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

Outline: "Report on the Framework of the Deposit Insurance
System and Resolution of Failed Financial Institutions after the Termination
of Special Measures" by the Financial System Council (1

December 21,1999


 Protection of depositors through market discipline
(1)  Ensuring sound and profitable management of financial institutions is the basis of depositor protection
(2)  Prompt identification and prompt correction of troubled financial institutions are important
  • Monitoring by market discipline
  • The supervisory authority should;
    • intensify inspection and monitoring activities
    • carry out prompt corrective measures in an appropriate and timely manner


 Framework of resolution methods
(1)  Basic principles
  • Aim at a "small" deposit insurance system
    (Under the current special measures, all deposits and liabilities are protected)
    • Non-viable financial institutions should be resolved at an early stage
  • Give preference to the financial assistance method when an assuming institution is found
    • Financial functions of a failed financial institution are to be transferred to the assuming institution
    • Paying off depositors (the payoff method) should be avoided as much as possible
          Note: Both the financial assistance method and the payoff method involve a haircut of deposits
  • Expedite resolution processes and provide various resolution methods
(2)  Accelerating transfer of business with financial assistance
    It is important to transfer the financial functions of the failed financial institution promptly to an assuming institution, in order to minimize the negative impact on the depositors, the economy as a whole, and the financial system, caused by the failure.
  • Prior preparation (-includes grouping of deposits held by the same person)
    • Develop an interface enabling smooth transfer of financial institution's data on depositors to the Deposit Insurance Corporation (DIC)
  • Enlarging the scope for DIC where financial assistance is allowed
    • Allow financial assistance when a portion of business (e.g. performing assets and insured deposits) is transferred, etc.
  • Expedition and simplification of procedures to transfer business
    • Introduce systems for management by public administrators and court subrogation authorization for business transfer
(3)  Preservation of financial function (-measures to be taken when transfer of business takes time)
    Even when prior preparation is incomplete, it is important to preserve certain financial function of the failed institution.
  • Ensuring depositors' convenience
    • DIC should be authorized to make advance payments
    • Failed financial institutions should be allowed to repay deposits up to the insured amount
    • DIC should be empowered to purchase deposits and other liabilities, as for the portion of deposits exceeding the insured amount
  • Protection of liquid deposits
        Liquid deposits should be protected by some temporary special measures in order to avoid a disruptive impact on the economy as a whole and the financial system through interruption of payments, until the speedy resolution methods are well established and a variety of private payment services are innovated. In this case, however, measures to prevent moral hazard such as charging higher insurance premium for liquid deposits are necessary.
  • Protection of borrowers
    • Financial institutions under judicial proceedings should be able to make loans, and additional measures from the government and local governments are required
    • A change in the covenant (of off-setting) of loan is desirable
(4)  Measures concerning assuming financial institution
  • Development of an environment which encourages financial institutions to assume business of failed institutions
    • Introduction of loss-sharing (profit-sharing) scheme, capital enhancement of assuming institutions
  • Measures applicable to cases when no assuming institution is found
    • Bridge bank scheme, and continuation of the function of the Resolution and Collection Corporation (RCC) as an assuming institution


 Measures applicable to cases when a critical situation is foreseeable
It is necessary to make exceptional measures possible in systemic risk cases where the overall financial stability (or stability of national/regional economy) could be disrupted. Rigorous procedures are necessary in such cases.
  • Specific measures and procedures
    • Involvement of the Conference for Financial Crisis (planned to be established in January 2001)
    • Concrete measures: capital enhancement to prevent failures, financial assistance in an amount of exceeding the payoff cost, the special public administration framework
    • Special contribution from financial institutions (Besides, there may be cases that the use of public fund is unavoidable)


 Other issues concerning the deposit insurance system
(1)  Insured deposits - including the followings is appropriate
  • Bank debentures (limited to those for personal saving and are non-negotiable)
  • Deposits of public funds and deposits of corporations established under special laws
  • Interests on deposits
(2)  Insured financial institutions
  • Federations of cooperative financial institutions should be included
  • Further study of whether to include branches of foreign banks (and the ways of inspection and supervision) is necessary
(3)  Insurance limit and advance payments
  • Insurance limit: maintain the current level (10 million yen per depositor)
  • Advance payment: significantly raise the current level (0.2 million yen per depositor)
(4)  Purchase of deposits and other liabilities by the DIC
  • At present, the DIC is authorized to purchase only insured deposits and liabilities. This DIC's purchasing authority should be widened to some uninsured deposits and liabilities with certain conditions, including a requirement that the claims and creditors are clearly identifiable.
(5)  Insurance premium
  • Insurance premium after the termination of special measures is to be studied, referring to the present level, from the viewpoint of repaying DIC's borrowings promptly
  • The framework of risk-based premiums (rates determined in light of the financial conditions of individual insured institutions) should be studied at an early opportunity, but the application of the framework is not feasible at this juncture


 Environment to be developed before the termination of special measures
(1)  Disclosure by financial institutions
  • Disclose non-performing assets according to standards equivalent to the ones set by Securities and Exchange Commission of the United States (from accounting period ending March 1998)
  • Legally required to disclose, on a consolidated basis, specific matters concerning their businesses and properties which are stipulated in laws and regulations, with possible penalties (from accounting period ending March 1999)
  • Disclose the outcome of the self-evaluation of assets following the Financial Revitalization Law (for all financial institutions from accounting period ending March 2000)
(2)  Financial system stability - before the end of March 2001
  • Make continued efforts to ensure financial system stability
    • Utilize the legal framework of the Financial Revitalization Law and the Financial Function Early Strengthening Law and other available means
  • Individual financial institutions should strengthen competitive financial and management bases
(3)  Others
  • Public relations on the Deposit Insurance System

1) Following the report by the Financial System Council, on December 29, 1999, the coalition of the ruling parties decided to postpone the termination of special measures by one year (until the end of March 2002). The coalition also decided that liquid deposits would be fully protected for another year (until the end of March 2003) under temporary special measures. Following the decision, the Ministry of Finance is preparing necessary legislation, which is planned to be submitted to the ordinary session of the Diet starting from January 2000.

[Financial System]

[Financial System Reform]