LDP panels stall on refund cap bill

Policy panels of the ruling Liberal Democratic Party on Thursday failed to approve a bill that would allow the government to continue fully guaranteeing all demand deposits.

The current Deposit Insurance Law calls for a refund ceiling of 10 million yen to be put in place on April 1, but the administration of Prime Minister Junichiro Koizumi has announced its intention to delay this cap.

The Finance and Banking Systems Research Commission, the special commission on antideflation measures and other policy panels, also failed to endorse a bill aimed at indirectly injecting public funds into regional financial institutions to facilitate mergers, participants said.

The panels decided to hold further talks and are expected to approve them at a joint meeting to be held sometime soon.

In the meeting Thursday, some panel members criticized the Financial Services Agency for not providing sufficient explanations, they said, quoting one lawmaker as saying, “Injecting public funds only for mergers doesn’t make sense.”

The government plans to submit the two bills to the Diet during an extraordinary session that begins Friday.

Japan abolished a government-backed blanket guarantee on time deposits this past April 1, imposing a limit of 10 million yen per bank per person on deposits at failed banks.

It had also planned to implement a similar refund cap on demand deposits next April, but the government on Oct. 7 decided to postpone the new cap due to concerns that suddenly exposing banks to market forces could further cripple the banking system.

Some economists say the cap would cause depositors to shift their savings from weak banks to those that are perceived to be strong, a shift that could kill off several small lenders.

Other economists say the refund cap is a key banking sector reform — one Koizumi repeatedly promised to implement — that will eventually be needed. if stronger financial institutions are ever to emerge from their bad-loan mess and stand on their own feet.

The proposed amendment to the deposit law calls for creating a new settlement-specific bank account. These accounts would earn no interest and be fully protected by the government.

The amendment also sets a two-year transitional period until April 2005. Until then, the government would designate ordinary accounts as settlement-specific accounts, thus effectively postponing the refund cap for two years on demand deposits.

The amendment stipulates that settlement-specific accounts must satisfy three definitions — they must be used to pay bills, earn no interest and can be withdrawn at any time.

Financial institutions would be required to report to the government-run Deposit Insurance Corp. which accounts they will provide as settlement-specific.

The government would also guarantee credits that are in the process of settlements, including remittances requested by depositors before financial institutions fail.

The DIC would lend funds necessary for deposit protection to failed financial institutions and shoulder losses incurred on the loans.

As for the proposed law to promote mergers among regional banks, the government would establish a framework for injecting public funds indirectly through central industry bodies into financial institutions to prevent their capital-adequacy ratios from falling when they merge.