The Financial Services Agency declared Saturday Eitai Credit Union insolvent, legally forcing it to begin insolvency proceedings under the Deposit Insurance Law, FSA sources said.

However, Eitai officials said later Saturday that they would not accept the declaration, saying the credit bank would continue its business independently.

As a result of an inspection last year, the agency concluded that the credit union, based in Tokyo's Koto Ward, had fallen into a negative net worth, with its capital-adequacy ratio standing at about minus 5 percent, the sources said.

Later Saturday, the FSA appointed two administrators -- a financial expert and a lawyer -- to the credit union to handle the proceedings, the sources said.

The agency also plans to determine those in the management responsible for the credit union's failure, while selecting financial institutions to take over its operations.

The financial institution said it is in talks with foreign firms to boost its capital base and may file a suit against the FSA demanding that it nullify its decision because it could ruin the negotiations.

Under the law, Eitai will be allowed to continue operations as usual from Monday and its deposits will be fully protected and refunded.

Eitai will be the third case in which financial regulators apply legal measures in declaring failure and forcing insolvency proceedings.

The two other cases are Nippon Credit Bank in October 1998 and Kansai Kogin, an Osaka-based credit union mainly serving South Korean residents in Japan, in December 2000.

The sources said the FSA decided to take the legal measure after a prolonged conflict with Eitai over the FSA's assessment of bad loans in its inspection last year.

FSA inspectors concluded Eitai has fallen into a negative net worth as they designated Eitai's loans to golf courses in Chiba Prefecture as nonperforming and its loans for real estate development during the bubble economy as having turned sour.

Established in 1926, Eitai was seen as one of the prominent credit unions in Tokyo, with 279.4 billion yen in deposits and 26 branches as of the end of March last year.

Eitai has been actively promoting loans to venture firms and the establishment of a "citizen's bank" for lending operating funds to businesses closely linked with local communities.