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Staff writer

A new financial safety net should be set up by April 2001 to prepare for a possible crisis in the banking sector, Financial Reconstruction Minister Hakuo Yanagisawa said Monday.

Some kind of system will be needed to replace the temporary financial stabilization laws after the government’s policy of protecting all bank deposits comes to an end, Yanagisawa said in an interview with The Japan Times and other news organizations. “From April 1, 2001, will it be OK for the financial sector to enter the era of the bankruptcy law, the corporate rehabilitation law and the like?” he asked.

Yanagisawa, first to hold the newly created post, refrained from commenting further, noting there should be more discussion to take public opinion into account before a decision is made on the issue.

The banking reform laws — including the financial system revitalization law that has enabled the recent nationalization of the effectively insolvent Long-Term Credit Bank of Japan and the bank recapitalization law that allows capital to be injected into viable banks — will expire March 31, 2001.

From April 1 that year, the government will guarantee the accounts of individuals up to an amount not exceeding 10 million yen each in the event of a bank failure. Yanagisawa said LTCB should be sold to another bank as soon as possible and within the year, at the latest, so that its financial assets do not deteriorate in value and its human resources do not flee.

The government will decide on detailed standards for capital injection as early as next week, in light of the timing of banks’ midterm earnings reports, Yanagisawa hinted. “It is necessary to move ahead as quickly as possible,” he said, because the midterm reports may invite speculative attacks in the market after mid-November.

In calculating banks’ capital adequacy ratios for capital injection, Yanagisawa said banks’ shareholdings should be calculated at their purchase price instead of market value. The purchase cost method artificially keeps banks’ capital ratios from falling because it does not reflect the present sluggishness of the stock market.

No banks have applied to receive a capital infusion from the newly created 25 trillion yen fund yet.

Banks should go beyond increasing lending to existing customers and make their utmost efforts to find new borrowers and new ways to utilize banking resources, he stressed. Such efforts are necessary to boost return on equity and capital adequacy ratios at the same time, he said.

Yanagisawa acknowledged that the last capital injection, a 1.8 trillion yen infusion for 21 banks carried out in March, did not solve the credit crunch as was hoped. This time, however, he appears optimistic because applicant banks must submit plans to the government on how they will expand lending.

Yanagisawa, 63, was formerly director general of the National Land Agency. Now head of LTCB, he took the helm of the Financial Reconstruction Commission, a newly created ministerial post, on Oct. 23 and is in charge of running capital infusions for banks.

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