Having spent much of March teetering on the brink of a funding crisis, the Nippon Credit Bank announced a dramatic restructuring plan on April 1 that is intended to save it from extinction.

NCB will put three of its leasing and finance subsidiaries into voluntary bankruptcy, shut down all of its overseas operations, and refocus its energies on becoming an investment bank serving small and medium-size Japanese companies.

In addition, it will dispose of fourteen office buildings in Tokyo and Osaka and reduce its overall work force by 20%. The bank's president will return his entire salary for last year, and most of the directors and senior staff will take substantial pay cuts.

The Ministry of Finance, for its part, embraced this plan and arranged for Dai-Ichi Kangyo Bank and Bank of Tokyo-Mitsubishi, shareholders of Nippon Credit Bank, to infuse new capital into the bank. It also encouraged life insurance companies to make subordinated loans.

The Bank of Japan was also persuaded to support the plan by using its new financial-stabilization fund for the purchase of newly issued NCB shares. (A newly concluded landmark deal with Bankers Trust will also greatly improve matters.)

So a crisis passes. But is the resolution satisfactory, or could it lay the groundwork for future crises?

Let us remember that many Japanese banks are failing because of a long- standing practice of making loans the risk-adjusted returns on which, if at all positive, fall well below an acceptable hurdle rate-that is, a valid cost of capital.

Japanese bankers made little effort in the past to measure expected loan losses (the mean probability of loan default) and even less effort to estimate unexpected loss frequencies (the extent to which losses can diverge from their mean). As a result, they could neither price loans properly nor reserve for future losses adequately.

This behavior is perfectly understandable when we consider that the banks did not, and in many instances still do not, view themselves as profit-maximizing organizations, but rather as quasi-public utilities purveying subsidized credit to leading firms.

To varying degrees, this attitude, so inimical to the allocation of credit according to realistic price signals, has been shared by banks in other countries, even those much less dirigiste than Japan. British banks, for example, have only recently stopped behaving like institutions compelled to place the needs of borrowers of indifferent creditworthiness above those of shareholders.

Our own American institutions often operated, though not avowedly so, as something less than profit maximizers.

They too subsidized risky borrowers by failing to measure systematically the cost of risk and factor these measurements into pricing calculations. At least they did so until an alert marketplace forced them, by dint of severely discounting their stock prices, to manage with the objective of maximizing the difference between the present value of asset and liability cash flows.

In Japan, there is as yet no strong market influence on banks to do likewise.

The Japanese authorities recently sought to create such an influence by developing a set of reforms labeled the Big Bang. These would promote entry into the banking, securities, and insurance sectors; improve disclosure; facilitate new financial products; and harmonize Japanese and global accounting systems.

The end result of this and collateral efforts would be to make markets free, fair, and global within five years, thereby increasing investor interest in, and understanding and scrutiny of, the Japanese banking sector.

As part of this new initiative, the Japanese authorities expressed sympathy with the doctrine that virtually no banking institutions is too big to fail. Yet in the case of Nippon Credit Bank, they shrank from implementing this doctrine.

Although one cannot now gauge the full ramifications of this decision, it would be a great loss to Japan and the global economy generally if the authorities retreated further, perhaps capitulating to the tired argument that the current fragility of bank balance sheets makes virtually all Big Bang reforms too chancy.

Just the reverse is true. For example, allowing global investment banks and institutional investors freer access to Japanese financial markets will probably result in a secondary market for bank loans.

By enabling parties that have limited generic credit risk or prarticular varieties of risk to trade with those that have too much of these risks, such a market will improve bank diversification and thus diminish the risk of failure.

Suffice it to note that the loan sales market in the United States is one of the major vehicles for reducing the kinds of loan concentrations that so weakened our banking industry in the late '80s.

We know the cadre of reform-minded officials in the Finance Ministry well enough to believe that they are sincere in their desire to move the system to more market-oriented regulation. We hope and believe that they will not allow the Nippon Credit Bank affair and the travails of other banks to divert them from this praiseworthy goal.

In the meantime, recent events make it essential for international financial institutions to reassess their strategies toward Japan.

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