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The Framework for Deposit Insurance Law of Japan

The 5 th IADI-ASIA REGIONAL COMMITTEE International Conference March 28, 2006. The Framework for Deposit Insurance Law of Japan. Jiro HOTTA Chief Legal Officer, Legal Affairs Dep.

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The Framework for Deposit Insurance Law of Japan

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  1. The 5th IADI-ASIA REGIONAL COMMITTEE International Conference March 28, 2006 The Framework for Deposit Insurance Law of Japan Jiro HOTTA Chief Legal Officer, Legal Affairs Dep. Deposit Insurance Corporation of Japan

  2. Topics • The Purpose of the Deposit Insurance Law 2. Deposit Insurance System in Japan 3. Financial Crisis Management • Collection of Non-Performing Loans and Pursuit of Liability

  3. Initial Contribution to Capital of DICJ Government Bank of Japan Private Financial Institutions Contribution: ￥150 million Contribution: ￥150 million* Contribution: ￥150 million DICJ *Extended to \155 mil when coverage for Rokin Banks started in 1986

  4. The Purpose of the Deposit Insurance Law Article 1. Purpose The purpose of the Deposit Insurance Law is to protect depositors and other parties as well as maintain an orderly financial system, by providing for the payment of deposit insurance claims and purchase of deposits and other claims in the event that repayment of said deposits, etc., is suspended by a financial institution, and, regarding the resolution of failed financial institutions, providing appropriate financial assistance to facilitate mergers, etc. or other resolutions of failed financial institutions, providing for financial administrators for failed financial institutions, providing for the succession of business of failed financial institutions, and establishing a system for appropriate measures in response to financial crises.

  5. Deposit Insurance Relationship Article 49. Deposit Insurance relationship 1. A deposit insurance relationship shall be formed between the DICJ, financial institutions, and depositors, etc., whereby deposit, etc., shall be repaid within a specified limit to each of said depositors, etc., by virtue of the liability related to deposits, etc., assumed by financial institutions when they conducted their business. • -omitted

  6. Overview:Deposit Insurance Scheme in Japan Insured Deposits Depositors Insured Financial Institutions Payment of Insurance (Limited coverage) Deposit DICJ Financial Institutions Insurance Premium

  7. Changes in Coverage Limits of Deposit Insurance Scheme • Enforcement of the Deposit Insurance Law: Coverage limit ⇒ \1 million 1974 Coverage limit extended to \3 million 1986 Coverage limit extended to \10 million June 1996 Blanket guarantee adopted as a temporary measure until March 2001 (One year extended later) April 2002Limited coverage partially implemented (Liquid deposits were fully protected until March 2005) April 2005Limited coverage completely implemented (Deposits for settlement and payment purpose are continuously fully protected)

  8. Managementby Financial Administrators Article 74. Order for the Management One of the conditions (1) to (4) below must be met, as well as one of (a) or (b) • The institutions liabilities are deemed to exceed its asset • It is deemed possible that the institutions may suspend the repayment of deposits. • The repayment of deposits has actually been suspend • It is deemed possible that the institution’s liabilities may exceed its assets, based on notification from the institutions. • The management of the institution’s operations is extremely inappropriate • In the absence of a merger, etc., the total suspension of operations or dissolution of the failed financial institution could greatly obstruct the smooth flow of funds in the area or sector in which the institution operates, as well as hindering the convenience of its users.

  9. Deposit Protection Scheme • Financial Assistance Method; A method of transferring business to other sound financial institution (assuming financial institution) and concurrently providing financial assistance • Insurance Pay-Out Method; A method where the DICJ pays insurance proceeds directly to depositors

  10. Financial System Council report 1999 When a financial institution fails, it is important to choose a method of failure resolution which is expected to incur smaller cost as well as to minimize the confusions associated with such failure. Therefore, priority should be given to the financial assistance method. The payoff method should be avoided as far as possible.

  11. Chart Showing Financial Assistance In the case of partial transfer of business to an "assuming" financial institution by the Bridge Bank of Japan (Assuming financial institution) [Failed]financial institution Bridge Bank of Japan Deposit Insurance Corporation of Japan Monetary grants （§59) Partial transfer of business insured deposits, sound assets Monetary grants (§59-2) <For keeping equality among creditors> Assets purchased Purchase commissioning Resolution and Collection Corporation book value Instruction and advice in resolution and collection operations Purchase price

  12. Financial Assistance within Pay-Out Cost Article 64. Financial Assistance 2. In the event of a decision as stipulated in the preceding paragraph, the Policy Board shall take into consideration the financial condition of the DICJ, estimated costs necessary for any grant of financial assistance pertaining to said decision, and estimated costs necessary in case for paying insurable contingencies affecting the failed financial institution subject to said financial assistance, and shall take care to effective use of the DICJ’s assets.

  13. What is “Pay-out cost” Pay-out cost is a necessary cost in order to pay off covered deposits of failed institution under limited coverage. ・Pay-out cost = Uncollectible amount by DICJ + insurance payment administrative cost ・Uncollectible amount by DICJ = insured deposit amount ×(1 –expected dividend ratio)

  14. Role of Bridge Bank 1. A Bridge Bank is a temporal successor of business. 2. Insured deposits, sound assets and related operations such as settlements are to be transferred to the BB. 3. Business to be transferred to the BB about 6 months after the failure. 4. Sponsorship by the BB for a failed financial institution is one of the most essential function in the resolution procedure.

  15. Measures Taken Against Financial Crisis Article 102. Confirmation of Necessity of Measures Taken Against Financial Crisis Item1. Capital Injection to Financial Institutions Item2. Financial Assistance Exceeding the pay-out cost Item3. Acquisition of Shares by DICJ (Special Crisis Management)

  16. Purchase ofNon-Performing Loans Article59. Applications for Financial Assistance 1. A financial institution undertaking merger, etc. or a holding company undertaking a merger, etc. may apply to the DIC for measures stipulated in the following items to assist in the said merger, etc.. (1) Monetary grant (2) Loan or deposit of fund (3) Purchase of assets (4) Guarantee of liabilities (5) Assumption of financial obligations (6) Subscription of preferred shares, etc. (7) Loss sharing 2.-7. (omitted)

  17. Pursuit of Liability Article 83. Measures to Clarify the Liability of Executives of Financial Institutions Under Management 1. In order to pursue civil liability in connection with any violation of duties committed by the incumbent or former directors or auditors of a financial institution under management, the financial administrator shall initiate civil litigation or other necessary measures. 2. On becoming aware of any criminal conduct while discharging its responsibilities, the financial administrator shall take the requisite steps to file formal charges in connection with such.

  18. Thank you ! Deposit Insurance Corporation of Japan Please visit our Website: http://www.dic.go.jp

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