2nd-tier regional banks eye safety net for large-lot deposits.

TOKYO, Oct. 27 Kyodo

The Second Association of Regional Banks is considering creating a mechanism to ensure member banks can fully refund public-money deposits by prefectural and municipal governments even in cases of failures, association officials said Friday.

The association envisions putting the mechanism in operation after the government ends its full refund guarantee for commercial bank deposits during bank failures on April 1, 2002.

The Diet passed in May an amendment to the Deposit Insurance Law that calls for limiting the amount of deposits per bank the government is allowed to refund to 10 million yen per depositor, under its deposit insurance system.

The officials said the proposed safety-net mechanism is designed to prevent large-lot deposits from local governments leaving their vaults en masse.

Some leading economists have warned that abolishing the government's full refund guarantee would bankrupt many banks by precipitating a deposit exodus from banks that appear weak to major banks.

Bank of Japan (BOJ) statistics show the tally of deposits at Japan's 59 second-tier regional banks dropped 4.8% in September from a year before to 57.34 trillion yen.

Of the total, an estimated 3 trillion yen is deposited by prefectural and municipal governments, according to association officials.

But the local governments are now moving to relocate deposits to what they perceive as banks less vulnerable to credit problems.

A Financial Services Agency official said, ''It is good that banking-industry bodies devise such a mechanism based on their own ideas before the government removes the current full-refund guarantee.''

Industry bodies grouping credit unions and shinkin banks may follow.

More specifically, the association is contemplating arranging for member banks to set up a joint company in charge of fully reimbursing deposits by local governments if a member bank fails.

If the company is set up, member banks would be required to put up reserves in proportion of the size of deposits by local governments.

If a failure occurs, the company would be held responsible for refunding an amount equal to a deposit by any local government beyond the 10 million yen guaranteed by the central government.

The association plans to guarantee only deposits by local governments under the envisioned safety net because offering the protection to all depositors would require the member banks to pay premiums that could be well beyond their ability to shoulder comfortably, they said.