Japan Takes Over Major Insolvent Bank

Japan took another step toward cleaning up its festering banking industry Sunday by declaring long-troubled Nippon Credit Bank insolvent and putting it under state control.

Prime Minister Keizo Obuchi said the decision was made after the government’s financial watchdog determined that Nippon Credit was swamped with liabilities.

Such a move had long been advocated by financial analysts and the surprisingly fast action is expected to help restore confidence and demonstrate that the traditional “convoy” system to protect weak banks is over.

Nippon Credit is the second Japanese bank in two months to become state-owned under Tokyo’s $155-billion plan to nationalize failing banks and revive its fragile financial system--a root cause of the nation’s long recession.

Japan’s worst postwar economic slump has been blamed for Asia’s inability to extricate itself from the effects of a regional financial crisis, and Obuchi has repeatedly promised to tackle the banks’ loan problem.

The nationalization of Nippon Credit, which followed a similar action in October with the Long-Term Credit Bank of Japan Ltd., was inevitable to eliminate worries about the nation’s financial system, government officials said.

The bank had $30 billion worth of problem loans at the end of March and suffered a capital shortage of $813.8 million once it took the necessary loan-loss charges, the government’s Financial Supervisory Agency said.

Obuchi said he was assured that the bank’s deposits, debentures and interbank transactions will be fully protected.

“The government will continue to take all possible measures to protect depositors and others, to maintain order in the financial system and to stabilize financial markets both in Japan and abroad,” the prime minister said in a prepared statement.

But Nippon Credit President Shigeoki Togo said top management disputed the government’s findings and told reporters the decision was regrettable and taken too quickly. He and other top executives plan to resign.

The news of Nippon Credit’s demise was widely expected, but some traders said it could hit banking stocks today as investors look to who could be next. In Tokyo, the Nikkei opened lower.

Masatoshi Kikuchi, strategist at the Daiwa Institute of Research, said that while the news would cheer foreign investors eager to see Japan end its policy of protecting banks, shares in banks with comparably troublesome credit ratings to Nippon Credit may be sold off.

Nippon Credit’s long-term deposit has a Baa3 rating from Moody’s Investors Service, a level that signals possible investment risk. Those with similar ratings include Yasuda Trust & Banking Co, Daiwa Bank and Chuo Trust & Banking Co.

Economic Planning Agency chief Taichi Sakaiya earlier warned that there could be more financial failures. “The financial problems will reach a turning point in the next several months before [the financial system] moves toward a relatively healthy state,” Sakaiya said on NHK television.