Sound and highly profitable management by financial institutions is fundamental to protection of depositors.

Prompt discovery and prompt correction of problematic financial institutions are important.

Monitoring through the market discipline should function effectively.

The supervisory authority should;

• improve and strengthen inspection and monitoring,
• take prompt corrective measures timely and appropriately.

Basic thinking

A “small” deposit insurance system is desirable.

It is important to minimize confusion caused by failures of financial institutions (and select the method with the lowest estimated cost).

(a) Priority should be given to application of the financial assistance method when a successor exists that takes over the operations of a failed financial institution.

(b) The application of the insurance payout method should be avoided if possible.

(c) Measures should be taken to deal with failures promptly and through various methods.

Managers and shareholders of the failed financial institutions should be demanded to take responsibility.

Speeding up the transfer of business accompanying financial assistance

It is extremely important that the financial functions of the failed financial institutions are promptly transferred to the succeeding financial institutions. For this purpose, the following steps must be taken.

Advance preparations

The Deposit Insurance Corporation and the supervisory authority should prepare for failure with close mutual cooperation.

Financial institutions are required to establish systems ensuring smooth transfer of their data on depositors to the Deposit Insurance Corporation.

Easing of the conditions for financial assistance

Scope of financial assistance should be extended to cases in which only part of the business (e.g. sound assets and deposits covered by insurance) is transferred.

Speeding up and simplification of the procedures for transfer of business

A public administrator system should be introduced.

A court subrogation authorization system should be introduced.

Maintenance of financial functions

Financial functions of failed financial institutions should be maintained by dealing with the failures rapidly.

Even when considerable time is required before the transfer of business, it is necessary to maintain certain financial functions of the failed financial institutions.

Assuring convenience of the depositors

Repayment of deposits up to the ceiling on insurance payout (currently ¥10 million) should be permitted, even when considerable time is required before the transfer of business.

The (existing) system which allows the Deposit Insurance Corporation to purchase a certain proportion of deposits and other claims could be applied for the portion of the deposits exceeding the ceiling (¥10 million).

The issue of liquid deposits (There are various arguments and discussions should be expedited.)

One view is that in order to prevent problems in corporate and personal settlements from occurring, all liquid deposits should be protected.

Another view is that full protection of liquid deposits would give rise to problems such as increase in moral hazards and difficulty of demarcating liquid deposits from other deposits.

Another view is that a certain amount exceeding the ceiling for insurance payouts should be repaid promptly at a predetermined rate.

Protection of borrowers

To protect sound borrowers, failures should be dealt with rapidly.

It is desirable to make it possible for borrowers to obtain loans from failed financial institutions - even when they are under judicial procedure.

Additional measures by national and local governments are also desirable.

The problem of finding succeeding financial institutions

Develop an environment conducive to the emergence of succeeding financial institutions
    It is necessary to study the following measures accompanying financial assistance.

A mechanism for partially securing losses when assumed assets deteriorate

Recapitalization of the succeeding financial institution (to recover the capital adequacy ratio that has declined)

Measures to be taken when no succeeding institution is found in a short period

A bridge-bank system (based on the existing scheme) should be introduced.

It is also necessary to maintain the function of the Resolution and Collection Corporation as a successor.

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It cannot be denied that there may be cases where system risk exists, which is beyond the regular framework of dealing with failures. It is necessary to prepare for such unusual case so that exceptional measures could be taken.

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Strict procedures should be followed in the above case.

Scope of insurance coverage

The main criteria determining what products should be covered by deposit insurance are as follows:

• The product is well-established among the people as a basic means
  of
  savings.
• The principal of the product is guaranteed.
• The creditor is designated, and the product is not in circulation.

(Insurance coverage of individual financial products will be studied.)

Ceiling for insurance payouts

Taking into consideration the average balance of savings per person in Japan and ceiling levels in other countries,

there is little necessity to raise the current level (¥10 million).

Deposit insurance premiums

Level of deposit insurance premiums
The level should be studied, taking into consideration the necessity of promptly repaying the Deposit Insurance Corporation’s borrowing on the general account and the necessity of building a certain size of liability reserve that will win the confidence of the people.

Introduction of premium rates that correspond with financial conditions etc.
Variable premium rates are desirable from the standpoint of market discipline, but should be studied with caution for the time being.