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The Diet must pass a nuclear compensation bill within two months before banks including Mitsubishi UFJ Financial Group Inc. offer new loans to the owner of the radiation-spewing Fukushima No. 1 atomic plant, the nation’s banking lobby said.

Passage of the bill, along with government loan guarantees, is a prerequisite for banks to provide credit to Tokyo Electric Power Co., said Katsunori Nagayasu, head of the Japanese Bankers Association. The utility is unlikely to suffer a shortage of funds in the year through March, given that it received emergency loans after the record earthquake, he said.

Opposition parties have said Prime Minister Naoto Kan’s proposed law, which aims to restructure the utility and secure funds for compensation to be paid to victims of the nuclear disaster, needs amendment. Nagayasu is also president of Mitsubishi UFJ, one of the Japanese banks that lent about ¥2 trillion to Tepco after the March 11 quake and tsunami damaged its nuclear plant.

“The bill must be passed in August at the latest, and it needs a speedy deliberation and approval because the country’s reconstruction has to proceed quickly,” Nagayasu, 64, said July 5. “Without the law, new money from financial institutions to Tepco would be very difficult.”

Under the draft law, Japan will create a body to handle claims against Tokyo Electric amid the worst nuclear crisis in 25 years. The third-party entity will issue bonds to fund compensation, be allowed to acquire assets owned by the utility, and receive bank loans that are guaranteed by the government, according to the bill.

Kan’s Cabinet approved the compensation bill on May 13. The legislation was sent to the Diet a month later.

Tepco reduced the average interest rate it pays on ¥3.4 trillion worth in long-term loans to less than 1 percent in the year that ended in March, according to a company securities filing dated June 29. Tepco more than doubled loans, which it defines as debt maturing in more than a year, from ¥1.6 trillion a year earlier.

“Maintaining loans outstanding to Tepco and offering lower interest rates are part of the banks’ support for the company,” Nagayasu said. “The banks need the government’s guarantee if Tepco needs fresh loans right now before the compensation bill becomes law. But it won’t be the case because Tepco is unlikely to need payment of vast amounts of provisional compensation to the victims in the near term.”

Tepco unveiled plans on July 5 to pay as much as ¥48 billion to victims of the Fukushima nuclear disaster, after an initial round of ¥49.8 billion compensation.

Trade minister Banri Kaieda has said the government isn’t asking banks to forgive loans to Tepco as the Lower House began deliberating the Tepco compensation bill.

“Behind the proposed law, there is a basic idea that the government is not going to put Tepco into a situation where its debts exceed assets,” Nagayasu said. “Given that, forgiveness of loans would be little more than a donation and wouldn’t make any sense.”

Nagayasu also asserted Japan’s biggest banks, led by Mitsubishi UFJ, may benefit from being deemed too big to fail as global regulations make competition “fair and square.”

The Basel Committee on Banking Supervision said last month the world’s most important banks must hold as much as 2.5 percentage points in extra capital to prevent a repeat of the global crisis. Japan’s three biggest lenders have enough capital and won’t have to raise funds even if they’re subject to the strictest requirement, Goldman Sachs Group Inc. said last month.

The rules “are aimed at putting the knife of reform into some global banks, which have been managing their business recklessly in pursuit of short-term profit, drastic dividend payouts and skyrocketing paychecks for bankers,” he said.

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