JAPAN Law and Practice Contributed by: Tomoyuki Tanaka and Henry Tan, Anderson Mori & Tomotsune
8. Insolvency, Recovery and Resolution 8.1 Legal and Regulatory Framework The legal framework for the liquidation of banks is laid out in the Deposit Insurance Act. The Deposit Insurance Act classifies liquidation pro - cedures into the following three categories. • Ordinary procedures, which are resolution regimes. • Procedures for financial crisis management, which are essentially bail-out regimes for the protection of bank deposits. • Procedures under an orderly resolution regime, based on the “Key Attributes of Effective Resolution Regimes for Financial Institutions” adopted by the FSB, involving an arrangement which largely mirrors a bail-in scheme. The Deposit Insurance Corporation performs the main role of protecting depositors and the entire financial system in the process for liquidation of banks. Ordinary Procedures In principle, ordinary liquidation procedures should be used unless the failure of the local bank is systemically important. Under the ordinary procedures, only a certain amount of deposits (usually JPY10 million per depositor) is protected under the deposit insurance system. Ordinary procedures fall under two categories. • Payout method: this is where deposits are paid off directly to depositors through the Deposit Insurance Corporation’s deposit insurance funds. The failed local bank is subject to bankruptcy procedures, such as civil rehabilitation proceedings or corporate reorganisation proceedings.
• Purchase and assumption method: this is where all or part of the business operations of a failed local bank are transferred to an assuming financial institution. Under this method, a financial administrator is appointed to manage the failed local bank until the oper - ations of the failed local bank are transferred. The Deposit Insurance Corporation provides financial assistance (including monetary grants) within the scope of payout costs to ensure the smooth transfer of the local bank’s business. Generally, the purchase and assumption meth - od is preferred over the payout method, as the former would generally be better equipped to address the concerns of depositors and avoid financial turmoil. Procedures for Financial Crisis Management The Deposit Insurance Act provides certain measures in cases where serious problems arise in maintaining the stability of the financial systems in Japan or in regions where a bank operates its business. These measures, which include capital injection, full deposit protection and temporary nationalisation, may be initiated subject to deliberation by the Financial System Management Council. Capital injection is designed to allow a bank with positive net worth to increase the amount of its capital through subscription by the Deposit Insur - ance Corporation of shares in the local bank. Full deposit protection is provided for banks with a negative net worth coupled with suspension or possible suspension of repayment of deposits. Temporary nationalisation is used for banks with negative net worth coupled with suspension or possible suspension of repayment of deposits.
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