The nearly decade-old blanket guarantee on bank deposits is to end Friday, reflecting an improvement in the creditworthiness of banks due to active bad-loan disposal efforts.

The following briefly explains the changes to the deposit-guarantee system and how they affect depositors.

What has changed?

The government will only guarantee the principal and interest on bank deposits up to 10 million yen per depositor, even if a bank goes under.

The system of limiting the government’s protection of bank deposits under the Deposit Insurance Law was introduced in 1971. It was suspended in 1996 amid fears over the stability of the nation’s financial system, which was saddled with a huge number of nonperforming loans.

The blanket guarantee was meant to end in April 2001. But it was only lifted the following year, and just for certain types of accounts, including time deposits, due to concerns about banks’ health. Savings accounts continued to receive full protection.

Foreign currency-denominated deposits at domestic banks as well as holdings in their overseas units and at foreign banks here are not covered.

Why was the full guarantee lifted?

The policy comes partly from the government’s desire to see more of the huge financial assets held by households — estimated at more than 1.4 quadrillion yen — move into such investments as stocks and real estate to help stimulate the economy.

According to Bank of Japan data, cash and bank deposits currently account for more than 50 percent of all household financial assets in Japan. They are more popular, for example, than stocks, which account for less than 10 percent.

The government also hopes that as depositors become more selective about where they put their money, banks will be pressured to offer better services.

Can greater diversification of personal financial assets be expected?

Not necessarily; experts say there is a loophole.

The government will continue to fully guarantee so-called settlement accounts, which are typically used for settlement purposes and pay no interest.

These accounts are mainly for firms and regional governments that need to have daily settlements, although they also can be opened by individuals.

The government asked banks to set up this type of account before blanket deposit guarantees ended, and about 98 percent of banks already offer or plan to offer this type of account, according to the Financial Services Agency. Japan is the only industrialized nation that has them.

The FSA has defended the creation of these specially protected accounts, saying the settlement system must be protected because any problems with the accounts could seriously damage business activity.

Will banking services improve now that blanket protection has ended?

Yen deposits are expected to remain popular with the general public, especially since deposits of up to 10 million yen per person per bank will continue to be guaranteed.

In view of this, some banks have begun offering bank deposits with competitive interest rates to lure new customers.

Some banks are offering customers a wider range of financial products, including mutual funds and variable annuities, in the hope of earning commissions.

Is the government acting because it is confident no more banks will fail?

There are some small regional banks whose capital adequacy ratios are extremely low, and the government has been nudging them to merge with other banks to survive.

The government also set up an emergency safety net in 2001 under the Deposit Insurance Law, through which the prime minister can order the full protection of deposits at a financial institution if it is determined the bank’s failure would seriously harm financial stability in the area.

It was used for the first time in May 2003, when authorities bailed out Resona Bank.

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