of financial institutions are difficult to differentiate and that it does not necessarily lead to enhanced profitability. one might argue that the profitability of such businesses could be enhanced by mergers and consolidations of financial institutions. economic theory shows that the scale economy can take place and indeed some empirical analysis confirms that the efficiency of general and administrative expenses could be improved, while another analysis suggests that a mere increase in asset size would push down lending rates, offsetting the improvement in general and administrative expenses. since many analyses on mergers and integrations cover the period when financial institutions struggled with the non performing loan problem, the picture may turn out to be different when financial institutions engage in m & a activity as part of a forward - looking business strategy. as i mentioned in the beginning, various types of m & as are currently taking place in the non - financial industries. japan's financial industry will naturally engage in m & a activities in their pursuit of raising their corporate value. for example, acquiring business operations that bring a greater synergy with the current operations, or selling business operations with a small competitive advantage are a few means of enhancing their corporate value. with respect to cross - border m & as, the recent revision of japanese corporate law enabled overseas firms to conduct a forward triangular merger through the exchange of shares. in fact, the first case took place in the financial industry, where a large u. s. banking group acquired a major securities firm in japan. in summary, while mergers and integrations that simply increase the asset size do not necessarily lead to enhanced profitability, m & as could be an effective tool for improving profitability if they are used to strengthen and streamline business operations that have a comparative advantage. measures for legal and accounting infrastructure so far i have outlined the measures taken and challenges faced by financial institutions themselves. improvement in its infrastructure is also imperative in enhancing the profitability and competitiveness of japan's financial system. now i mention a few issues that require improvement with respect to legal and accounting infrastructure. first, the transparency and reliability of financial accounting information should be enhanced. in order for financial institutions and investors alike to adequately assess the risks when extending credit or making an investment decision, further disclosure of firms'financial information is necessary. in that respect, the financial instruments and exchange law enacted in september 2007 introduced mandatory quarterly releases of financial information to listed companies. and to secure the reliability of the released information, the law obliges companies to submit certification of an annual report and an internal control

masaaki shirakawa : provision of subordinated loans excerpt from an address by mr masaaki shirakawa, governor of the bank of japan, at a meeting with banks ’ top management, tokyo, 24 march 2009. * * * at the policy board meeting held on march 17, the bank of japan decided to explore a new framework for providing subordinated loans to banks. we have invited today representatives of banks which are subject to international capital standards to explain the background and the bank of japan ’ s view on the decision. the funding conditions for firms have deteriorated rapidly since last autumn due to the increased strains in global financial markets after the collapse of lehman brothers. while financial institutions have retained the financial intermediation function accordingly by increasing lending, the environment surrounding financial institutions has become increasingly severe due to the stock price plunge and the domestic economic downturn. fund raising in financial markets for funds over the fiscal year - end has mostly been completed, but the firms continue to face difficult funding conditions. while the cp market has started to restore its function, funding in the capital market has been limited to the firms with high ratings. looking ahead, while demand for funds to secure liquidity for the year - end and the fiscal year - end and demand for working capital due to the rise in raw material prices until last summer will decline, demand for funds to continue and to restructure business are expected to gain momentum. there might be a case in which the financial intermediation function will not be carried out smoothly from a macro perspective, if the strains in global financial markets increase and financial institutions become more conscious of possible capital constraints in the future. if financial institutions become more conscious of taking credit risk and all financial institutions take the same action simultaneously, the adverse feedback loop between the finance and the economy may intensify through financial institutions ’ restraining from accumulating their assets, leading to the fallacy of composition, although the action is judged as rational for each individual institution. as a result, that might weaken the capital strength of each financial institution. from that point of view, concern is for the influence of a possible decline in stock prices. while the amount of stocks currently held by financial institutions is significantly reduced compared with the early 2000s, it remains unchanged that they hold substantial market risk associated with stockholdings. although stock prices have recently somewhat rebounded, the financial systems in the u. s. and europe have remained unstable. it should be avoided that each financial institution's consciousness