The government and the Deposit Insurance Corp. of Japan, the state-appointed administrator of the Incubator Bank of Japan, which filed for bankruptcy protection on Sept. 10, have invoked the limited deposit protection plan for the first time since it was introduced in 1971. That means that deposits of up to ¥10 million, plus interest, will be refunded. Since some local banks are reported to suffer from business instability, the government should ensure that its handling of Incubator Bank deposits does not spawn baseless rumors or worries.

The bank was set up in 2004 by Mr. Takeshi Kimura, a former Bank of Japan official and key adviser to then financial services minister Heizo Takenaka, during the Koizumi administration, with Mr. Takenaka’s approval. The bank offered loans to small and midsize firms at interest rates slightly higher than what large banks charged without requiring security, in principle.

The bank began to experience difficulties after large banks became more positive about providing loans to small and midsize firms. In an effort to turn things around in 2007, it started buying loan claims held by SFCG Co. — a moneylender that has since gone bankrupt — and charging SFCG commission fees. As of the end of August, the bank had ¥180.4 billion of liabilities in excess of assets.

Mr. Kimura, former chairman of the bank, and Mr. Tatsuya Nishino, the bank’s president, were arrested in July on suspicion of obstructing an audit of the bank by the Finance Services Agency, and were indicted in August.

As of Sept. 10, 126,779 people had deposits totaling ¥582 billion at the bank. Of the depositors, 3,423 people or 2.7 percent, who have a total of some ¥1.1 billion at the bank, will not get full refunds because they deposisted more than ¥10 million.

What are the lessons of this fiasco? People must be careful in choosing their banks. Banks on their part must provide people with easy-to-understand documents that accurately describe their financial conditions. And the government should strengthen the system to financially support small and midsize firms that have good growth prospects.

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