I. INTRODUCTION
A series of failures of financial institutions has induced growing
concerns among depositors, and domestic and international confidence
in the soundness of Japan's financial system has been threatened.
Against this background, the Government of Japan, aiming to restore
confidence in the nation's financial system and prevent the total
economy from falling into a crisis, decided to take temporary
emergency measures: strengthening the framework for protecting
deposits in full; and establishing a new system to maintain the
financial system by enhancing the capital bases of financial institutions
in times of financial crisis.
To this end, the Government will make 30 trillion yen in public
funds--10 trillion yen in government bonds and 20 trillion yen
in government guarantees--available for protecting depositors
and stabilizing the financial system.
II. STRENGTHENING THE FRAMEWORK TO PROTECT DEPOSITS
IN FULL
(AMENDMENT OF THE DEPOSIT INSURANCE ACT)
1. Objectives
To ensure the protection of deposits in full at all financial
institutions, the financial base of the Deposit Insurance Corporation
of Japan (DIC) will be strengthened through the use of public
funds, while the Corporation's operations will be enlarged so
as to cover failures of not only credit cooperatives but also
other financial institutions. It is also intended that the DIC's
ability to collect bad loans will be strengthened, and that the
functions of the Resolution and Collection Bank (RCB) as a bank
that takes over the business of possible insolvent financial institutions
will be upgraded.
2. Specific Measures
(1) Integration of the Special Account
To ensure the protection of deposits in full, existing special
accounts set up as temporary measures through the end of March
2001--currently separated for credit cooperatives and other financial
institutions--will be integrated into one account to cover all
financial institutions.
(2) Strengthened Financial Base of the DIC
a) Government bonds of 7 trillion yen will be delivered to the
special account of the DIC. Losses arising from financial failures--such
as the debt of insolvent financial institutions that cannot be
covered by special insurance premium payments, and possible secondary
losses from acquired assets--could be made up by cashing in these
government bonds.
b) To ensure smooth financing through the special account, the
DIC will acquire a capacity to issue bonds in addition to borrowing.
Moreover, the government guarantees up to 10 trillion yen will
be authorized to finance the DIC, with which the DIC will be able
to purchase assets from failed financial institutions.
(3) Expansion of the Functions of the Resolution & Collection
Bank (RCB)
The RCB will become able to take over the financial business of
not only failed credit unions but also other failed financial
institutions. By this measure, depositor protection will be facilitated
even when no bank other than the RCB is able to take over the
business of a failed financial institution.
(4) Strengthening the Collection Facility of the DIC
Collection by the DIC will be strengthened through such measures
as expanding the scope of its investigation authority with the
possible imposition of penalties--currently allowed only in the
cases of the Housing Loan Administration Corporation.
(Note) In this regard, a new scheme will be established at the
DIC, which will facilitate a thorough review of the responsibility
for financial failures.
III. ESTABLISHING THE SYSTEM TO STABILIZE THE FINANCIAL
SYSTEM
IN TIMES OF FINANCIAL CRISIS (NEW LEGISLATION)
1. Objectives
Aiming to stabilize the financial system, the Government will
make public funds available for the DIC to purchase preferred
stocks and subordinated bonds issued by financial institutions
to increase their capital bases, as an emergency measure to cope
with the critical situation of the financial system. This operation
will be examined and decided on by an examining board based on
strict criteria, in order that it be distinctive from the aiding
of individual financial institutions.
2. Specific Measures
(1) Establishing a New Account
A new account will be established at the DIC, and the DIC will
acquire the capacity to purchase preferred stocks and subordinated
bonds issued by financial institutions until the end of March
2001.
(Note) The DIC will entrust the operation of purchasing the above-mentioned
stocks/bonds to the RCB.
(2) Fiscal Measures
a) The Government will deliver 3 trillion yen in government bonds
to the DIC's new account. The DIC will be allowed to cash in those
bonds to purchase the stocks/bonds as well as compensate for possible
losses resulting from the sale of the stocks/bonds.
b) The Government will authorize 10 trillion yen in government
guarantees to ensure smooth fund-raising for the new account.
(3) Establishing a Fair and Neutral Examining Board
An examining board will be established by law to ensure that the
purchase of preferred stocks and subordinated bonds is fair and
restricted. The board will consist of seven members: three experts
from the private sector, the Minister of Finance, the Commissioner
of the Financial Supervisory Agency, the Governor of the Bank
of Japan, and the Governor of the DIC.
In purchasing preferred stocks and subordinated bonds, the board
will examine the case against strict criteria and will decide
by unanimous consent. To warrant a high level of transparency,
the board will make its transcripts public.
(Note) In addition, the approval of the Cabinet will be required.
(4) The Criteria for Examination
The examination criteria stipulated by the board must include
the following points so that the purchase of stocks/bonds would
not be the salvation of individual financial institutions.
a) For financial institutions that have taken over the business
of a failed financial institution
- There must be an imminent risk of great damage to the credit
order and stability of local economy, in the absence of recapitalization
of the financial institution whose capital ratio deteriorated
as a result of the takeover of a failed financial institution.
b) For other financial institutions
- There must be an imminent risk of great damage to the country's
credit order and economic management, in the absence of recapitalization
of still-solvent financial institutions through the purchase of
their preferred stocks or subordinated bonds. These situations
include : (i) financial institutions facing a great difficulty
in raising funds in both the domestic and foreign markets, which
results in a serious malfunction of the country's financial system;
and (ii) a successive failure of financial institutions in a specific
region or sector that causes a serious malfunction of the economy
in the region/sector.
- The purpose of the purchase must be the maintenance of credit
order and should not involve reconstruction of the financial institution.
- The issuer of the stocks/bonds must be a healthy financial institution,
whose insolvency is not foreseen.
(5) Program for Solvency
The financial institution issuing preferred stocks and subordinated
bonds must submit a program to ensure its solvency. The program
must include the following items, and the examining board can
approve the purchase only if it regards the program as appropriate:
- Measures for rationalization and sound management
- Measures for healthy financial conditions
- Other measures to ensure sound and appropriate management of
its operations
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