On June 30th the Japanese Government and LDP approved an outline of a new financial policy which adopts a scheme similar to the US- bridge bank system ("Bridge Bank" scheme). Under the Bridge Bank scheme, the Japanese Government will take over a failed bank until a private financial institution, a corporation, or an individual makes a reasonable offer to take over the failed bank. This proposed scheme, preventing a bank failure from cutting off a vital flow of credit, is designed to protect depositors from the delay of reconstructing bank, which results in stability of the financial system as a whole and to protect sound borrowers of the failed bank from discontinuation of funding when such borrowers can not find another funding institution.

If a bank fails, the Financial Supervisory Agency appoints a Manager from the private sector. The Manager will be granted an exclusive right to represent the failed bank, to carry on its services, and to manage and/or dispose its properties. Although executives of the failed bank remain in their positions formally, financing for new facilities will not be extended, but funds will continue to be furnished only to existing financially sound borrowers until they can find solvent institutions to fund their businesses. The Manager looks for a private financial institution, corporation, or individual who would be interested in purchasing of or the merger with the failed bank and procures transfer of the business or merger of the failed bank with the third party. In the event that the failed bank still remains under the control of the Manager two years after the commencement of the Manager's taking over operations, a failed bank will be reconstructed as a public bank by contributions from the a public organization, namely the Deposit Insurance Corporation. The executives of the failed bank will be removed. The reconstructed bank will conduct its operations in accordance with the preceding operations. The proposed maximum period of the operation of the reconstructed bank will be 3 years. The settlement after the expiration of this term of three years is now still pending. A bill to implement this Bridge Bank scheme is intended to be submitted to the next session of the Diet, which is scheduled to be held at the end of this month.

Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

c Komatsu, Koma & Nishikawa 1997

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