Frequently Asked Questions -> Banks and Other Financial Institutions -> ''Pay-Off'' (Reimbursement of Deposits)

What is the ''pay-off'' scheme? Why do you remove full protection of deposits?

In a narrow sense, the ''pay-off'' scheme means the method in which the Deposit Insurance Corporation directly pays the insurance claim to depositors if financial institutions should go bankrupt.

In a broad sense, the ''pay-off'' scheme means termination of the exceptional measure to protect the entire amounts of deposits. In other words, the deposit amount exceeding 10 million yen of principal and its interest may be partially cut off if financial institutions should go bankrupt. This term is used in such a context as restart of the ''pay-off'' scheme.

However, it does not necessarily mean that the deposits would be immediately cut off. The most important thing for deposit protection is to prevent failures of financial institutions. If financial institutions do not fail, deposits would not be cut off. Therefore, it is important to prevent failures of financial institutions by realizing sound management through their own efforts and discovering promptly troubled financial institutions, and taking prompt corrective actions against such institutions.

In Japan, financial institutions have held a large amount of non-performing loans (NPLs) and the financial environment has been likely to bring about credit uncertainty. Against this backdrop, a temporary, extraordinary measure has been taken to fully protect deposits since 1996. Under this measure, depositors would not bear burden at all and the loss would be covered by the taxpayers' money even if financial institutions should fail. The restart of the ''pay-off'' scheme means a shift from the scheme of full protection using taxpayers' money to a new system where depositors may be requested to share some burden.

If the ''pay-off'' scheme is restarted, depositors would select the financial institutions to which they deposit their precious assets strictly, and the financial institutions would make efforts to strengthen their management base and improve profitability seriously. It is important to restart the ''pay-off'' scheme, in order to make an entire financial system more efficient. Regarding some types of deposits including time deposits, the ''pay-off'' scheme has already been restarted since April 2002.

Although NPLs held by Japanese financial institutions are large in amount, they will accelerate the disposal of NPLs to normalize this problem in FY2004. When NPL problems will be solved and a solid financial system will have been structured after April 2005, full protection will be lifted for all the deposits other than current deposits and other payment/settlement deposits (these satisfy three conditions: no interest, redeemable on demand, and ability to provide payment/settlement services).

As for the payment/settlement deposits, the entire amounts will be protected even after April 2005 with a view to ensure safe and secure payment/settlement measures.

For details, please access the following :
* New Deposit Insurance System

How will the deposits be protected after the restart of the ''pay-off'' scheme?

When you deposit money to a financial institution, the deposit is automatically covered with insurance. If the financial institution should go bankrupt, the deposit will be protected by insurance. This system for protection of depositors and functioning of payment and settlement is called the Deposit Insurance System. The Deposit Insurance System is operated by the Deposit Insurance Corporation (DIC) established by the fund of the Government, the Bank of Japan and private financial institutions, and the financial resources for insurance payment are appropriated with the premium that financial institutions to the DIC in accordance with outstanding of deposits.

If financial institutions should go bankrupt, the deposits would be protected by the Deposit Insurance System in either of the following methods.

Direct payment by the DIC to depositors (insurance claim payment (''pay-off'') method)
Transfer of the insured deposits to another financial institution (financial assistance method)

The coverage of the deposits protection is the same for both methods. Since it is important to minimize turmoil caused by the bankruptcy of financial institutions, the financial assistance method, in which various financial services provided by failed financial institutions are transferred to another financial institution, would be preferably selected.

The coverage of the deposits protection under the Deposit Insurance System is as follows:
<Up to March 2005>

Current deposits, ordinary deposits and specified deposits will be continuously protected in full.
As for time deposits etc., the principal in the amount of no more than 10 million yen in total and the interest will be protected per depositor at each financial institution. The portion in excess of that amount will be paid based on the asset status of the failed financial institution. (Some amount may be cut off.)

Current deposits and other payment/settlement deposits will be protected in full.
For deposits other than the above, the principal no more than 10 million yen and its interest will be protected per depositor at each financial institution. The portion in excess of that amount will be paid based on the asset status of the failed financial institution. (Some amount may be cut off.)

For details, please access the following :
* New Deposit Insurance System