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Japan's banking system

suffers major blow

TOKYO: Japan's banking system suffered a major blow as regulators moved to close Hyogo Bank Ltd., the 38th largest bank, and Kizu Credit Union, the country's largest credit union.

Hyogo Bank, based in the earthquake-torn city of Kobe, will be restructured with the help of Ministry of Finance, said people familiar with the ministry's plan. The operations of Hyogo will shift to a new bank, which will be funded in part by the Hyogo Prefecture government, Japanses news reports said.

The Governor of Osaka, where Kizu is based, said the thrifts' operations will cease except for withdrawals. Kizu had unrecoverable loans of 600 billion yen ($6 billion), said Governor Isamu Yamada Regulators said Kizu's 1.2 trillion yen ($12.5 billion) in deposits will be protected and the thrift's operations will be shifted to another institution. Finance Minister Masayoshi Takemura, Bank of Japan Gvovernor Yasuo Matsushita and the heads of Hyogo and Kizu were to hold separate news conferences to assure nervous depositors that the banking system will survive.

The Japanese yen fell against the US dollar in response to the news. The dollar bought 99.23 yen, up from a low of 98.04 yen before the news came out.

The struggling Kizu was pushed over the edge when depositors withdrew 50 billion yen from its vauts since the closure of Cosmo Credit Union, Tokyo's largest thrift, on July 31, Yamada said.

Analysts and bankers have long speculated that Hyogo Bank, with deposits of 2.67 trillion yen, was on the verge of failure because of bad debt of around 60 billion yen left over from loans made in the late eighties. In the year ended this March it recorded a current loss of 10 billion yen as it wrote off some of the loans. It has 3.6 trillion yen in assets.

Hyogo Bank is not only exposed to its own loans to troubled land developers but experts say Hyogo Bank is saddled with a huge burden of non-performing loans paid out to its nonbank financial affiliates. Hyogo's nonbank affiliates have reportedly borrowed a total of 1.47 trillion yen, of which 240 billion yen came from Hyogo Bank.

The quasi-public Deposit Insurance System will offer about 100 billion yen in low-interest rate loans to private banks which buy Hyogo's new shares, it said. The insurance system will also give 120 billion yen to Hyogo Bank to help it write off bad loans.

The collapse of Kizu and Hyogo comes as the Japanese financial system struggles through one of its worst crisis this century. Government officials estimate that Japan's banking system is must eventually rid itself of 40 trillion to 50 trillion yen in bad debts accumulated during the boom economy of the late 1980s. Private analysts say the total could be far higher, somewhere between 70 trillion and 100 trillion yen.

Already, three Tokyo credit unions have collapsed since late last year. Cosmo, the most recent of the failure, collpase after a run by customers last month that drained one-third of its deposits within a week.

The impact of the failure could reach other financial institutions, as well. For example, the credit union has long been affiliated with Sanwa Bank Ltd, which has already been asked by regulators to help the credit union out of a jam. And the Long Term Credit Bank of Japan Ltd., Tokai Bank Ltd., Toyo Trust & Banking Co. and Kinki Bank Ltd. all hold shares of a Kizu subsidiary, according to Teikoku Data Bank, a private reseach firm.

The most serious concer, however, is that the spectacle of another credit union failure could start a chain reaction where more depositors withdrawal money from other credit unions, pushing them toward collpase.