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BRIDGE BANKS: A Way Out for Japan's Troubled Financial System? September 10, 1998  Minister of Finance Hikaru Matsunaga (left) and Financial Supervisory Agency Commissioner Masaharu Hino announce the "bridge bank" plan at a July 2 press conference. (Jiji Press) The Japanese government has agreed on a systematic framework for dealing with bad loans as a key part of its "Total Plan for Financial Revitalization." This plan, which aims to prevent corporate bankruptcies resulting from bank failures, centers on the creation of a public "bridge bank" able to continue lending to sound borrowers. The plan would apply to bank failures occurring before the end of March 2001. The government, hoping for quick enactment, proposed this as a part of its Total Plan in an extraordinary Diet session held at the end of July 1998. The passage of this bill would create a comprehensive framework for handling bad loans, and is expected to pave the way to financial reorganization by way of mergers and business tie-ups among Japan's financial institutions. State to Manage Failed Institutions If no other institution can be found to take over the failed institution's operations, a bridge bank will be established as a subsidiary of the Heisei Financial Revitalization Corp., a public holding company to be established with capital from the Deposit Insurance Corp. The bridge bank will take over the operations of the failed institution, forming a "bridge" that offers continued credit to borrowers while problem loans are cleared away. In the event of multiple financial institution failures, the system allows for the existence of several bridge banks at once. In principle, a bridge bank has up to two years to settle its affairs by either merging with a private-sector bank or liquidating its assets. The bank's existence may be extended for up to five years if needed, however. The government has announced an allocation of 13 trillion yen (96 billion U.S. dollars at 135 yen to the dollar) in public funds to provide a source for bridge-bank lending and to cover related losses. These funds are to come from a planned 30-trillion-yen (222-billion-dollar) public fund meant to shore up Japan's banking system. Maintaining the Credit Flow After the November 1997 failure of Hokkaido Takushoku Bank, most of its borrower institutions were cut off from operating capital, and the effects on the real economy spread rapidly. This led to an outcry among borrowers demanding the establishment of a third-party handler to ensure continued lending. Both the administration and the ruling Liberal Democratic Party state that this plan will protect companies from the aftershocks of lenders' failures, as well as offer a way to deal promptly with financial institutions' bad debts and put the Japanese economy back on the road to recovery. The government hopes for rapid implementation of the Total Plan, which it sees as a comprehensive framework promoting the liquidation or recovery of the nation's bad loans. The major setback suffered by the LDP in the July 12 upper house election, however, could threaten its smooth passage. As a result, the party is planning to seek the cooperation of opposition parties in the extraordinary Diet session convened in late July.
 Edited by Japan Echo Inc. based on domestic Japanese news sources.
Articles presented here are offered for reference purposes and
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