EDITORIAL: Cap on deposit refunding

The government for the first time has placed a cap on its protection of deposits at a failed bank. The deposit insurance system guarantees the safety of bank deposit principal of up to 10 million yen ($119,000) per depositor, plus interest. But people holding deposits exceeding the limit at a bank could end up receiving only a portion of their money if the bank fails, depending on the results of liquidation. This possibility is now reality.

The Financial Services Agency has applied the deposit insurance cap to the Incubator Bank of Japan, which collapsed last Friday. The bank, founded as a lender for small and midsize companies, went under after years of lax and reckless management. In addition to the fact that the bank's liabilities far exceed its assets, another factor behind the move was the FSA's judgment that the bank's failure would have only limited effects on the depositors and the financial system.

The bank is not linked to a network of banks for mutual fund transfers. It has not raised money in a financial market. It is effectively isolated from the financial system. The biggest risk in dealing with a bank failure is the possibility of chain-reaction bankruptcies at other banking institutions. But the collapse of the Incubator Bank will not cause such a chain reaction.

Thus, the financial watchdog agency concluded that closing the insolvent bank would not shake the banking system.

The bank's deposit policy is unique. It offers no ordinary savings accounts or current accounts. It only offers time-deposit accounts with what it claims are higher interest rates than those offered at other banks. As a sales pitch, it used the deposit insurance coverage of up to 10 million yen. Deposits of less than 10 million yen account for 97 percent of the total. This made it easy to force depositors with more than 10 million yen in their accounts to accept losses due to speculative risk-taking.

Given the situation peculiar to the bank, this cannot be considered to be a typical case of the deposit insurance cap on a failed bank. The FSA will certainly be required to weigh various factors carefully in deciding whether to place the cap on refunding deposits if and when a more ordinary bank fails.

The highest priority in handling this case should be placed on ensuring that the first-ever application of this formula will go smoothly without causing any confusion. The Deposit Insurance Corp. of Japan, which serves as a bankruptcy administrator, will have to carry out the reimbursement and other tasks swiftly to avoid causing anxiety among depositors.

At the same time, it should act carefully to prevent aggressive debt collection practices from bothering any healthy corporate borrower.

Needless to say, exhaustive efforts must be made to uncover the whole picture of the outrageous management practices that led to the bank's demise and hold those responsible accountable. Takeshi Kimura, the former chairman of the bank who once served as an adviser to the government on financial administration, has been indicted on a charge of obstructing FSA's inspections at the bank in violation of the Banking Law. But Kimura's misconduct is probably just the tip of the iceberg.

A special investigative committee appointed by the Incubator Bank after it was penalized by the FSA has published a report which found the bank had committed various violations, such as shuffling bad loans among a network of small and midsize corporate clients with close relationships. It has also been revealed that some of the loans the Incubator Bank bought from failed moneylender SFCG Co. had previously been sold to other parties. Thus, the bank's losses are likely to grow.

The process of dealing with the bank's failure should illuminate the lender's lax management.

--The Asahi Shimbun, Sept. 11