Frequently Asked Questions - Banks and Other Financial Institutions

Public Funds
Q6   Although no help is given by the Government in case of the bankruptcy of companies which are not financial institutions, why are only financial institutions rescued with public funds?

The framework of the use of public funds for financial institutions has been established to stabilize the financial system, in order not to rescue individual financial institutions.

The main frameworks for the use of public funds are as follows:
First, if financial institutions failed before the end of March 2002, the public funds were appropriated to fully protect deposits and others. This is only for the protection of deposits, and not for that of the management and shareholders of failed financial institutions. The responsibilities of the management of such financial institutions are strictly pursued, the management is compelled to return their retirement benefits, and shares lose values. Administration of the financial institutions that had failed before the end of March 2002 was completed by the end of March 2003. The amount of the public funds appropriated to the full protection of deposits was about 10.4 trillion yen, which has been fixed as the public burden at the current stage. In addition, if financial institutions would fail after April 2002, the insurance premium that financial institutions have paid will be used as the resource for administration. In case that there is a risk of serious threat to the maintenance of orderly functioning of the financial markets, public funds may be used as an exceptional measure, in order to fully protect deposits and others based on strict procedures.

Next, there was a framework that the Government injects capital to financial institutions with their voluntary application, in order to enhance their capital and improve their management (this is called ''recapitalization'', a temporary measure by the end of March 2001 (by the end of March 2002 for shinkin banks and credit cooperatives)). As this capital was borrowed by the Deposit Insurance Corporation with the Government guarantee, and it was worth public funds which were used, but repayment was from the financial institutions. Moreover, even after the end of March 2001(2002), the scheme of recapitalization is separately prepared as an exceptional measure which will be implemented based on strict procedures, when there is a risk of serious threat to the maintenance of orderly functioning of the financial markets.

Why are such systems established only for financial institutions? The operation of financial institutions includes the following public roles. Namely, financial institutions conduct the business of financial intermediation such as lending money received as deposits to enterprises and individuals, and the settlement business to make settlement of various commercial transactions by account transfers. Financial institutions conducting such businesses have a public nature as an economic infrastructure. It is essential for smooth economic activities to prevent stagnation of money flow through financial institutions.

Therefore, the frameworks for use of public funds prevents stagnation of the finance as the artery of the economy, and ensures secure lives of depositors, borrowers and the general public by limiting a turmoil that could be caused by failures of financial institutions to a minimum and enhancing their soundness through recapitalization.