Depositors Stage a Run on Japanese Credit Union : Banking: Newspaper report sets off a stampede. Government steps in quickly with an emergency rescue plan.

Panicky customers made a run on one of Japan’s largest credit unions Monday, the first such incident here in half a century, triggering an emergency rescue that the government hoped would calm fears about broader trouble in the nation’s banking system.

Cosmos Credit Corp. was ordered Monday night to stop accepting new deposits and offering new loans after depositors withdrew more than $710 million in a single day. The sudden withdrawals followed news reports of the institution’s near-collapse.

It was the first run on a bank in Japan since the Great Showa Financial Panic of 1927 and the first time since 1963 that any financial institution had been ordered to halt new transactions.

The run came even though officials of Tokyo’s metropolitan government, the Ministry of Finance and the Bank of Japan said Sunday that public money would be used to cover all deposits in the financially troubled institution.

While some depositors remained inside branches of Cosmos Credit late Monday, withdrawing their money even after the credit union closed for the day, Tokyo Gov. Yukio Aoshima announced the order halting new business beginning today.

In an emergency news conference, Aoshima said the Tokyo government would provide up to $227 million to support Cosmos. In Japan, local governments supervise credit unions, which operate much like U.S. savings and loans.

Yasuo Matsushita, governor of the Bank of Japan, said the central bank and the Finance Ministry will support the Tokyo government in dealing with Cosmos’ troubles. No plan had yet been finalized, but bankruptcy “is one option,” he added.

Early today, Finance Minister Masayoshi Takemura took the highly unusual step of traveling to the studios of NHK, the semi-governmental TV network, to be interviewed. Declaring that the government guarantees payment of all time deposits, including interest, when they reach maturity, he urged Cosmos’ depositors to remain calm.

“We will ensure there will be no loss to depositors,” he said.

The decision to use taxpayer money to bail out Cosmo could mark the beginning of a move by Japanese authorities to shore up the nation’s financial system. A senior Finance Ministry official said he hopes the government will be evaluated highly--especially abroad--for its quick response to the woes of Cosmo.

The official, who spoke on condition of anonymity, said the government’s response was in line with the basic policy the ministry announced June 8 to deal quickly with the bad debts of Japanese financial institutions.

On Monday, investors reacted favorably, with bank shares helping propel the Topix index of all stocks listed on the Tokyo stock exchange up 8.49 points, or 0.64%.

“The government’s effort on behalf of Cosmo signifies that the monetary authorities are taking the banking industry’s problems seriously,” said Shizuo Kamijo, a general manager at Sanyo Securities.

Cosmos is a tiny speck in the mammoth financial system of Japan--whose banks are the world’s largest--but the credit union’s problems stirred unease far beyond its own doors.

After discounting the scope of Japan’s banking troubles for years, the Finance Ministry recently acknowledged that institutions were having trouble writing off bad loans. The ministry revealed that bad loans totaled at least $568 billion.

Scores of other credit unions, second-tier regional banks, housing-finance corporations and loan companies--in addition to a handful of big banks--are widely reported to be sagging under bad loans created when Japan’s “bubble” of soaring real estate and stock prices burst in the late 1980s.

Problem loans have clogged Japan’s financial system partly because banks have been refusing to sell real estate they hold as collateral at prices low enough to attract buyers.

Financial institutions have also been selling off stocks to raise funds to write off some of the bad loans, contributing to five years of doldrums on the Tokyo exchange.

On Monday, financial officials arranged an emergency loan of $454 million from the National Federation of Credit Cooperatives and offered their own guarantees of support for Cosmos to forestall runs at other banks. More than 6,200 of Cosmos’ 117,000 accounts were closed in Monday’s withdrawals, a Cosmos official said.

“We must avoid runs on other financial institutions and protect the stability of Japan’s financial system,” Aoshima said.

Spurred by a report in the newspaper Mainichi on Saturday that the credit union was about to collapse under the weight of bad loans, depositors lined up in front of all 24 branches before they opened Monday and jammed the offices all day to withdraw their money.

New supplies of cash were delivered in station wagons. Tellers worked through the lunch hour and were still waiting on customers after the official closing time of 5 p.m.

Cosmos had outstanding loans of $5.5 billion, compared to $4.9 billion in deposits, at the end of May. As much as 70% of the loans were considered uncollectible or were earning no interest.

On Sunday, Sampachi Taido, the credit union president, threatened to sue the Mainichi. On Monday night, he submitted his resignation.