The government has effectively placed Nippon Credit Bank under temporary state control, concluding the bad loan-laden institution had a capital deficit of 94.4 billion yen at the end of March.

Overriding resistance from NCB, Prime Minister Keizo Obuchi authorized nationalization of the bank on Sunday under Article 36 of the Financial Revitalization Law and the acquisition of NCB’s outstanding shares by the government-backed Deposit Insurance Corp. under Article 38 of the law.

The decision effectively puts NCB under state control although the actual transfer of the bank’s shares will not take place until Thursday. “The Financial Supervisory Agency determined that the estimated net value of the bank’s assets was negative as of March 31,” the prime minister said in a statement.

Although the agency ordered the bank to consider measures to recapitalize and restore its financial health, NCB failed to outline a realistic path for recapitalization since the FSA notified the bank of its inspection results Nov. 16, Obuchi said in the statement.

Later in the day, NCB President Shigeoki Togo condemned the government’s decision. “The decision was made in an abrupt manner, and it is extremely regrettable that our bank has been temporarily nationalized,” he told a news conference.

He added, however, that NCB will accept the move, saying, “We may lose public confidence (in the bank) if we resort to administrative litigation to change the government’s decision.”

At a separate news conference, Financial Reconstruction Minister Hakuo Yanagisawa stressed that one of the nation’s most urgent issues at present is the stabilization of the financial system amid the ongoing financial deregulation.

“I have always underlined the need for banks to assess their asset quality correctly and make appropriate provisions for possible loan losses,” he said. “As far as NCB is concerned, however, the results of the FSA inspection of the bank has led us to today’s decision.”

Urging the public not to panic over the NCB nationalization, Yanagisawa said: “Under temporary state control, all the deposits and financial assets at NCB will be protected by the government. I’d like to urge the public to react with prudence.”

There are no other banks at the moment saddled with capital deficits also facing possible nationalization, Yanagisawa said.

FSA Commissioner Masaharu Hino said he ordered NCB the same day to improve its operations, but stressed that the bank will continue business. “The FSA, in collaboration with the Finance Ministry and the Bank of Japan, is determined to take every step necessary toward year’s end to prevent a resurgence in anxiety over the nation’s financial system and the deterioration of the credit crunch hitting financial institutions,” he said.

The nationalized NCB is expected to continue normal business under supervision of the Financial Reconstruction Commission, which will be set up today.

The bank’s current board of directors will be replaced by a new management team to be appointed by the commission, he said. Togo said NCB executives have already submitted their resignations so they can be replaced by new managers.

Financial authorities will also attempt to outline to their overseas counterparts why the decision was made to nationalize NCB so that financial markets both at home and abroad can receive the right message about the latest move, Hino said.

According to the results of the FSA inspection of NCB last summer, NCB’s capital adequacy posted a deficit of 94.4 billion yen as of March 31. The inspection showed that the 561.5 billion yen the FSA required the bank to set aside to cover possible losses exceeded its capital of 467.1 billion yen.

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