Banks don’t want it. Most depositors don’t need it. Many politicians oppose it. A compromise plan financial regulators are preparing is supposed to appease critics, help save the nation’s weakest banks, and protect one of the key reform pledges of Prime Minister Junichiro Koizumi. It may accomplish none of these objectives.
A project team reporting to Koizumi on Monday urged financial institutions to create accounts that will be fully protected after April, when the state removes its guarantee on ordinary accounts in amounts in excess of 10 million plus interest per depositor.
So long as the accounts earn zero interest, down from about 0.001 percent, accounts will be fully protected by the government, the project team said.
“In the interest of the public good, and to protect the settlements system, we strongly hope banks will provide these accounts for depositors,” an FSA official attending the project team proceedings said. “I am sure banks will act in the public interest.”
Critics, however, say this represents a halt to deposit-insurance reform.
Weak banks will be allowed to hobble on, hurting the nation’s banking sector over the long term, said Naoko Nemoto, an analyst at U.S. credit-rating agency Standard & Poor’s.
A two-year postponement in 1999, which was supposed to give the government extra time to shore up the banks, left the sector, if anything, weaker than before, she noted.
The scheme is aimed at preventing a potential hemorrhaging of deposits from the smallest financial institutions, such as credit cooperatives and “shinkin” banks, which are seen to be central to regional economies. Both large and regional banks, and even politicians who oppose deposit-insurance reform, however, scoff at the measures.
The strongest banks, which have seen an inflow of money as April approaches, are reluctant to shoulder the extra deposit-insurance premiums for the zero-interest accounts, and customers are unlikely to want to pay account-management fees on them.
Plus, banks must shoulder the cost of differentiating which accounts are fully protected and which are not, and informing depositors of the choice. The Japanese Bankers Association says banks may need to spend as much as several hundred billion yen to adapt their computer systems accordingly.
“Protecting deposits is like an anesthetic,” said Hideo Kumano, senior economist at Dai-ichi Life Research Institute, who said introducing a cap to the deposit-insurance may be too disruptive to confidence in the system. “It has to come with surgery, with an injection of capital funds, to strengthen the banking system and regain confidence.”
The flow of money from unprotected time deposits to currently protected ordinary accounts this year proves that market confidence is weak, he added.
According to the Bank of Japan, the total volume of time deposits fell 14.4 percent in June from a year before, while total current and ordinary deposits ballooned 42.9 percent to a record 5 quadrillion.
If the aim is to prevent a rash of bank failures by discouraging depositors from moving their money away from weak banks into safer ones, all the fuss may not work anyway, argues Brian Waterhouse, analyst at HSBC Securities.
Unless all banks act simultaneously, those offering the special guaranteed accounts would immediately be seen to be desperate and may lead to runs on banks, precisely what the scheme seeks to avoid in the first place, he said.
Regulators, however, are reluctant to go so far as to tell banks what accounts to create. For months, they have been calling on banks to work to increase profitability.
Meanwhile, the new measures are doing little to appease ruling coalition politicians clamoring for a second postponement.
“Regulators should stop tinkering with ideas for new accounts, and call for an extension (of the full deposit guarantee),” said Hideyuki Aizawa, head of the ruling Liberal Democratic Party’s financial affairs panel. The banking system is not ready, especially in regional economies, where the potential failure of one credit cooperative could trigger failures in others and wreak havoc on small and medium-size businesses, he argued.
But the fact is that the customers themselves are ready for deposit insurance reform.
According to a BOJ survey released in May, 99 percent of all individual accounts, representing 71.5 percent in value, hold less than 10 million.
“If there was demand for these (fully protected) accounts, we would have created something like them already,” said a senior official at UFJ Holdings Inc. on condition of anonymity. He also said, however, that as chair of the Japanese Bankers Association, his bank “has no choice” but to begin preparations to make an account that fits regulators’ requests.
Even those who have argued for some kind of a safety net to help ease the pace of bank-initiated corporate bankruptcies have been taken aback by the government’s apparent about-face.
Last year, the FSA closed in on small credit entities and weak banks, initiating the collapses of 55 credit institutions and two regional banks since April 2001 in the name of structural reform.
“The government’s failure to push forward consistent reforms in the banking sector is causing violent fluctuations in the pace of bankruptcies,” said Katsuyuki Kumagai, general manager of private think tank Teikoku Databank’s information department. “Corporations are now constantly forced to guess whether they will be able to secure funding.”
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