisawa 2001). There was public speculation surrounding the RCC’s added functionalities, including hope that the RCC would “have the teeth to promote disposal of the banks’ huge bad loans, following in the footsteps of the Resolution Trust Corp” (Kishima 2001).

Furthermore, the government began to more aggressively combat the NPL problem in the early 2000s, with leaders making public statements about the need to address the crisis. Prime Minister Junichiro Koizumi actively spoke about the need to resolve the NPL problem, specifically stating that the RCC would be an important lever to do so (Koizumi 2001). Another key figure in addressing the NPL problem was the FSA minister, Heizo Takenaka, who developed the Program for Financial Revival, which set the goal to resolve the NPL problem by FY2004 (FSA 2002). Both Koizumi and Takenaka supported the proactive utilization of the RCC to mitigate the NPL crisis.

The IMF recognized that the FSA, BOJ, DICJ, and RCC all demonstrated “a high degree of transparency” in their operations (IMF 2003). The activities of the RCC were reported by the DICJ. The DICJ explicitly published the names of the failed firms receiving financial assistance in press releases and public statements, but it does not appear to have published the solvent financial institution participants. Press releases regarding failed firms outlined the financial assistance scheme, the book value of the assets transferred to the RCC, and the purchase price for the assets.^FSee DICJ n.d. for examples of the financial assistance schemes for failed institutions.

The RCC was established via the merger of the Housing Loan Administration Corporation and the Resolution and Collection Bank, both of which were established in the years prior to 1998 to resolve bad debt from specific financial institutions or types of financial institutions. The HLAC was a 100% subsidiary of the DICJ, while the RCB was a 75% subsidiary of the DICJ. An amendment to the Deposit Insurance Act and the Financial Revitalization Act (also referred to as the Financial Function Reconstruction Law), enabled the merger of the two to create the RCC.

The former president of the HLAC, Kohei Nakabo, became the president of the RCC. The RCC was staffed by the previous HLAC and RCB employees (Otake 1999a). When the RCC was established in April 1999, it had approximately 1,900 employees (Nakaso 2001). According to an analysis of asset management companies published by the Bank for International Settlements, the RCC had “limited” independence in the legal environment and was not granted special legal protection for staff (Fung et al. 2004).

The DICJ oversaw and provided guidance to the RCC, while the FSA and BOJ provided external governance and oversight (Fung et al. 2004). The DICJ provided the RCC “with the guidance and advice necessary to execute its recovery activities; such as uncovering hidden assets by exercising the right to inspect properties” (DICJ 2005a).

There were no restrictions placed on the RCC regarding the total sum of NPLs it could purchase (Fung et al. 2004).

The government of Japan provided the funding for the RCC. The DICJ issued government-guaranteed bonds and injected the proceeds into the RCC. At the time of its initial operations, the RCC had ¥212 billion in capital (Kang 2003). There was no loss-sharing arrangement for the RCC and selling institutions, as the RCC did not have recourse to the originator banks for the losses incurred when it sold collateral associated with a loan (Hoshi and Kashyap 2004). Because there was strong public sentiment to avoid incurring losses, the RCC purchased assets at a steep discount from book value—on average a 78% discount from failed institutions and a 91% discount from healthy institutions—making it unlikely that the RCC would recognize losses on the sale or collection of assets (Koo and Sasaki 2010; Nakaso 2001).

According to Article 53 of the Financial Revitalization Act, the eligible institutions included: managed financial institutions, agreement successor banks, and special public management banks (Law No. 132 1998). The definition of “financial institution,” as presented in the Deposit Insurance Act, included major, regional, and city banks as well as credit unions and credit cooperatives (DIA 1971). Other eligible financial institutions included bridge banks, the Federation of Agricultural Cooperative Associations, and the Federation of Fisheries Cooperative Associations (DICJ 1998). Special public management banks refer to banks such as the Long-Term Credit Bank and Nippon Credit Bank, which were temporarily nationalized banks (Law No. 132 1998).

The types of assets that the RCC could purchase from solvent institutions included loans, suspense payments, interest receivables, and accounts receivables for borrowers classified as “bankrupt, de facto bankrupt or in danger of bankruptcy” (DICJ 2002a). Loans that were ineligible included loans to public welfare corporations, loans with disputed claims, loans to borrowers undergoing reorganization, loans to nonresidents, and loans for overseas real estate (DICJ 1999).

For the transfer of assets in the case of a failed institution, the assets eligible for purchase were the assets considered unsuitable for the bridge bank or banks under special management to hold (DICJ 1999).

The RCC was engaged as needed for insolvent financial institutions, as the DICJ was involved in overseeing the financial assistance process. In the case of a failed financial institution, the DICJ, FSA, and courts were involved in overseeing and managing the resolution process. The FSA appointed a financial administrator; if no assuming institution was found, the FSA found a bridge bank. The failed institution and assuming institution(s) submitted an application to the DICJ for assistance, and the DICJ determined whether to provide assistance. The financial assistance could take “the form of a monetary grant, loan or deposit of funds, purchase of assets, guarantee of liabilities, assumption of financial obligations, subscription of preferred shares, etc. or loss sharing.” If there was an assuming financial institution, the assets that the assuming bank did not want were transferred to the RCC. The purchase of assets would be agreed upon by the failed institution, the assuming financial institution(s) or bridge bank, the RCC, the DICJ, and the FSA (DICJ 2008).

For the purchase of assets from solvent financial institutions, the RCC announced the first application window when it began its operations; the application window was from June 22 to July 9, 1999 (Japan Times 1999c). The application window for solvent institutions “as a rule [took] place four times a year,” but the RCC was also able to consult with individual financial institutions on the purchase window if requested (DICJ 2003). After receiving applications, the RCC evaluated the applications from interested banks and offered a price to the banks; the DICJ provided guidance on the offer price. If interested, the banks then submitted a formal application to initiate the sale and would work with the RCC to coordinate the purchase (Japan Times 1999c). The window for sales was initially set to expire in 2001 but was ultimately extended to March 31, 2005 (DICJ 2008).

The RCC determined the purchase price for NPLs on a case-by-case basis with guidance from the DICJ and the Purchase Price Examination Board (an advisory body) (Nanto 2009). The Purchase Price Examination Board was an advisory body of the DICJ governor (DICJ 2008). The Purchase Price Examination Board originally had three members, but it was expanded in 2002 to have five members (DICJ 2003). The RCC did not have recourse to the financial institutions selling the loans; thus, the RCC established a process to ensure the price “reflected fair value” (Packer 2000). The determination of the purchase price was to “[take] into consideration the risk of assets becoming uncollectable and the administrative expenses required for purchase and collection of the assets in question” (DICJ 1999). The RCC established a multistage process for pricing the NPLs in which a real estate appraiser submitted a valuation of the property, and the RCC, FRC, and DICJ reviewed and approved the valuation (Packer 2000). In addition, the RCC sought guidance from the MOF and FSA in determining purchase price (Japan Times 1999b). The purchase price also required approval from the prime minister, though the Financial Reconstruction Commission granted approval until January 2001 (DICJ 2008). In the first years of operations, the RCC purchased loans at a steep discount, paying an average of 3.8% of the original book value (Japan Times 2001b).

The steep discount the RCC paid for loans was considered to be a deterrent to healthy banks interested in selling their NPLs. In a Cabinet Report in 2001, the government recognized that the NPL problem was worsening and stated that “[t]he government will also make the price-setting formula more flexible in order to facilitate purchases of nonperforming loans by the Deposit Insurance Corporation of Japan and the RCC” (Cabinet Office 2001b). Given the increasing pressure to resolve the NPL problem, the government passed an amendment to the Financial Revitalization Act, effective January 2002, which allowed the RCC to purchase NPLs from “sound financial institutions at ‘market value’” (DICJ 2002a). However, some critics believed that this was not enough and advocated that the RCC should purchase loans at book value (Japan Times 2002a; 2002b). A cross-party coalition was established to study the proposal, and after analysis, the RCC president announced that he did not support the plan, as the RCC sought to avoid recognizing losses that would ultimately be transferred to taxpayers (Japan Times 2002c). As another measure to promote flexibility in purchase price, the RCC was given the ability to bid in NPL auctions in 2001 (IMF 2002). Between 1999 and 2005, the RCC’s purchase price of NPLs from solvent institutions was an average of 9% of book value (DICJ 2005b). According to an estimate, the RCC purchased assets from insolvent institutions at an average of 22% of book value (Koo and Sasaki 2010).

The RCC ultimately utilized the following methods for disposal of NPLs: collection, sales, securitization, and/or operational and financial restructuring. In its first years of operations, the RCC was limited in disposal methods, and the RCC was slow to dispose of assets (IMF 2002). The RCC received its trust license to securitize nonperforming assets in 2001, after which it began issuing asset-backed securities (Kang 2003). The Program for Financial Revival called for the RCC to accelerate the sales and collections of loans, which led the RCC announce its “Basic Policy Concerning the Liquidation and Securitization of Assets Held by the RCC,” under which the RCC would “more actively” consider sales and securitization when the methods were economically rational and advantageous. “The RCC adopted a method to sell multiple claims in bulk (bulk sales) through bidding at the end of FY2002” (DICJ 2008). Due to the expanded disposal options, the RCC was more aggressive in its disposal of NPLs between 2001 and 2008; its total balance of debt decreased from ¥5.8 trillion to ¥1.1 trillion (Hoshi and Kashyap 2010).

The corporate restructuring function was delegated to the RCC in 2001 through an amendment to the Financial Revitalization Act and the Cabinet Office’s Front-Loaded Reform Program. The Front-Loaded Reform Program called for the RCC to establish a headquarters for financial revival (Cabinet Office 2001a). The RCC began operations related to corporate restructuring in November 2001. The RCC established the Corporate Revitalization Study Committee as an advisory body with the purpose of evaluating the feasibility of each revitalization case (DICJ 2008). The corporate restructuring function was strongly encouraged in the FSA’s Program for Financial Revival in 2002 as well (FSA 2002). Corporate revitalization could take multiple forms: the RCC was involved in legal revitalization in which it utilized legal proceedings to enforce rehabilitation, and it was involved in cases of private revitalization that involved debt or business restructuring with the consent of other creditors (DICJ 2008). The RCC used its trust license to support the revitalization of firms for which a revitalization case was submitted to the RCC by a different financial institution. The RCC evaluated cases based on the following criteria: the continuation value of the business, the willingness of the firm to make repayments, disclosure transparency, and the economic rationality for the creditor (RCC 2018). Between November 2001 and March 31, 2008, the RCC assisted with 569 cases of revitalization (DICJ 2008). Overall, the RCC assisted with the restructuring of ¥6.2 trillion in debt (Hoshi and Kashyap 2010).

There was no official sunset date for the RCC, as the RCC continues to operate (with new capabilities and authority) to the present date (Fung et al. 2004; RCC 2018). The deadline for the purchase of NPLs from solvent institutions was initially set for March 31, 2001, and was later extended to March 31, 2005 (DICJ 2008).