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The Diet enacted financial reform laws Monday afternoon that mandate creation of a “financial resuscitation committee” to handle failed and failing banks as well as a public institution to buy bad loans from them.The government and Liberal Democratic Party now turn their attention to a bank recapitalization bill expected to be passed by the Lower House today and by the Upper House by Friday, when the extended Diet session ends, with support from part of the opposition camp. The new bank recapitalization bill would replace the current plan of injecting up to 13 trillion yen in public funds into banks to boost their capital bases.The financial reform laws were largely based on opposition party proposals, as the LDP falls far short of a majority in the Upper House and had to compromise. The bills cleared the Upper House with support from the LDP, the Democratic Party of Japan, Komei, the Social Democratic Party and other forces. The laws will create a committee within the Prime Minister’s Office, independent of Finance Ministry influence, that will be given authority to deal with bank failures. But in urgent situations, such power will be shared by the committee and the ministry.Some pundits say, however, that selection of the members will be a hard task, given the expertise and responsibility required of the committee. Government sources said Chief Cabinet Secretary Hiromu Nonaka may be tapped to serve concurrently as chief of the panel.Under the plan, when a bank fails or nears bankruptcy, the committee will choose one of three policy options for handling it. The first is to put the bank under temporary state control through government purchase of its common shares. The state-controlled bank would be required to draft a restructuring plan and keep operating until a private-sector buyer is found.The ailing Long-Term Credit Bank of Japan is expected to be the first and maybe the last case to which the measure of placing the bank under special public administration will be applied. The LTCB is expected to apply for state administration as early as next week.While the LDP agreed with the opposition camp to deal with LTCB under the nationalization scheme, the government and the ruling party want to utilize the new bank recapitalization plan to prevent failures of major banks.The second option is to liquidate the bank by sending a bankruptcy administrator to it.

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