Unofficial and Provisional Translation
Readers are advised to refer to the original Japanese
text before quoting from this document.

Outline of the Amendment Bill of the Deposit Insurance Law

March  2000

The bill stipulates the deposit insurance system and the system for resolving failed financial institutions after April 2001. At the same time, the amount of subsidy government bonds is to be increased, and the special measures to fully protect deposits are to be extended by a one-year period.

As part of the efforts to create an environment suitable for the termination of the special measures, steps are to be taken to strengthen the management base of cooperative financial institutions. The steps to be taken include allowing cooperative financial institutions to issue preferred subscription certificates and extending by one year the scheme to recapitalize cooperative financial institutions pursuant to the Law concerning Emergency Measures for the Early Strengthening of the Financial Functions (Early Strengthening Law).


 

I. Framework of the Deposit Insurance System and System for Resolving Failed Financial Institutions after April 2001

1. Amendment of the Deposit Insurance Law


(1) Expedition of the resolution of failed financial institutions


1)


Prior preparation
Require each financial institution to prepare the necessary data on depositors for grouping of deposits held by the same person (nayose), and to develop a system that enables swift transfer of the data to the Deposit Insurance Corporation (DIC). Require financial institutions to submit materials using media such as magnetic tape, when the DIC requires the submission of such materials, in order to enable the DIC to ascertain the amounts of deposits rapidly.

2)

Expedition and simplification of business transfer procedures
Introduce systems allowing provisional resolutions (of shareholders meetings) on transfer of business, and court subrogation authorization in lieu of special resolutions. In addition, introduce special procedures for the proceedings for convening general meetings of cooperative financial institutions.

3)

Special procedures to protect creditors on transfer of business
Introduce a system for effecting ex post facto procedures to protect creditors in case of transfer of business, and devise special procedures for the proceedings for the replacement of trustees in case of assumption of trust business. In addition, in business transfers from financial institutions managed by financial administrators, devise special procedures to allow maximal-hypothec (mortgage that secure unspecific claims up to a certain amount) to be transferred together with collateralized assets.
Note:   Since steps to expedite the resolution of failed financial institutions will be taken, such as those in 1) to 3) above, emergency procedures are to be abolished.

(2) Diversification of the methods to resolve failed financial institutions


1)


Financial administrators
Introduce a system where public administrators ("financial administrators") take control of the management of failed financial institutions.
Under this system, the prime minister may direct the financial administrators to manage the business and assets of a financial institution, (a) if it is judged that the institution is insolvent, (b) if it is judged that there is a risk that the repayment of deposits will be halted, (c) if the repayment of deposits has been halted, or (d) if, upon receipt of a notice from a financial institution, it is judged that there is a risk that it will become insolvent. Financial institutions will be required to file notifications (a) if they are insolvent, or (b) if there is a risk that the repayment of deposits will be halted.
In addition, to clarify the responsibility of the managers and ex-managers of those institutions managed by financial administrators for the failures of those institutions, the financial administrators will take necessary civil and criminal legal measures.
Management by financial administrators is to be completed within one year (with a possible one-year extension).

2)

Bridge bank scheme
Establish a bridge bank scheme, to deal with cases in which no assuming financial institution can be immediately found.
A bridge bank will be established as a subsidiary of the DIC, allowing the DIC to guarantee debts and lend the funds necessary for the operation of the bridge bank to be conducted smoothly, and compensate for a portion of the losses arising from its operation. The DIC will also be allowed to provide financial assistance to the bridge bank.
The operations of the bridge banks are to be completed within two years (with a possible one-year extension).

3)

Enlarging the scope for the DIC where financial assistance is allowed
(a) Allow DIC to provide financial assistance to the assuming institutions not only when all the business is transferred, but even when only a portion of the business (including insured deposits) is transferred, (b) allow supplementary financial assistance following the transfer of business and/or merger, and (c) allow financial assistance to failed financial institutions for the purpose of ensuring equity among creditors.
In addition, introduce measures to enhance the capital of the assuming institutions and to share a portion of the losses incurred after the transfer of business ("loss sharing") as ways to extend financial assistance. Also, include companies other than banks and bank holding companies to institutions eligible for financial assistance by means of share acquisition.

(3) Addressing financial crises


1)


Where systemic risk is anticipated, the prime minister may, following deliberation by the Conference for Financial Crises, acknowledge the necessity of adopting exceptional measures for financial institutions according to the following categories.
a)      Solvent financial institutions: Share subscription by the DIC (capital enhancement)
Applications for share subscription by the DIC may only be filed by acknowledged financial institutions. When filing applications, financial institutions must submit plans for strengthening their management, and the prime minister makes the decision regarding the capital enhancement. The prime minister requires reports on the status of implementation of these plans, and makes them public.
b)      Failed financial institutions or insolvent financial institutions: Financial assistance in excess of the payoff costs (the estimation of the cost incurred by the DIC to pay off insured deposits)
Acknowledged financial institutions will, immediately following acknowledgement, be placed under the management of financial administrators, and financial assistance in excess of the payoff costs will be possible.
c)      Banks failed as a result of insolvency: Acquisition of the banks’ entire stock by the DIC (special crisis management banks [provisional name])
Simultaneously with the acknowledgement, the DIC will decide to acquire the stock of the acknowledged bank, and upon gazetting this, the DIC will acquire the relevant stock. In addition, the new directors of special crisis management banks will take necessary civil and criminal legal measures for the purpose of clarifying the responsibility of the former managers, and financial assistance to the assuming institution in excess of the payoff costs will also be possible. These measures are to be terminated as soon as possible by transferring business to the assuming institution.


Note:

The measures in c) can only be taken if a crisis situation is unable to be avoided by the measures in b).

2)

SThe Crisis Management Account (provisional name) is to be set up as an account for the operations related to dealing with financial crises. Government guarantees can be provided for borrowing by the DIC of funds necessary for the operations, and the issuance of bonds.

3)

Ex post facto contributions will be made by financial institutions to fund exceptional measures. In addition, in cases where it is feared that contributions by financial institutions alone would not be sufficient to avoid critical disruption of the financial stability, fiscal measures may be taken.
Note:   The amount of the contributions of each financial institution is to be calculated on the basis of its balance of all outstanding liabilities at the end of the fiscal year, preceding the year when the contributions must be made.

(4) Revision of the scope of deposit insurance coverage


1)


Expand the scope of insured deposits to include bank debentures (limited to those for which the title-holder can be identified), deposits of public funds, deposits of corporations established under special laws, and interests on deposits.
Note:   The insured amount for each individual depositor will be the principal up to the insurance limit plus the interest on that principal. The insurance limit will be maintained at its current level (\10 million per depositor; stipulated by government ordinance).


2)


Expand the range of insured financial institutions to include federations of cooperative financial institutions.

3)

Enable the purchase of deposits not only upon deposit payoffs, but also when financial assistance is provided.

4)

Change the basis of calculating insurance premiums from the balance of insured deposits at the end of each fiscal year, to the average balance during each fiscal year.
Note:   Premium rates corresponding to the soundness of the management of financial institutions can be introduced.

(5) Other items


1)


Enable the DIC to lend necessary funds to failed financial institutions, in order to make possible, (a) withdrawal of deposits from failed financial institutions up to the insured amount, and (b) lending by failed financial institutions to prevent the decline of asset values.

2)

Lay down stipulations for reporting requirements and on-site inspections of financial institutions by the DIC, in order to ensure the smooth implementation of the resolution of failed financial institutions.

3)

Continue, for the time being, the role of the Resolution and Collection Corporation (RCC) as an assuming institution and the scheme in which the DIC entrusts the RCC with purchasing assets of failed financial institutions.

2. Amendments of Other Laws

(1) Amendment of the Special Law concerning Reorganization of Financial Institutions


1)


Stipulate special procedures for civil reconstruction proceedings (initiation of reconstruction proceedings by the supervisory authorities, empowerment of the DIC to act as proxy for depositors in reconstruction proceedings, etc.).


2)


Enable withdrawal of deposits held at financial institutions after the commencement of reorganization proceedings and civil reconstruction proceedings, up to an amount equivalent to the insured amount.

(2
) Amendment of the Trust Business Law
 -  From the standpoint of protecting the beneficiaries of trust assets, simplify the conditions necessary to obtain perfection against third parties with regard to registered corporate bonds and registered government bonds held by trust companies as trust assets.

(3
) Amendment of laws concerning cooperative financial institutions including the Shinkin Bank Law
 -  In order to diversify the methods of resolving failed cooperative financial institutions, enable the reconstruction procedures under the Commercial Code to be applied to cooperative financial institutions.

II. Increase of Subsidy Government Bonds


-


Amendment of the Deposit Insurance Law (Temporary Measure)
The government bonds granted to the DIC will be increased by ¥6 trillion, in addition to the ¥7 trillion already granted.

III. Extension of Special Measures to Fully Protect Deposits

-

Amendment of the Deposit Insurance Law (Temporary Measure)


(1)


The temporary special measures enabling provision of application of financial assistance in excess of the payoff costs, and purchasing of deposits, will be extended by one year, until the end of March 2002.
Note:   The period for payment of special insurance premiums will be extended by one year, and the discontinuance of the Special Operations Account will also be postponed for one year, until the end of March 2003.


(2)


TLiquid deposits such as current deposits and ordinary deposits will be fully protected for another year following the termination of the special measures to fully protect deposits (until the end of March 2003).
Note:   During that time, higher insurance premiums will be charged for the fully protected liquid deposits than for other deposits (the insurance premium will be determined by the DIC's Policy Board), and interest rates will be controlled under the Temporary Interest Rates Adjustment Law.

IV. Strengthening of the Management Base of Cooperative Financial Institutions

1.

Amendment of the Law concerning Preferred Subscription by Cooperative Financial Institutions

The issuance of preferred subscription certificates not only by federations with nationwide coverage, but also by individual credit cooperatives, shinkin banks, labor cooperatives, and other cooperative financial institutions, will be newly permitted.


2.

Amendment of the Law concerning Emergency Measures for the Early Strengthening of the Financial Functions (Temporary Measure)

With regard to cooperative financial institutions that are currently eligible for capital enhancement based on the Early Strengthening Law and will become able to issue preferred subscription certificates in accordance with the amendment mentioned in the preceding item 1, (1) the conditions for the application of the law will be revised to facilitate capital enhancement, and (2) the application period will be extended by one year, until the end of March 2002.


3.

Amendment of the Deposit Insurance Law (Temporary Measure)

The collection of non-performing loans conducted by the Society of Credit Cooperatives accompanying the resolution of credit cooperatives having failed prior to the partial amendment of the Deposit Insurance Law in 1996, will be centralized in the RCC.

Specifically, the DIC will be able to purchase the non-performing loans of previously failed credit cooperatives which the Society of Credit Cooperatives has been collecting, and which has transferred to the financial institutions as payment in substitution. The DIC will be able to compensate for losses within the amount of losses arising from the sale.

Note: The DIC will be able to entrust the purchasing of assets to the RCC.

V. Other Matters

1. Enforcement dates

(1)

The measures relating to the permanent deposit insurance system and the system for resolving failed financial institutions, and the extension of the special measures to fully protect deposits will be put into effect on April 1, 2001.

(2)

The measures relating to the expansion of the range of insured financial institutions to newly include federations of cooperative financial institutions, the increase in subsidy government bonds, and the measures relating to the strengthening of the management base of cooperative financial institutions will be put into effect as prescribed by government ordinance, on a date no later than one month after the date of promulgation.

2. Other matters

    Stipulations regarding other necessary transitional measures will be laid out.


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