Diet gets bill allowing for state fund injections into banks

Kyodo News

The government submitted a bill Friday to the Diet to allow it to inject state funds into banks and other financial institutions to shore up their capital bases and ease the credit crunch amid the global financial crisis.

The government, however, has no immediate plan to inject capital into banks. The injection process would only start if so requested by a bank.

The bill, which the Cabinet approved earlier in the day, is to revise the Act on Special Measures for Strengthening Financial Functions. It is expected to help ease the pressure on financial institutions from the worldwide credit turmoil as they have been increasingly reluctant to lend money to smaller companies due to fear of default.

The legislation is part of the additional government economic stimulus package Prime Minister Taro Aso told his Cabinet ministers to compile.

Under the revised law, the government would accept applications from financial institutions for public funds until the end of March 2012, extending an earlier deadline from March.

It is aiming to enact the legislation by the end of December in anticipation of an expected growth in demand for operating funds from small and midsize businesses ahead of year’s end.

The government has allocated around ¥2 trillion for bank recapitalization in the budget for the current fiscal year through next March, but ruling party lawmakers could discuss boosting the amount, sources said.

The legal revision would also ease the clause that banks applying for the assistance of taxpayer money have to clarify their management responsibilities.

But some major bank officials say there is strong resistance in the industry to bailing out regional and other small financial institutions unconditionally.

They warn that could only lead to a “moral hazard.”

The Cabinet also approved a bill to revise the Insurance Business Law to use the safety-net system to protect policyholders of failed life insurers with public money beyond its planned expiration next March.