An advisory panel to the finance minister on Tuesday said that healthy banks should be brought in to buy failed banks after a revised deposit protection system takes effect in April 2001.
As it stands now, failed banks would be liquidated, and the government would only insure depositors’ savings up to 10 million yen.
But that plan is sparking fears that depositors will shift their savings from banks viewed as weak. If such a scenario plays out, it would further undermine Japan’s already fragile banking industry.
With that in mind, the Financial System Council is suggesting an alternative that would allow failed banks to be kept afloat, possibly through a method used in the United States.
But the panel did not reach a conclusion on another contentious issue — whether and by how much to further protect business bank accounts that exceed 10 million yen.
Its report merely says that after the new system takes effect, the government should be able to take “exceptional measures” in the face of a major financial crisis.
Finance Minister Kiichi Miyazawa will explain the ideas spelled out in the report before the upcoming extraordinary Diet session, which begins later this month.
At Miyazawa’s request, the blueprint was released two months before the final report to ease public concern about what will happen after March 2001.
The report signifies a “conversion” away from the so-called payoff or limited deposit protection scheme that has been on a five-year hold since April 1996 amid the government’s emergency steps to stabilize the nation’s banking system, Yasuichiro Kurasawa, head of a subpanel, told reporters.
The proposed shift in priority — from liquidating failed banks to selling them — would help dispel depositor anxiety, said Makoto Fukuda, head of the ministry’s Financial System Planning Bureau.
The proposed method of transferring bank operations is modeled on the U.S. purchase-and-assumption scheme in which a receiver bank purchases a failed bank’s good assets and assumes its liabilities, including customer deposits.
Sales of failed banks in this manner should be carried out smoothly with the help of public funds, the report says.
It also calls for legal arrangements through which the government could partially compensate the receiver bank for future losses on inherited assets that go bad. This would encourage healthy banks to buy failed ones, the report says.
In addition, it calls for the current “bridge bank” scheme to remain in place in case receiver banks do not emerge soon enough.
In another matter, the panel remains split over the protection of “liquid-deposit accounts,” especially those used for business settlements.
Some have argued that deposit insurance is designed to protect small-scale depositors, not business settlement accounts. Others have insisted on full protection of such accounts to prevent a bank failure from having a huge impact on corporate and personal settlements.
The report only notes that the panel will speed up discussions on this complex issue.
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