（Nikkei Newspaper=3 million circurations, 3/Sep,'98） A shift from bureaucratic corporate governance toward a market economy will create 'information symmetry' enabling both financial rehabilitation and the Big Bang to be achieved.　 SUMMARY During the bubble years, banks were able to earn a huge amount of excess profit from the market thanks to their superior information resources, taking advantage of their functions as main banks. However, in line with market principles, the collapse of the bubble economy has forced them to surrender these excess profits. The moves toward globalization and asset securitization have transformed the financial sector into a market-driven economy, thanks to a shift from bureaucratic corporate governance toward a market economy. Therefore, both financial rehabilitation and the Big Bang can be achieved if an understanding of the importance of disclosure of corporate information takes root and 'information symmetry' is attained. Mitsutake Yoshimura Professor of Economics, Yamaguchi University Born 1938.. Has served as editor of the Nihon Keizai Shimbun and a board member and auditor of the Japan Bond Research Institute. There has been a rapid escalation in the emphasis placed by Japanese banks on market trading as a result of the movements toward financial globalization and securitization. The banks' exposure to risks associated with market trading has therefore increased, and they have become forced to pay greater attention to risk management. Most major banks have now almost completed setting up systemic processes for measuring VaR (Value at Risk = level of risk). However, the major banks have been slow to establish the evaluation and forecast systems for credit risk which will enable them to determine the appropriate amount of lending and interest rates for their core lending business. It is anyway difficult to measure the credit risk of the tens of thousands of companies to which they lend, so it is all the more difficult to forecast risk and maintain an appropriate system. Even though the tentative classification of various credit risks has been achieved as a result of legislation for prompt corrective action against bad debts, a process which includes manual procedures, most banks have not been able to measure, systemically and theoretically, the bankruptcy forecasts and recovery prospects for exposures of each classification. The credit crunch has only increased the volume of bad loans, making the Diet discussion on how to dispose of them all the more complicated. Failure to achieve accurate disclosure on bad loans by the banks themselves will only increase market distrust, and the point has been reached where banks will be forced out of the market by market principles. It is also becoming more difficult to pump public funds into the banking sector. The reason that Japan's banks are finding it so difficult to measure or estimate borrowers' credit is that they have never before used this approach in lending money. In the past they have mainly been involved in secured loans, whose collateral has usually been real estate. Learning the lessons of the financial crisis at the beginning of the Showa era, banks adopted the principle of demanding collateral and only lending money against property. In other words, when lending, they have not based their judgment on the company itself or its credit risk. Banks advanced far too many secured loans during the bubble years. To use a theoretical example, a bank may have lent 15 billion yen against land worth 10 billion yen but whose price rose to 20 billion yen because of asset inflation. However, when the bubble economy collapsed, the value of the land may have fallen to just 2 billion yen. In this way, recovery of the loans became impossible, and this is how bad loans accumulated. This has now been followed by asset deflation, and to control their lending banks have had no choice but to focus mainly on ratings based on each company's credit condition. In other words, banks need to shift their activities to an approach based on the market, and to follow market principles whereby sound companies can receive considerable amounts of money at low cost, whereas unsound companies can only acquire smaller amounts of money and at high interest rates. Failure to make this transformation would make it impossible for the banks to remain in operation. The credit crunch is a sign of the difficulties banks face. When appraising non-listed companies in deciding to lend money based on credit risk, Altman's bankruptcy indicator model, for instance, requires corporate financial data, but the banks have not collected and updated such data to create a database. Furthermore, there are a lot of window-dressed accounts, as is shown in the case of Mita Industry Co, Ltd., which went bankrupt recently, so the data available is often of little value for the purposes of forecasting. In terms of public companies such as listed companies, it is possible to predict bankruptcy prospects judging from fluctuations in stock prices using stock option theory. However, an overwhelming amount of the banks' lending, even that of the majors, has been to unlisted companies, so an organized and theoretical prediction of bankruptcy is difficult to achieve. Japanese banks themselves have never been enthusiastic about disclosure. In the first revision to banking law for 50 years, a provision for disclosure was incorporated into the law in the middle of 1975, but it was ineffective and hard to implement. The disclosure called for under the revised law consisted of a so-called disclosure journal, which differed greatly from the securities report which is the major form of disclosure under securities and exchange law. The journal was presented to over-the-counter depositors, while the report is submitted to the securities exchange. However, the journal was an unambitious measure, and the items disclosed were voluntary, while there were various definitions in use. Mandatory disclosure has to be conducted precisely, fairly, and impartially using a specified definition. Otherwise, a comparison of corporate information cannot be made, either chronologically or horizontally (i.e. between different banks or countries). The securities report demands the above conditions, but it was administered by the then Securities Bureau, and the Bank Bureau, which claimed to have a higher rank, was able to exercise something like extraterritorial rights over disclosure under the securities and exchange law (according to a former executive of the Securities Bureau). Therefore, the report was remarkably inferior to the securities reports submitted by US banks to the Tokyo Stock Exchange. The disclosure of bad loans achieved today is a result of gradual, step by step rectification at the financial system investigative committee, but its actions have always been late. Banks also had a function of monitoring companies through their lending. According to the agency cost approach, banks (the principal as creditor) have tried to lower agency cost (opportunity cost, the risks borne by managers) by monitoring agency (the manager or agent). In this connection, rating agencies lower agency cost for direct finance, whereas banks lower agency cost for indirect finance. In addition, banks themselves now face their own agency cost problems. During the bubble years, unfair, illegal and excess lending prevailed, increasing agency risk all the more. The banks are now having to pay expensive compensation for the after-effects of this, in the form of their bad loan problems. Banks pose a major problem from the standpoint of information theory. Banks held a dominant position during the bubble years through their superior information resources thanks to reinforcing their cross-holdings of group companies' stock under the main bank system, exploiting excess profits by huge insider trading within the group. Even though laws against insider trading were in fact enacted during the bubble years, the trading that was regulated was only small units, and major transactions were overlooked. The same theory applied to land deals as well as stocks, and huge amounts of excess profit were acquired. Regarding the theory of disclosure, if information on securities is not fairly and impartially available to market participants, in other words until "information symmetry" is achieved, "reverse selection" occurs and the pricing system of securities will be distorted. This excludes from the market those with an inferior access to information until eventually the market collapses. Evidence of was provided by the collapse of the bubble economy. Write-offs of bad loans are now being conducted out of the excess profits of players that had superior access to information, and this is a vindication of the disclosure process. It is common in the United States for those who make profits through unfair disclosure to be fined 5 times the profits they made. As this example shows, disclosure is considered crucial in the United States and the market system is treated with respect. However, in the case of Japan, the financial world has been controlled and supervised by the Ministry of Finance which has used the right to grant permits to gain a power of life and death over banks. There are many bank employees and members of opposition parties who still think that disclosure means nothing more than to report to the Ministry of Finance. This is a remnant of bureaucratic corporate governance. The announcement of bad loans by the financial authorities, however, is not a matter of disclosure but of the information disclosure law. The manufacturing sector is also controlled through the granting of permits to companies, for example by the Ministries of International Trade and Industry, Construction, and Transportation, through industry associations, and this system has controlled everything from supply and demand to prices. By forming cartels during times of recession, this system has built "Japan Inc." Some say this system is a continuation of wartime practices, and that as the GHQ occupation authorities dissolved the financial combines and democratized stocks after the war, Japan Inc. was governed by the twin pillars of "financial feudalism" and the "cartel system" for 50 years since the war. The regulated economy accounts for 40% of GDP in Japan, compared to 30% in China. The bureaucratic system was effective during a high-growth period, but now that Japan has moved to a low-growth economy and now to zero-growth, it is not effective anymore because of its high cost. Agency cost is increasing everywhere, and the increase in the bureaucracy's agency cost has also been conspicuous. This is why the financial Big Bang was proposed and has been carried out, or even imposed. The principle is based upon the supremacy of the market and market principles. Reporting the condition of the banks to the market through accurate disclosure is the fastest short-cut to the stabilization of the financial system. This is because if credit evaluation is conducted properly based on accurate information disclosure, securities will be priced fairly and reverse selection will not occur in the market. It is also essential for banks which do not disclose to be forced out of the market from the standpoint of effectiveness in the market, and if their condition is poor it is natural that their reason for existing will be questioned.