The argument that the deterioration of bank balance sheets has contributed to the cutback in new loans provided by Japanese banks has gained favor in many circles. (Mieno, Okina and Sakuraba) The securitization of some of the bad loans and/or the disposal of the real estate underlying those loans has been often proposed by Japanese and non-Japanese alike as a means to generate the necessary liquidity for banks to take advantage of new lending opportunities. (Mieno, Corrigan).
When Japanese banks formed the Cooperative Credit Purchasing Company (CCPC) in January 1993 to facilitate the write-off of bad loans from their books, it was hailed by some as a major step towards securitization. However, the CCPC principally represents a deal on taxes between the banks and the authorities. The deal has allowed Japanese banks to realize tax benefit from a troubled real estate loan more quickly and with greater flexibility. In return for considerable tax savings, banks must bring bad credits to an independent committee for review and appraisal, exposing them to some degree of accountability concerning asset valuation.
Since each bank is responsible for lending to the CCPC the funds necessary for purchasing the loan it sells, liquidity is unaffected by the initial sale. Subsequent sales of underlying real estate to third parties have to date amounted to only 1.35 percent of the appraised value of properties held. Notwithstanding write-downs which average more than 50 percent on loans sold, the restructured balances are still not yielding a market rate in terms of rent and interest.
In the text to follow, we will review the origins, structure, and operations of the CCPC through fiscal year 1993. We will addend to this an overview of the proposed formation of special purpose companies (SPCs) to assist banks in the disposal of a different class of outstanding loans. In conclusion, we will assess how these measures fit into the Japanese approach to the reconstruction of bank balance sheets.
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