Federal Deposit Insurance Corporation Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States, FDIC, 1998.
Milhaupt, Curtis J., “Japan’s Experience with Deposit Insurance and Failing Banks: Implications for Financial Regulatory Design?” Bank of Japan, Monetary and Economic Studies, August 1999.
Ueda, Kazuo, “Causes of the Japanese Banking Instability in the 1990s,” University of Tokyo Faculty of Economics Discussion Paper Series No. 96-F-17, 1996.
The statutory payoff limit was initially set at ¥1 million, increased in 1974 to ¥3 million, and rose in 1986 to ¥10 million, the current level. A second deposit insurance system, covering agricultural and fishery cooperatives, was established in 1973.
A 1986 amendment to the Deposit Insurance Law allowed the DIC to provide financial assistance in connection with mergers of troubled banks. However, the amount of assistance was limited to the hypothetical cost of paying off depositors. The cost of resolving troubled institutions usually exceeded this ceiling, so mergers continued to take place outside the formal deposit protection system.
For example, the ratio of insurance fund reserves to covered deposits in Japan was only 0.07 percent in 1995, compared to 1.30 percent in the United States.
In a purchase and assumption transaction, the acquiring bank purchases some or all of the failed bank’s assets and assumes some or all of the failed bank’s liabilities.
Branch growth constituted the principal form of competition between city banks under the regulated interest rate regime.
Another resolution company, the Housing Loan Administration Corporation (HLAC) was established to handle the remaining jusen assets.
A bridge bank is a bank under temporary state administration, which gives the authorities time to find a suitable private buyer.
Reflecting the history of blanket deposit insurance and no bank failure in Japan, many depositors are not presently accustomed to assessing the creditworthiness of their banks, and the authorities are not used to conducting rapid bank resolutions.
Liquid deposits are defined as those with interest rates of zero or close to zero, and include checking and savings deposits, but not time deposits or certificates of deposit.
Banks might be able to provide full protection for a wider range of deposits, by periodically sweeping non-liquid deposits into liquid deposits (sweep accounts are common in other countries). One solution would be to offer a system of coinsurance for the amount above ¥10 million. In other words, depositors would face the possibility of losing a small fraction (say 10 percent) of the covered deposit, which could help alleviate moral hazard while limiting the amount of loss.
The special deposit insurance premium (0.036 percent) will be eliminated in April 2003, reducing the premium to 0.048 percent.
Setting an appropriate target would require a realistic assessment of the condition of the banking industry, the size and timing of financial demands that are likely to be placed on the fund, and the industry’s ability to pay the necessary premia without prejudicing its profitability, solvency, and liquidity. In the United States, the target level is 1.25 percent of insured deposits and the actual level currently exceeds the target level.
In Japan, deposit insurance premia are not adjusted for bank risk. While risk-adjusted criteria could play a role in controlling moral hazard, in practice it is difficult to measure risk. In the United States, the additional premium for weak banks has been kept quite low in part because of concerns about the impact on these banks’ financial condition.
Indeed, Shinsei Bank recently sold its claims on Sogo, a troubled major retailer, to the DIC for their full face value (net of specific loan loss reserves).
International experience suggests that most bad assets should be managed by the private sector—either in the receiving bank or in specialized loan collection vehicles—so as to maximize their value, especially once the economic recovery is underway. In Japan, the RCC acts primarily as a collection agency, rather than trying actively to dispose of its bad assets.
In the U.S. under FDICIA, the Secretary of the Treasury—after consulting with the President and with the recommendation of the FDIC and Federal Reserve System—may grant an exception to the least-cost requirement in case of systemic risk.
The payoff cost principle provides more flexibility in dealing with a banking crisis.
Specifically, standards could require the disclosure of the results of stress tests using the banks’ internal risk assessment model; the full disclosure of the self-assessments of asset quality, including gross amounts of loans by asset class, the amounts covered by collateral or guarantees, and provisions; and quarterly—rather than semiannual—disclosure.
The Swedish government’s report was thorough, covering the banking system as a whole, categories of banks, and selected individual banks, and considered a wide range of indicators, including problem assets, loan losses, capital adequacy, profitability, and fund raising premia. The report took into account not only the views of the financial supervisory authority, but also those of banks themselves and of external observers, such as credit rating agencies. The report was far reaching, in that it considered the macroeconomic outlook and prospects for the real estate market, and evaluated the banking system’s prospects under different interest rate and asset price scenarios. Finally, the report was candid in recognizing remaining problems, including at individual institutions-these problems were considered manageable.