When Nihon Shinko Ginko filed for bankruptcy on Sept. 10 the media reacted predictably with alarm. Any bank that fails is bound to send shivers through the population, even those who don't have accounts with the institution in question. Incubator Bank of Japan, as it's called in English, had debts that exceeded its assets by more than ¥180 billion, incurred through making loans to small businesses. Exactly 126,779 people had time deposits in the bank.
What makes the story especially notable is that this is the first instance of a bank failure in which the government will limit "payoffs" (deposit guarantees) to ¥10 million per account (plus interest earned) since the deposit guarantee program was begun in 1971. Between 1996 and 2005, the cap was suspended to prevent runs on banks that were hard hit by the post-bubble recession. The cap was reinstated as part of the financial reforms undertaken by former prime minister Junichiro Koizumi (Incubator, in fact, was started in 2004 by Takeshi Kimura, a pal of Koizumi's financial services minister, Heizo Takenaka). For Incubator customers with more than ¥10 million in their accounts, there is no guarantee they will get it all back.
As it turns out, only 3,423 of Incubator's depositors had more than that amount, and their total at-risk deposits — meaning the money in excess of the ¥10 million limit — only came to ¥11 billion of the total ¥582 billion in time deposits. The reason for this low amount is simple: Incubator took advantage of the payoff system by telling potential customers that there was no risk if they deposited less than ¥10 million, and then offered much higher interest on time deposits than any other bank, a cool 1.9 percent for five-year accounts. Consequently, they got lots of customers. They could offer this high rate because they do not offer regular savings accounts, which require lots of resources and personnel to maintain.