extremely difficult situation for the past several years, it appears that overall stability has finally been restored thanks to various measures. for example, in overseas markets, the difficulty that japanese banks faced in raising funds around the beginning of last year and the japan premium, which was the extra cost that they had to pay, have largely subsided against such background as the injection of public funds into major banks in march 1999. at international meetings like the g10 central bank governors meeting at the bis, which in fact i attended a few days ago, we have seldom heard any concern or criticism about financial system stability in japan. in addition, the ratings of japanese banks, mainly those that have announced merger and consolidation plans, have begun to be upgraded. and yet, it is true that there exist a number of agendas that we have to tackle to further strengthen financial stability, as evidenced by the recent collapse of sogo department store. today, i would like to talk about the need to strengthen the capital base, one of the most important agendas over the medium to long term. among many issues regarding the capital base, the first is the capital structure of japanese banks. the risk - based capital adequacy ratio of internationally active japanese banks was 11. 8 % at the end of march 2000, out of which tier 1 capital was 6. 6 %. in the case of us money center banks, the capital adequacy ratio was 13 %, and tier 1 capital 8 to 9 %. it should be noted that in the united states, there has been no injection of public funds and deferred tax assets corresponding only to income for the following year are included in tier 1 capital. if we calculate the tier 1 capital of internationally active japanese banks according to the us standard, it would decline from 6. 6 % to the 4 % level. indeed, there is clearly a big difference in the capital structure between major japanese banks and us money center banks. in other words, there exists a difference, significantly larger than what is observed, between japan and the united states in terms of the strength of banks ’ capital position. under such circumstances, japanese banks need to strengthen capital base by increasing its key element. furthermore, from the viewpoint of achieving multiple targets including not only the strengthening of capital base but also a reduction in capital cost and an increase in return on equity, banks should work toward the redemption of high - cost capital and an increase in internal reserves through higher profits. the second issue is how to

network to reduce operational costs. for this, we need to take full advantage of the progress of information technology, which requires enormous investment. in this regard, whether or not one has sufficient capital to be able to finance such investment is the key to success. banks that plan mega - mergers emphasize business areas such as investment banking, project finance, global cash management and networking in asia as their primary strategies. in these business areas, major banks in the united states and europe have already constructed a fairly solid business foundation. particularly in such business areas as global cash management and global custody, japanese banks need huge investment and technology to compete with banks in the united states and europe. the key to success in these business areas is investment in information technology and sufficient capital. as i just described, strengthening the capital base and pursuing the efficient use of capital seems a typical case of “ easier said than done ”. nevertheless, when we look back at the recovery of us banks from the banking crisis in the early 1990s, we observe the following virtuous circle. first, banks ’ profitability improved thanks to restructuring. then, their ratings were upgraded, which led to a reduction in capital cost and fund - raising costs. such cost reductions contributed to higher profitability. using increased profits, banks amortized high - cost capital by, for example, purchasing back preferred stock. higher profits increased internal reserves, return on equity rose and ratings were further upgraded. these processes continued. efficient use of capital means that we need to select targeted business areas and concentrate resources on these selected areas. this reminds me of the fact that mr john reed, chairman of citicorp, decided to abolish its investment banking section. in the mid - 1990s, return on equity in the investment banking section was as high as 13 %. nevertheless, citicorp pursued its chosen strategy by abolishing the investment banking section and transferring all human and physical resources in it to the consumer banking section. there were various criticisms about citicorp ’ s decision, but it turned out to be successful. this episode shows that it is ultimately the decision of top management to achieve the strengthening of capital base and efficient use of capital. there are five months remaining before we enter the 21st century. we strongly hope that in the coming century japanese financial institutions will be internationally competitive and provide the best financial services on a global basis thanks to the efforts of all those concerned in the management of financial institutions. we at the bank of japan will continue to