However, not all firms will necessarily decide to unwind their cross-holdings, and other factors such as earnings performance and economic conditions may have a greater impact on share price than the unwinding. Banks have been the focus of concern. While banks in many other countries are restricted or forbidden from holding stocks, banks in Japan are heavily invested in equities and thus exposed to the risks of the stock market. In fact, banks are the biggest owners of cross-held shares, but a quote from the annual report of a major Japanese bank best describes how difficult it may be for banks to extricate themselves from these cozy ties. Large sales of equity securities by the Bank could result in substantial declines in the market prices for such securities, and could result in sales of the Bank's common stock held by the issuers of such securities.
Banks are subject to maintaining a minimum capital adequacy ratio, which gauges credit risk.
But if banks fail to meet the minimum ratio, they face the possibility of credit rating downgrades and may have to resort to requests for capital injections from public funds. A drop in the market value of their holdings will hurt banks in other ways too. Banks have been using profits from securities sales to write off bad loans, but they will be less able to do so if stock prices continue to fall. With motives more political than fiduciary, politicians from the ruling Liberal Democratic Party had proposed postponing the new accounting rules or even using public money to prop up the stock market. Finance ministers and other opponents, however, have taken the bold initiative to reject such interventionist policies.