[provisional translation]
Basic Thinking Concerning the Deposit
Insurance System
after the Lifting of the Special Measures (Summary)
(Framework of the desirable permanent system)
1. Protection of depositors centered on market discipline
(1) | Sound and highly profitable management by financial institutions is fundamental to protection of depositors. |
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(2) | Prompt discovery and prompt correction of problematic financial institutions are important. |
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- | Monitoring through the market discipline should function effectively. |
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- | The supervisory authority should; |
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2. Desirable way to deal with failures of financial institutions
(1) | Basic thinking |
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- | A small deposit insurance system is desirable. |
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Supervisory authority should promptly deal with financial institutions
that are unlikely to recover, -> to minimize the risk of moral hazard and the burden on depositors. |
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- | It is important to minimize confusion caused by failures of financial institutions (and select the method with the lowest estimated cost). |
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-> | (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. |
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(b) The application of the insurance payout method should be avoided if possible. |
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(c) Measures should be taken to deal with failures promptly and through various methods. |
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- | Managers and shareholders of the failed financial institutions should be demanded to take responsibility. |
(2) |
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- | 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. |
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[1] |
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- | The Deposit Insurance Corporation and the supervisory authority should prepare for failure with close mutual cooperation. |
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- | Financial institutions are required to establish systems ensuring smooth transfer of their data on depositors to the Deposit Insurance Corporation. |
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[2] |
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- | 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. |
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[3] |
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- | A public administrator system should be introduced. |
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- | A court subrogation authorization system should be introduced. |
(3) |
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- | Financial functions of failed financial institutions should be maintained by dealing with the failures rapidly. |
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- | Even when considerable time is required before the transfer of business, it is necessary to maintain certain financial functions of the failed financial institutions. |
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[1] |
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- | 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. |
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- | 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). |
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[2] |
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- | One view is that in order to prevent problems in corporate and personal settlements from occurring, all liquid deposits should be protected. |
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- | 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. |
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- | Another view is that a certain amount exceeding the ceiling for insurance payouts should be repaid promptly at a predetermined rate. |
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[3] |
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- | To protect sound borrowers, failures should be dealt with rapidly. |
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- | It is desirable to make it possible for borrowers to obtain loans from failed financial institutions - even when they are under judicial procedure. |
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- | Additional measures by national and local governments are also desirable. |
(4) |
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[1] | Develop an environment conducive to the
emergence of succeeding financial institutions |
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- | A mechanism for partially securing losses when assumed assets deteriorate |
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- | Recapitalization of the succeeding financial institution (to recover the capital adequacy ratio that has declined) |
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[2] |
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- | A bridge-bank system (based on the existing scheme) should be introduced. |
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- | It is also necessary to maintain the function of the Resolution and Collection Corporation as a successor. |
3. Action when systemic risk is foreseen
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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. |
4. Other issues concerning the deposit insurance system
(1) | Scope of insurance coverage |
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- | The main criteria determining what products should be covered by deposit insurance are as follows: |
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(Insurance coverage of individual financial products will be studied.) |
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(2) |
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- | Taking into consideration the average balance of savings per person in Japan and ceiling levels in other countries, |
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-> | there is little necessity to raise the current level (¥10 million). |
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(3) |
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- | Level of deposit insurance premiums |
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- | Introduction of premium rates that correspond with
financial conditions etc. |