and the size of financial markets are also useful. information vendors are planning to provide information relevant to the secondary markets for npls. bank loans have been the dominant means of corporate financing in japan. under the main bank system, borrower information has been shared only between the borrower and its main bank, and neither party has been especially averse to this arrangement. it is always difficult to change such established practices. for this reason, persistent efforts will be required not only to establish an infrastructure to facilitate the use of information, but also to convince market participants to change their thinking on this matter. second, the revitalization of credit markets using cutting - edge financial engineering techniques is indispensable. we see technological innovation in many industries but it is particularly rapid in the financial sector. a variety of statistical methods have been introduced which use information such as accounting data and bankruptcy ratios to obtain quantitative estimates of credit risk and also to evaluate the overall risk inherent in particular portfolios. these techniques have facilitated the rapid development of markets for syndicated loans, abss, and small - value business loans based on scoring models, as well as markets for non - recourse loans and credit derivatives. when arranging abss, these techniques enable the classification of cash flows from pooled assets into tranches, such as senior, mezzanine, and equity, reflecting different degrees of risks, enabling investors to select the tranche best suited to their individual risk preferences. v. expectations for syndicated loan market next, i would like to focus on syndicated loans in the context of reforming corporate finance in japan. syndicated loans are considered sophisticated because they incorporate devices for both producing and managing information efficiently. i believe that the development of this market will play a leading role in the reform of corporate finance in japan, and is likely to accelerate the establishment of a “ credit culture. ” there are two features of this market that are worth specific mention. first, contracts make clear stipulations regarding the relationships between borrowers and banks, and between agent banks and participating banks. they also stipulate precisely the obligations of contracting parties and the compensation to which they will be entitled. for example, the contract between a borrower and its bank includes covenants that establish certain conditions on profitability and asset quality to which the borrower agrees to be subject. such covenants allow borrowers more operational freedom, since they can prevent unnecessary intervention of banks. on the other hand, they also allow lenders to take necessary measures quickly

when the borrower becomes unable to fulfill its obligations under the covenant. in the united states, where the syndicated loan market is firmly established, covenants are seen performing a triggering role : when borrowers experience difficulties in honoring the terms of their covenants, this prompts discussions with their banks and the implementation of recovery measures. a separate set of contracts for syndicated loans is also signed between agent banks and participating banks. under these contracts, agent banks are responsible for disclosing information on the borrower and monitoring its observance of the covenant, a service for which they receive a compensatory commission. this gives agent banks incentives to monitor borrowers'financial situations accurately. second, syndicated loan assets are designed specifically with the secondary market in mind. if borrowers allow lenders to transfer loans to a third party, this will dramatically change the landscape of japan's financial markets. in the past, there were close and exclusive relationships between borrowers and lender banks, especially the main bank, and borrowers were extremely resistant to the idea of having their loans transferred to a third party. indeed, they were reluctant even to see changes in the share of their total borrowing that came from banks. this explains the existence of contracts for syndicated loans in japan that explicitly limit the scope for transferring loans to third parties. for transactions in the secondary market to take off, syndicated loan assets should be priced in such a way that banks other than the existing lenders, or institutional investors, may purchase them in the market. if this happens, it will allow borrowers and agent banks to consider current market prices for loan assets when fixing the terms governing lending in the primary market. a positive growth cycle in secondary markets can be envisioned with more institutional investors entering the credit market. of course, expansion of syndicated loan market alone does not complete the reform of corporate financing in japan. however, if the transfer of loan assets becomes more widely accepted through the development of a secondary market for syndicated loans, the market liquidity of new vehicles such as abss will improve. moreover, if covenants allow borrowers and agent banks to respond more promptly when firms become financially distressed, the amount of lending and investment that goes to finance low - return projects will gradually decrease, and this should accelerate the shift of economic resources to highly - profitable businesses and industries. i look forward to seeing the jsla continue to contribute actively in this area. vi. the bank of japan's initiatives a. three pillars of the