Koizumi braces for battle over bank plan
Reviewed By Hitoshi URABE
"Koizumi braces for battle over bank plan"
(by Ken Belson, The New York Times ) International Herald Tribune
"Guarantees cap fuels Japan funds outflow"
(by Michiyo Nakamoto in Tokyo) Financial Times
The article introduced is apparently inspired by the recent change of policy by Prime Minister Koizumi on bank deposit insurance, where he has changed his stance on the plan to place a cap for all deposits next April. The related article above written on July 29 does not incorporate the policy change, but provides a better background on the issue.
There used to be a cap on deposit insurance in Japan until 1996, when, and for the first time after WWII, a number of financial institutions failed. In attempt to buy time to recover confidence in the financial system, a special measure was implemented in which the government would guarantee the full deposit amounts, for 5 years until 2001, which was then extended for a year. Thus, the cap on insured amount of 10 million yen per person or entity became effective on time deposits this April, but it was again postponed for settlement-type, liquid deposits for another year, until next April.
After the announcement last year of this split treatment depending on the type of deposit, it was reported that some 42 trillion yen was shifted from time deposits to liquid deposits. This was generally interpreted as a sign of the people not having regained confidence in the financial system.
For the last couple of months, Mr Koizumi and the financial authorities have declared and confirmed on a number of occasions that the policy to replace a cap on liquid deposits next April is solid and unchanged. However, certain practical concerns have surfaced. One is the fear for the deposits to be shifted from smaller banks to larger ones by the depositors seeking safety. A consequential effect of this could be for the bankers to act overcautiously, which means they would tighten the money flow to small businesses, forcing them to fail. Another fear pointed out is the risk of a bank in short of liquidity to trigger a systemic fiasco, where a stumble in fund transfer operations could turn cause settlements between legitimate businesses to fail, endangering normal business transactions.
Then it was reported on July 30 that Mr Koizumi had instructed the financial authorities to seek a possibility of excluding settlement-type accounts from the cap to be imposed. The details apparently still need to be sorted out, beginning with the clarification of what "settlement-type" deposit means. Then such questions as whether it will be limited to checkable accounts held by corporates or includes personal savings accounts needs to be resolved, along with perhaps more details such as whether there will be some new facility created to protect the individuals.
There has been some sense of relief expressed from various sectors, which is very natural. What must not be forgotten, however, is that this change of policy was brought about because of the lack of faith by the people in the banking system, and the unlimited guarantee is in fact providing comfort to the bankers by taking people's tax money hostage. It is evident that while buying time again with technical adjustments, some bold plans to reshape the financial industry need to be implemented.