have begun to improve due to the widening interest spread created by a series of cuts in policy rates (see Figure 12, Table 6, and the first row in Table 7). The stock market has also largely recovered from the depressed level at the end of March 1995, adding to a recovery in latent gains of listed securities. However, it is still too early at this point to judge whether or not the stock of bad debt is going to be paid off smoothly. As Table 7 shows, even if the arguments are confined to the betterpositioned 21 major banks, the ratios of nonperfomrning loans and of unresolved amounts to total assets have not yet declined sufficiently, although the banks have been actively writing off bad loans using loan-loss reserves and CCPC. These 21 major banks also hold a sizable amount of restructured loans, as shown in Tables 3 and 4, which could turn into nonperforming loans at any moment. The aggregate ratio of restructured loans to total assets was estimated at 2.66 percent at the end of September 1995. Among the group of trust banks, the ratio of restructured loans to total assets was estirnated at over 5 percent.

# _B. Risks of Failing BIS CapitalAdequacy Criteria_

It is imperative for banks to clear the BIS risk-asset ratio (8 percent) to remain operative in financial markets. As Table 8 shows, all but one of 88 Japan's deposit-taking financial institutions reportedly met this BIS regulation in March 1995. However, shrinking latent gains reduced the computed owned capital base, and thus reduced the group's risk assets/owned capital ratio by 0.68 percentage points, down to 9.03 percent from 9.71 percent at the end of fiscal year 1993. During the same period, long-term and regional banks, as groups, have observed declines in their risklasset ratios of 0.3 to 0.5 percentage points. City and trust banks, as groups, saw declines of 0.81 and 1.09 percentage points, respectively. Murashima (1995) has estimated capital adequacy for the major 21 Japanese banks. Table 9 reproduces his estimation of capital adequacy for long-termn, city, and trust banks. Estimation of capital adequacy was made by the following procedures:

- 1) Add up the total amount of nonperforming loans made by the 21 major banks, as reported by the Ministry of Finance: the nonperforming loans made to Ju-Sen, to nonbanks related to Hyogo bank, to Nichiboushin bank, and to nonbanks related to three Kansai-area regional banks (Fukutoku, Han-wa, Osaka).

- 2) Calculate losses from loans made to various institutions by applying the following arbitrary loanloss ratios to the stock of nonperforming loans and utilizing other adjustrnent methods: 80 percent for reported debt (80 percent of reported nonperforming loan is computed as a loss); 80 percent for nonperforming loans made to Hyogo bank using lenders' responsibility method; 54 percent for nonperforming loans made to Nichiboushin using lenders' responsibility method; and 60 percent of nonperforming loans to Kan-sai regional banks using adjusted founders' responsibility method. For loans made to Ju-Sens, the semi-complete founders' responsibility method is utilized, based on Ministry of Finance research.<sup>1</sup> '

" In the founders' responsibility method: initial founding investors of the mortgage company are held accountable for debts at insolvency. In the adjusted founders' method: initial investors grant all the loans to the mortgage company and other lenders are held responsible for losses, depending on the amount of loans.

8