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An advisory panel to Prime Minister Junichiro Koizumi urged financial institutions Monday to create fully protected zero-interest accounts by April.

Such accounts will create a virtual loophole in the government’s plan to limit deposit guarantees.

The measure, proposed in draft recommendations compiled the same day by the Financial Services Council’s project team, is designed to guarantee large accounts that are used to settle payments, in the event of a bank failure.

As the end of the state’s full guarantee on ordinary bank accounts approaches, large depositors such as municipalities and businesses and their banks as well are beginning to show concern.

A single withdrawal by a wary municipality, for example, could trigger a run on its bank, and small firms that cannot find new lenders risk antagonizing their creditors by transferring their deposits to safer banks.

“We hope that financial institutions will not consider the safety of the settlements system as somebody else’s business,” reads one of the draft recommendations.

“They should take the initiative” to ensure settlements are safe, it says.

The team’s proposals are scheduled to be submitted to Koizumi on Thursday.

Koizumi had instructed the council in late July to ensure that settlement payments remain protected, even after the state limits its full guarantee on deposits on April 1 to 10 million plus interest.

Although it has stopped short of ordering the creation of the special accounts, the project team is exerting strong pressure on banks.

Team members declined to stipulate the specific kinds of accounts it would like to see, stating only that they should earn zero interest, provide settlement services and issue payments on demand.

In practice, however, banks will be limited to granting large depositors the option of reducing interest rates on their regular or ordinary accounts to zero in exchange for a full guarantee.

Designing entirely new accounts requires up to a year’s worth of tests and would incur high costs in terms of computer systems adaptation.

Even the relatively straightforward task of transforming certain accounts into protected and zero-interest accounts could cost several hundreds of millions of yen, bankers have said.

While insisting that the project team was seeking to protect settlement payments and that “there was no financial uncertainty,” FSA officials urged banks to be cautious in following the team’s recommendations.

“We would like to emphasize that banks should not impose high costs or trouble on customers, or take any measures that might unnecessarily cause consternation among depositors,” reads the project team’s draft.

Faced with the problem of having to change account numbers and notify credit card and utilities company of these changes, depositors might use the opportunity to simply withdraw their money altogether and place it in the care of institutions they feel are safer, critics have argued.

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