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Japanese Bank Collapses For First Time Since WWII

By David Holley
Los Angeles Times

Panicky depositors Wednesday helped trigger the first collapse of a Japanese commercial bank since shortly after World War II, part of a financial double whammy that appeared to bring the nation's festering banking crisis to a head.

The government closed the country's second largest credit union and announced it would dissolve the bank, and then declared that the worst is over because no other financial institutions are both as large and as weak as the two liquidated Wednesday.

Authorities also moved quickly to contain the damage, pledging that depositors at both failed institutions will get their money back and that the government will use taxpayer money if needed to ensure the overall system's stability.

"Fear will not spread," insisted Bank of Japan Governor Yasuo Matsushita.

But the news sent shivers through international financial markets and prompted both foreign and domestic investors to sell yen. That sent the dollar to as high as 99.25 yen, a 6{-month high, virtually wiping out its worrisome losses for the year.

Now the continuing banking crisis and generally fragile economic outlook in Japan mean the dollar can reach 110 yen by the end of the year, said Hillel Waxman, manager of foreign exchange at Bank Leumi Trust Co. in New York.

However, analysts were encouraged by Japan's unusual decision to dissolve a weak bank, saying it could assure Japanese savers that future bank insolvencies can be handled smoothly.

"This sets a good precedent," said Betsy Daniels, a Tokyo-based banking industry analyst with Morgan Stanley. "The Ministry of Finance is starting to take action, and that's very positive. I definitely think there's going to be more of this, but it's good that it's being dealt with."

Sei Nakai, deputy director of the Finance Ministry's Banking Bureau, said that while there may still be more failures among small institutions, there are no other large credit unions or regional banks in as weak a condition as Kizu Credit Union and Hyogo Bank.

"The major problems" in this category, he said, "are all solved."

The decision to eliminate the two institutions but guarantee their depositors' funds - even in excess of the amount legally covered by deposit insurance - means that "the settlement of our big problem involving individual financial institutions is in sight," Finance Minister Masayoshi Takemura told a news conference. "With this, the worst is behind us."

Authorities decided to liquidate Hyogo, a major regional bank located in the western city of Kobe, after depositors started a run Wednesday on Kizu Credit Union, located in nearby Osaka. Both institutions were known to be weak, and officials decided Kizu's troubles would undermine Hyogo.

The devastating earthquake that hit Kobe early this year drove many of Hyogo Bank's borrowers into bankruptcy and also pushed down local land values, worsening the bank's bad-loan problem.

Hyogo Bank will continue functioning normally until its operations are transferred to a new bank sometime next year, but stockholders will lose their investment, authorities said. Kizu Credit Union will immediately cease business except for customers' withdrawal of deposits.

Finance Ministry officials have acknowledged that the Japanese banking system is burdened with at least $500 billion in non-performing loans, many of them backed by real estate that has plunged in value since the collapse of Japan's late-1980s speculative boom.

Most major banks hold problem loans equal to about 10 percent of their total portfolios, but they also have sufficient cash flow and profits to gradually write off their losses over a period of years, officials say.

Concerns within Japan thus have focused not on the big banks but on two categories of weaker firms: housing finance companies, which take no deposits but instead borrow from other financial institutions in order to make real estate loans, and relatively small deposit-taking institutions including regional banks and credit unions. Many of these institutions have credit or ownership links with the country's large banks, while the entire system is tightly regulated by the Finance Ministry.

Some American analysts have expressed fear that if a domino effect were to trigger a sudden overall worsening of the bad-loan problem, Japanese banks might sell off foreign stocks and bonds to cope with the problem, which could trigger a plunge in New York stock prices and a sharp rise in U.S. interest rates.

Speaking at a late-evening news conference, Nakai insisted that plans are coming into place for dealing with the overall problem.