Japan likely to force banks to sell stock

Japanese banks such as Mizuho Holdings, the world's biggest, could flood the market if forced to sell $90 billion in stock

By CNN's Alex Frew McMillan in Hong Kong

TOKYO, Japan - Japan is preparing a fresh set of rules for its banks, including a cap on the amount of stock they can own.

The Financial Services Agency (FSA), which regulates Japanese banks, is currently drawing up the changes.

It will present the government with a blueprint on June 20, according to the Nihon Keizai Shimbun.

Banks would only be allowed to hold as much stock, in terms of market value, as they are worth, in terms of capital or shareholder's equity.

Forcing $90 billion in stock sales

The restrictions would force banks to sell around $90 billion (11 trillion yen) of stock in a little over two years.

Some investors worry that will flood Japan's markets. The FSA hopes to put the cap in place by 2004.

To take the sting out of the selling, the FSA wants to establish a stock-buying fund that would absorb some of the shares.

Cross-holdings cause problems

Japan's banks have vast cross-holdings, stock they own in customer companies and the companies own in them.

Those relationships make it difficult for Japan to solve one of its biggest problems, a vast amount of bad debts sitting on its banks' books.

Banks have no incentive to call in bad debts when doing so hurts a company they own stock in. But experts say the banks' normal procedure of forgiving debts or extending loans keeps essentially bankrupt companies in business.

Japan's banks own $353 billion (44.3 trillion yen) in stock and have $271 billion (33.4 trillion yen) in capital, according to the central Bank of Japan.

A rule forcing them to sell the difference will hit home at Japan's large banks. The chairman of the Regional Banks Association of Japan said smaller banks would not be affected because most regional banks already fall below the proposed levels.

The idea of a stock-buying fund was first floated under ex-Prime Minister Yoshiro Mori. But the idea has been put on the back burner as Junichiro Koizumi took over.

The government is still expected to unveil the fund later this year. But how much stock it will buy, and where the financial backing will come from, is still unclear.

The FSA is also looking at raising the risk weighting it gives to stock. That would reduce the amount of capital that banks with large stock holdings are assessed to have.