Japan Proposes Major Revamp in Banking Supervision : Asia: Plans include a strengthening of the inspection division. But the measures are short on specifics for dealing with problems.

Stung by worldwide criticism of its failure to forestall a string of disasters at Japanese banks, the Finance Ministry announced plans Tuesday for a radical overhaul of its system of banking supervision.

Measures included a strengthening of the Finance Ministry’s inspection division, an early warning system based on tougher, objective criteria for banks’ financial strength, and greater use of external auditors to examine banks’ accounts.

Meanwhile, the Bank of Japan said Tuesday that it had begun a series of emergency inspections of New York branches of 10 leading Japanese banks.

The Finance Ministry’s proposals will disappoint critics by being short on specific plans to tighten supervision and by failing to increase disclosure requirements, a crucial failing at Japanese institutions in the last few years.

The ministry said the underlying principle in the measures was a commitment to end the cozy relationship between banks and their regulators.

At the same time, the proposals call for banks to improve their internal management controls and impose more reporting burdens on them.

“These measures will introduce a fundamental change in our system of banking supervision,” said Masayoshi Takemura, the finance minister.

The main change is a legislative reform to enable the Finance Ministry to order corrective action if banks fail to satisfy objective criteria for key financial ratios.

An early warning system will enable regulators to insist on remedial action if banks fall short of objective criteria for capital adequacy and other measures.

Banks will also be given new guidelines on risk management and internal control mechanisms. Overseas branches will be expected to use external auditors.

And the manpower of the banking supervision department of the Finance Ministry will be expanded from 420 examiners to about 490, under the plan.

But there were no measures aimed at improving the limited disclosure of financial information by banks.

The announcement came at the end of a dismal year for Japanese banks.

A succession of financial collapses at smaller institutions was largely the result of the banks’ reckless lending in the bubble years of the late 1980s.

But the larger banks also had problems that resulted in the accumulation of billions of dollars in nonperforming loans on their balance sheets.

Last week, the government was forced to announce plans to spend $6 billion of public funds to help out some of the weaker institutions.

In September, Daiwa Bank, one of Japan’s largest, disclosed losses of more than $1.1 billion by a bond dealer in its New York branch over a period of 11 years.