Designing New Financial Infrastructure for a New Lending Model

Japan's non-performing loan (NPL) problem was, previously, regarded as stemming from the formation and bursting of asset price bubbles. In recent years, however, the problem has been increasingly linked with structural adjustment pressure in the economy. This article analyzes the continuing large amount of NPLs at Japanese banks against the background of structural adjustment from the viewpoint of their lending model, i.e. lending rules and practices. The article also discusses the need for a new lending model, which urges earlier corporate restructuring or liquidation, especially when structural changes can weed out non-competitive firms. In order to promote this scenario, new provisioning rules reflecting the decrease in economic value/benefits of NPLs are desirable.