JEI's Spin on the News

Bank Restructuring Accelerates Ahead of Deadline

Wednesday, April 14, 1999

Although almost two years away, April 1, 1999 already is shaping up as an important deadline for Japanese financial institutions. On that day, they are scheduled to lose what has become a security blanket in recent years — virtually complete government insurance of any liabilities they might incur. Under this guarantee, which emerged in the mid-1990s in response to the banking crisis, customers have been free to choose banks without worrying about whether the the institution is a trustworthy custodian of a customer's funds.

For Japanese individuals., this guarantee matters because Japanese banks of all types are seen as vulnerable to bankruptcy. Absent the extraordinary program, some deposit-like instruments would have fallen outside the deposit protection scheme. For example, debentures, bond-like instruments offered by long-term credit banks, traditionally have not been covered but are under the special program. In light of the failure of two of the main issuers of debentures, Long-Term Credit Bank of Japan and Nippon Credit Bank, the expanded program of recent years has made a real difference.

Moreover, the traditional ¥10 million ($83,000 at ¥120=$1.00) ceiling on protection has been lifted under the special program. For this reason, individuals have felt secure parking huge sums at shaky institutions such as the small credit cooperatives (shinkumi) that dot Japan. This ceiling is scheduled for reimposition in 2001.

Will the government really pull the plug on the special protection two years from now? Apparently, there is widespread fear that it will. The Industrial Bank of Japan now is trying to get deposit insurance for its debentures in the apparent belief that it otherwise would suffer an outflow of funds. For their part, the shinkumi face the question of consolidation and survival more urgently than they otherwise would.

For Yukio Aoshima, retiring Tokyo governor, the shinkumi problem, which he encountered on taking office, will last beyond his tenure. Four years ago, the de facto bankruptcy of two Tokyo area shinkumi under the direct regulation of the city government was a factor in his election. Two days after his successor was chosen on April 11, the city government and the Financial Supervisory Agency reportedly decided to declare three of the shakiest shinkumi, Tokyo Credit Corp., Sobu Credit Cooperative and Taito Credit Cooperative, bankrupt and merge them into other shinkumi after selling their shaky loans to the newly formed Resolution and Collection Corp. As with IBJ's request, the action was believed at least partly motivated by a desire to shore up their financial structure and avoid an outflow of deposits ahead of April 1,2001. Analysts expect that shinkumi, which number 40 in Tokyo alone and in the hundreds throughout Japan, will take their cue from their three counterparts in the capital and desperately restructure. Whether these moves will be enough to reassure depositors is another question. If not, Tokyo may have to revisit plans to reimpose the limits on deposit insurance.

JEI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.

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