There should be an exemption to the planned end of the government’s full protection of bank deposits, an advisory panel to the finance minister said Tuesday.
Bank accounts for business settlements should be fully protected for a “limited time” even after the current scheme expires, the Financial System Council said in its final package of recommendations.
But “heavy” insurance premiums should be levied on banks to prevent a possible misuse of the proposed exemption, the council recommended.
The long-awaited report comes at a time when a heated political debate is going on over whether the termination of full protection should be postponed until after the scheduled date of March 31, 2001.
However, the advisory panel did not clarify its position over the controversial issue, saying it has been considering the scheduled end of deposit protection as given.
The package was submitted to Finance Minister Kiichi Miyazawa, who then said the report should help clear up the controversy.
Miyazawa has said he wants to make a final decision on the matter by the end of the year.
The current five-year deposit protection scheme was launched in 1996 as a government emergency step to stabilize the nation’s banking system.
When this scheme expires, the government originally intended to guarantee deposits of up to 10 million yen per depositor.
The proposed exemption of settlements accounts is intended to prevent an economic disaster which might arise while uncertainties remain over a new scheme to handle bank failures.
The logic assumes any situation in which personal and business settlements may be suspended if it takes time to handle a bank failure or when a significant part of deposits over 10 million yen is slashed.
The report calls for a new government scheme that would enable healthy banks to buy failed banks immediately after the failure. That would minimize the losses of depositors and prevent a systemic crisis, it says. The present laws require more time and threaten more costs.
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.
The report says the special treatment of “liquid deposit” accounts, such as no interest-bearing deposits, should be fully protected until the new scheme works properly and settlement services in the financial sector are more diversified.
The “limited time” is not defined in the report, but some panel members suggested two to three years, said Yasuichiro Kurasawa, head of a sub-panel. As for the limited protection of other kinds of bank accounts, interests of principal up to 10 million yen per depositor should be insured, the report says. In the initial government plan, only principal would be insured.
The panel did not reach a conclusion about how to protect deposits at foreign banks operating in Japan, because of questions as to the jurisdiction of financial authorities. At present, such deposits are not insured. The report calls for a continued discussion on the issue.

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