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Saturday, Sept. 11, 2010
Incubator Bank of Japan files for bankruptcy
Government activates deposit insurance program for first time
The troubled Incubator Bank of Japan filed for bankruptcy Friday at the Tokyo District Court after an overly ambitious expansion and a series of allegedly illegal transactions prompted its downfall.
The country's first bank failure in seven years is also the first case in which the government will limit its deposit guarantee to ¥10 million since the system was instituted in 1971.
Incubator Bank said it had net liabilities of ¥180.4 billion as of Aug. 31.
"We started our business with the purpose of supporting small and midsize companies," President Haruki Kohata told a news conference in Tokyo. "But at a certain point, we started to rush expansion, which resulted in a distorted business."
Prior to filing for bankruptcy to begin rehabilitation proceedings, the bank decided to suspend operations at 114 outlets across the nation, in line with a business suspension order issued by the Financial Services Agency to protect depositors.
The bank will resume operations Monday at 16 outlets in major cities.
Deposit Insurance Corporation of Japan, ordered by the FSA to manage Incubator Bank's operations and assets, said it aims to hand over the financially sound parts of its business to the DIC's bridge bank in August.
Meanwhile, the DIC will seek a support organization that can take over the failed bank's business.
The FSA applied the deposit guarantee cap Friday because the bank's operations are quite different from those of other banks and it would have little impact on the financial system as a whole, experts said.
Incubator Bank doesn't have access to the interbank market, where banks raise funds. The closely held, small-business lender doesn't have the same kind of depositor numbers as other commercial banks.
The application of the deposit cap "is an extraordinarily exceptional case," said Hideo Kumano, senior economist at Dai-ichi Life Research Institute Inc.
"It isn't certain whether (the government can invoke) the system for other cases in the future," he said.
The government's protection only covers up to ¥10 million in deposits as well as interest on the principal.
The failure comes after former Chairman and Japan Financial Services adviser Takeshi Kimura was arrested in July for allegedly obstructing FSA inspections.
The financial watchdog as well as the DIC consider taking civil and criminal actions against former Incubator Bank executives, including Kimura, said Masanori Tanabe, acting director of the DIC.
As of Sept. 7, the Tokyo-based lender has about 3,500 depositors who each have more than ¥10 million deposited, totaling ¥46 billion, Kohata of Incubator Bank said at a news conference.
The depositor number consists a merely 3 percent of its overall depositors of 113,000 people, according to the FSA.
The bank was ordered in May to suspend some operations after breaching banking rules. The failure is the first since Ashikaga Bank Ltd. filed for bankruptcy in 2003 after the government suspended deposit insurance caps to prevent turmoil amid multiple bank failures.
Bank of Japan Gov. Masaaki Shirakawa released a statement saying the financial system was in sound shape.
"Japan's financial system has remained stable as a whole," Shirakawa said. "The Bank of Japan will continue to carefully monitor the developments of financial markets and the financial system."
Finance Minister Yoshihiko Noda also said there wouldn't be a significant impact on the banking system.
Authorities suspended the 1971 cap on deposit insurance in 1996, instead offering blanket guarantees to dissuade people from withdrawing their savings during the financial crisis triggered by the collapse of the asset-price bubble. It fully revived the limit on deposit guarantees in 2005.
Kimura resigned in May after Incubator Bank posted a net loss of ¥5.1 billion in the year ended March. Kimura and three other bank officials were charged with breaching bank laws.
Information from Bloomberg added