September 1998
Bank of Japan

1. I. Decisions Related to the Revision of the Bank of Japan Law
2. II. Decisions Related to Monetary Policy
3. III. Decisions Related to International Finance
4. IV. Decisions Related to the Financial System
   1. A. Resolution of Failed Financial Institutions
   2. B. Improvement of Payment and Settlement Systems

• References [PDF 511KB]

Major decisions made by the Policy Board during fiscal 1997, summarized from press releases, the 1997 issue of the Nenji Houkokusho (Annual Report of the Policy Board of the Bank of Japan), and the January, February, and March issues of the Nippon Ginko Seisaku Iinkai Geppo (Monthly Report of the Policy Board of the Bank of Japan).

I. Decisions Related to the Revision of the Bank of Japan Law¹

1. The new Bank of Japan Law (Law No. 89, 1997, hereafter the Bank of Japan Law of 1997), effective from April 1, 1998.

• Policy Board decision : Reform of the Bank's organization(Sep. 12, 1997)

  The Policy Board decides the framework for the Bank's organizational reform and the disposal of the Bank's real estate assets. Contents of the decision are as follows:

  1. (1) In April 1998, the Bank will reform its organization and reassign the responsibilities of Head Office departments to establish a new organizational framework in which policy management and business operations will be governed by the Policy Board and to ensure that the mission entrusted to the Bank as the central bank of Japan will be fully and efficiently accomplished. The thirteen departments, two offices, and one institute will be reorganized into ten departments, five offices, and one institute.
     Major aspects of revisions to the organization of the Bank's Head Office are as follows:
     1. (a) Strengthening of the functions of the Secretariat of the Policy Board.
     2. (b) Appointment of support staff for Executive Auditors.
     3. (c) Streamlining of the decision-making process and reassignment of the duties of Executive Directors.
     4. (d) Establishment of an independent internal auditing section to be placed under the direct control of the Governor.
     5. (e) Reform of the Credit and Market Management Department into the Financial Markets Department.
  2. (2) The Bank will dispose of idle real estate and the Bank's golf course memberships.

  Note: For the details of the reform, see"About the Bank."

• Policy Board decision : A new framework for Policy Board meetings on monetary policy(Dec. 26, 1997)

  The Policy Board decides on a new framework for Board meetings on monetary policy with a view to improving the transparency of the policy decision-making process--one of the foremost aims of the new Bank of Japan Law of 1997. Revisions to the framework include the commencement of regular Board meetings on monetary policy and publication of minutes. The new framework to be put into effect in January 1998 is as follows.

  1. (1) Name: Monetary Policy Meeting (MPM).
  2. (2) Frequency: Twice a month around the 10th and 25th of each month (there may be exceptions).
  3. (3) Meeting schedule: Schedule to be announced at the end of each quarter--i.e., at the end of March, June, September, and December. The announced schedule will specify the meeting dates for the six months following the month of the announcement.
  4. (4) Matters to be decided: (a) guideline for money market operations; (b) official discount rate; (c) reserve requirement ratios; and other related matters.
  5. (5) Announcement of MPM decisions: Policy decisions to be announced immediately after each meeting, including decisions not to change policy.
  6. (6) Publication of the Monthly Report of Recent Economic and Financial Developments: The Japanese version of the report to be published two business days after the first MPM of each month. Accordingly, Monthly Economic Review and Quarterly Economic Outlook, which were similar in content, will be discontinued.
  7. (7) Disclosure of minutes and transcripts of MPMs: Minutes, or summaries of discussions, to be submitted to the Policy Board for approval at the second MPM following, such meeting taking place approximately a month later. The minutes will be released three business days after the Board's approval. Transcripts, or detailed records of discussions, to be disclosed after a period of time decided by the new Policy Board established under the Bank of Japan Law of 1997.

• Policy Board decision : Emolument standards for Bank of Japan executives (excluding Counsellors)(Mar. 6, 1998)

  Pursuant to Article 31 of the Bank of Japan Law of 1997, the Policy Board decides the standards for the basic salary, half-yearly compensation and retirement allowance (hereafter collectively referred to as emoluments) of the Governor, Deputy Governors, Policy Board Members, Executive Auditors, and Executive Directors, to be effective from April 1, 1998.
  The standards are decided in accordance with the following provisions of the Bank of Japan Law of 1997:

  1. (1) Article 31, Paragraph 1 stipulates that emolument standards should be decided consistent with the general standards prevailing in society.
     In accordance with this provision, the Board decides that executives' emoluments should (a) reflect responsibilities and abilities required for each post; (b) be competitive with the remuneration of comparable personnel in the private sector; and (c) ensure reasonable and efficient budget allocation, bearing in mind that the Bank's service and assets are of a public nature.
  2. (2) Article 31, Paragraph 2 stipulates that the emolument standard should be decided taking into account the standards of the national public service officials assigned to certain positions and responsibilities (e.g., prime minister and other ministers).
     In accordance with this provision, the Board decides that (a) the Governor's salary should not exceed the highest salary of national public service officials, and the salaries of other Bank executives should be decided proportionately with responsibilities assigned to each post, in appropriate balance with the Governor's salary; and (b) executives' retirement allowance should be decided taking into consideration those of national public service officials, at the same time taking into consideration Bank executives' employment status and employment restrictions after retirement from the Bank.

  Note: The Board reports the emolument standards of Bank executives excluding Counsellors to the Minister of Finance and also releases it to the public.

• Policy Board decision : Salaries of Bank of Japan executives (excluding Counsellors)(Mar. 6, 1998)

  The Policy Board decides the salaries of the Governor, Deputy Governors, Policy Board Members, Executive Auditors, and Executive Directors, to take effect from April 1, 1998. The salaries are decided in accordance with the emolument standards set on the same day.
  Amounts are decided as follows:

  Table : Salaries of Bank of Japan executives (excluding Counsellors)

  Post	Basic monthly salary (thousands yen)	Half-year compensation (thousands yen)
  Governor	2,150	7,100
  Deputy Governor	1,700	5,600
  Policy Board Member	1,630	5,370
  Executive Auditor	1,020	3,330
  Executive Director	1,390	4,560

• Policy Board decision : Code of conduct for Bank executives and staff(Mar. 6, 1998)

  The Policy Board decides the code of conduct for Bank executives and staff pursuant to Article 32 of the Bank of Japan Law of 1997.
  The code includes confidentiality and restrictions on outside businesses and employment after retirement from the Bank.

  Note: The Bank reports the code of conduct to the Minister of Finance and releases it to the public.

• Policy Board decision : Amendment of the Bank's by-laws and other rules(Mar. 24, 1998)

  The Policy Board decides to amend the Bank's by-laws and establish a written statement stipulating procedures for conducting business and internal rules in accordance with the Bank of Japan Law of 1997.

  Note: The Bank receives approval for the Bank's by-laws from the Minister of Finance and also reports the written statement stipulating procedures for conducting business and the internal rules to the Minister of Finance, and releases them to the public.

II. Decisions Related to Monetary Policy

• Policy Board decision : Market operations in the repo market(Oct. 28, 1997)

  The Policy Board decides to introduce borrowing of Japanese government bonds (JGBs) with cash collateral ("repo" operations) as an instrument of open market operations.

  Note: For the details of the statement, see References[PDF 511KB]-References 1 and 2 for the scheme.
  The Board decides to utilize "repo" operations focusing on the merits of such transactions in terms of risk management and on the considerable expansion of the repo market. In the transactions, bonds such as JGBs virtually serve as collateral for cash and the bond values are marked to the market on a daily basis. The risks involved in the transactions can therefore be managed effectively. The repo market, which was established in April 1996 after the abolishment of the restriction on interest rates on cash collateral in January 1996, has been developing rapidly.
  On October 30, 1997, pursuant to Article 27 of the Bank of Japan Law of 1942, the Minister of Finance approves the Bank conducting "repo" operations.
  On October 31, 1997, the Bank releases a statement on the introduction of repo operations and explains the scheme as follows.

  1. (1) Lenders of bonds: Banks, securities companies, and other financial institutions that hold an account at the Bank's Head Office.
  2. (2) Bonds traded: Interest-bearing Japanese government bonds.
  3. (3) Amount of cash collateral: Market value of traded JGBs multiplied by standard ratio for calculating cash collateral.
  4. (4) Repo rate (interest rate on cash collateral minus bond-borrowing fee rate): Decided through bids.
  5. (5) Term of a transaction: 6 months or less.
  6. (6) Bond revaluation and cash collateral adjustments: Bonds are marked to the market on a daily basis. If cash collateral exceeds or falls below the required amount as a consequence of daily revaluation, cash collateral shall be adjusted upon request from the borrower of bonds (the Bank) or the lender.

• Policy Board decision : Decisions of the Monetary Policy Meeting(Jan. 16, 1998)

  The Policy Board decides by unanimous vote to leave monetary policy unchanged and the guideline for monetary market operations in the intermeeting period as follows: The Bank will encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate.

  Note: The Board holds a Monetary Policy Meeting, a regular meeting on monetary policy held twice a month. At the meeting, the Board also approves "The Bank's View" on recent economic and financial developments, the basis for monetary policy decisions, to be published on January 20, 1998 in the Monthly Report of Recent Economic and Financial Developments. (For details, see "Minutes of the Monetary Policy Meeting on January 16, 1998.")

• Policy Board decision : Decisions of the Monetary Policy Meeting(Feb. 13, 1998)

  The Policy Board decides by unanimous vote to leave monetary policy unchanged and the guideline for money market operations in the intermeeting period as follows: The Bank will encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate.

  Note: The Board holds a Monetary Policy Meeting, a regular meeting on monetary policy held twice a month. At the meeting, the Board also approves "The Bank's View" on recent economic and financial developments, the basis for monetary policy decisions, to be published on February 17, 1998 in the Monthly Report of Recent Economic and Financial Developments. (For details, see "Minutes of the Monetary Policy Meeting on February 13, 1998.")

• Policy Board decision : Decisions of the Monetary Policy Meeting(Feb. 26, 1998)

  The Policy Board decides by unanimous vote to leave monetary policy unchanged and the guideline for money market operations in the intermeeting period as follows: The Bank will encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate.

  Note: The Board holds a Monetary Policy Meeting, a regular meeting on monetary policy held twice a month. At the meeting, the minutes of the Monetary Policy Meeting held on January 16, 1998 are also approved to be published on March 3, 1998. (For details, see "Minutes of the Monetary Policy Meeting on February 26, 1998.")

• Policy Board decision : Decisions of the Monetary Policy Meeting(Mar. 13, 1998)

  The Policy Board decides by unanimous vote to leave monetary policy unchanged and the guideline for money market operations in the intermeeting period as follows: The Bank will encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate.

  Note: The Board holds a Monetary Policy Meeting, a regular meeting on monetary policy held twice a month. At the meeting, the Board also decides to approve "The Bank's View" on recent economic and financial developments, the basis for monetary policy decisions, to be published on March 17, 1998 in the Monthly Report of Recent Economic and Financial Developments. In addition, the minutes of the Monetary Policy Meeting held on February 13, 1998 are approved to be published on March 18, 1998. (For details, see "Minutes of the Monetary Policy Meeting on March 13, 1998.")

• Policy Board decision : Decisions of the Monetary Policy Meeting(Mar. 26, 1998)

  The Policy Board decides by unanimous vote to leave monetary policy unchanged and the guideline for money market operations in the intermeeting period as follows: The Bank will encourage the uncollateralized overnight call rate to remain on average slightly below the official discount rate.

  Note: The Board holds a Monetary Policy Meeting, a regular meeting on monetary policy held twice a month. At the meeting, the minutes of the Monetary Policy Meeting held on February 26, 1998 are also approved to be published on March 31, 1998. In addition, the Board approves the dates of Monetary Policy Meetings in April-September 1998. (For details, see "Minutes of the Monetary Policy Meeting on March 26, 1998.")

III. Decisions Related to International Finance

• Policy Board decision : Bridging loan facility to the Bank of Korea(Dec. 18, 1997)

  The Policy Board decides to provide the Bank of Korea with a bridging loan facility in the amount of 165 billion yen, until the second-tranche disbursements are made by the International Monetary Fund (IMF).

  Note: On December 4, 1997 the IMF decided to provide Korea with financial assistance of special drawing rights (SDRs) of approximately SDR15.5 billion (equivalent to approximately US$21 billion). The Bank received a request from the Bank of Korea to provide a bridging loan for the period between the first and second disbursements by the IMF, these disbursements being determined at SDR12.9 billion and SDR2.6 billion, respectively.
  On December 19, 1997, the Bank releases a public statement on this matter.

IV. Decisions Related to the Financial System

A. Resolution of Failed Financial Institutions

1. Delivery of Opinions to the Minister of Finance

• Policy Board decision : Opinion on the necessity of the business transfer of Sanpuku credit cooperative(Apr. 4, 1997)

  The Policy Board decides to deliver the opinion to the Minister of Finance that, with due regard to the current condition of Japan's financial system, it is necessary to transfer the business of Sanpuku credit cooperative to the Resolution and Collection Bank (RCB) with special financial assistance by the Deposit Insurance Corporation (DIC) in order to maintain the stability of the financial system.

  Note: On the same day, the Bank delivers the opinion to the Minister of Finance. The Management Committee of the DIC decides on the financial assistance on April 11, 1997, and the business transfer is made on April 21.

• Policy Board decision : Opinion on the necessity of the business transfers of Hanshin labor credit cooperative, Kita-kyushu credit cooperative, and Kanagawa-ken credit cooperative(Oct. 14, 1997)

  The Policy Board decides to deliver the opinion to the Minister of Finance that, with due regard to the current condition of Japan's financial system, it is necessary to transfer the business of (1) Hanshin labor credit cooperative to Hyogo-ken credit cooperative; (2) Kita-kyushu credit cooperative to Bank of Fukuoka; and (3) Kanagawa-ken credit cooperative to Bank of Yokohama; in each case with special financial assistance by the Deposit Insurance Corporation (DIC), in order to maintain the stability of the financial system.

  Note: On the same day, the Bank delivers the opinion to the Minister of Finance. The Management Committee of the DIC decides on the financial assistance on October 22, 1997, and the business transfers of Hanshin labor, Kita-kyushu, and Kanagawa-ken credit cooperatives are made on November 4, November 17, and November 25, respectively.

• Policy Board decision : Opinion on the necessity of the business transfers of Hanwa Bank, Tokai credit cooperative, and Toki credit cooperative(Dec. 26, 1997)

  The Policy Board decides to deliver the opinion to the Minister of Finance that, with due regard to the current condition of Japan's financial system, it is necessary to transfer the business of (1) Hanwa Bank to the Kii Deposit Management Bank; (2) Tokai credit cooperative to Ogaki Kyoritsu Bank; and (3) Toki credit cooperative to Juroku Bank; in each case with special financial assistance by the Deposit Insurance Corporation (DIC), in order to maintain the stability of the financial system.

  Note: On the same day, the Bank delivers the opinion to the Minister of Finance. The Management Committee of the DIC decides on the financial assistance on January 14, 1998, and the business transfers of Hanwa Bank, and Tokai and Toki credit cooperatives are made on January 26, February 9, and January 26, 1998, respectively.

• Policy Board decision : Opinion on the necessity of the business transfer of Tanabe credit cooperative(>Mar. 24, 1998)

  The Policy Board decides to deliver the opinion to the Minister of Finance that, with due regard to the current condition of Japan's financial system, it is necessary to transfer the business of Tanabe credit cooperative to Sakura Bank with special financial assistance by the Deposit Insurance Corporation (DIC), in order to maintain the stability of the financial system.

  Note: On the same day, the Bank delivers the opinion to the Minister of Finance. The Management Committee of the DIC decides on the financial assistance on March 30, 1998, and the business transfer is made on April 13.

  Note: The Minister of Finance requests, under Article 16, Paragraph 4 of the Supplementary Provisions of the Deposit Insurance Law, that the Bank give its opinion on the necessity of each of the business transfers, as each will entail financial assistance by the DIC in excess of the payoff cost ("special financial assistance").
  Article 16 of the Supplementary Provisions of the Deposit Insurance Law stipulates that:

  1. (1) If the DIC judges that the cost of financial assistance will exceed the payoff cost--that is, the cost of insurance payments--for a failed financial institution, it should report such judgment to the Minister of Finance (Paragraph 1);
  2. (2) If the Minister of Finance judges a merger, business transfer, or acquisition of stock for which the financial assistance has been requested to be indispensable to avoid serious disruption of the financial system, the Minister should acknowledge the necessity of such merger, business transfer, or acquisition of stock, and notify the DIC of the acknowledgement (Paragraph 2); and
  3. (3) In making the acknowledgement, the Minister of Finance may, when the Minister deems necessary, request the Bank of Japan to give its opinion (Paragraph 4).

  The Board considers in all these cases that the confidence of the depositors and creditors of other financial institutions might also be undermined if the failed credit cooperatives and banks were liquidated, rather than having their business transferred to other financial institutions, and that if deposits and other liabilities were not fully repaid. Therefore, the business transfers will be necessary to ensure the stability of the financial system.

2. Special Measures for Loans

• Policy Board decision : Special measures for loans on bills to Kyoto Kyoei Bank(Oct. 14, 1997)

  The Policy Board decides to implement special measures regarding loans on bills to Kyoto Kyoei Bank until a resolution scheme for the bank is put into effect.

  Note: Kyoto Kyoei Bank has faced severe business difficulties, and through a recent inspection by the Ministry of Finance of the bank's financial condition, it has become apparent that the amount of assets to be written off significantly exceeds its capital. With no prospect of the bank being able to extricate itself from the condition, relevant parties reached a basic agreement to transfer the bank's business to Kofuku Bank, on condition that financial assistance, including purchase of nonperforming assets, will be requested of the Deposit Insurance Corporation (DIC). To clarify management responsibility, the president of the bank will resign. Kofuku Bank will implement measures to enhance its capital base and to improve efficiency.
  The Bank releases a statement by the Governor on this issue.

• Policy Board decision : Special measures for loans on bills to Hokkaido Takushoku Bank(Nov. 17, 1997)

  The Policy Board decides to implement special measures regarding loans on bills to Hokkaido Takushoku Bank.

  Note: On September 12, 1997, Hokkaido Takushoku Bank announced the postponement of its planned merger with Hokkaido Bank, previously scheduled for April 1998, and disclosed a restructuring program including disposal of nonperforming loans, strengthening of the capital base, and improvement of management efficiency. However, after this announcement, the bank gradually lost market confidence, experiencing a sharp decline in its stock price and a substantial outflow of deposits. This, together with the cautious lending attitude of interbank market players, has made it impossible for the bank to fulfill overall funding requirements.
  Under such circumstances, the Bank is informed by Hokkaido Takushoku Bank that (1) it has become difficult for the bank to continue business operations; (2) the bank seeks to transfer its business to another bank to maintain its role as a financial intermediary in Hokkaido (the northern island of Japan), and in doing so, will request the Deposit Insurance Corporation (DIC) to purchase its nonperforming assets; and (3) all directors including the president will resign before the business transfer in order to clarify management responsibility.
  In view of Hokkaido Takushoku Bank's important role in the Hokkaido economy and in order to maintain the stability of Japan's financial system, the Bank believes that a resolution package must be worked out by the parties concerned in a way that the bank's financial function itself is maintained. The Bank considers that the outline of the resolution scheme should be as follows.

  1. (1) The business of Hokkaido Takushoku Bank will be transferred to North Pacific Bank ("Hokuyo Bank," hereafter NPB), a regional bank based in Hokkaido, and necessary cooperation from financial institutions in the Hokkaido region will be sought. Hokkaido Takushoku Bank will continue normal business operations until the business transfer is completed.
  2. (2) The NPB will assume only the sound assets and liabilities of Hokkaido Takushoku Bank. The DIC will provide necessary support, including the purchase of the bank's nonperforming assets. The capital of the bank will be appropriated first to cover losses arising from the nonperforming assets.
  3. (3) The resolution package will seek to separate the sound assets and liabilities held by Hokkaido Takushoku Bank in Honshu (the main island of Japan) and transfer them to other financial institutions to ensure stable management of the NPB.
     The Bank releases a statement by the Governor on this issue.

• Special measures for loans on bills to Tokuyo City Bank(Nov. 26, 1997)

  The Policy Board decides to implement special measures regarding loans on bills to Tokuyo City Bank.

  Note: Tokuyo City Bank has continued independent reconstruction efforts to deal with deterioration in asset quality and to improve poor business performance. However, amid falls in its stock price, a significant amount of deposits has been withdrawn and financing has become extremely difficult. In such circumstances, basic agreement has been reached on a transfer of business to Sendai Bank on the following premises: (1) a request be made to the Deposit Insurance Corporation (DIC) for financial assistance including the purchase of the bank's nonperforming assets; and (2) a part of assets and deposits be transferred to financial institutions within and outside of Miyagi Prefecture, including the 77 (Shichijushichi) Bank. In order to clarify management responsibility, the chairman and the president will resign.
  The Bank releases a statement by the Governor on this issue.

  The special measures are as follows:

  1. (1) Collateral item designated in Article 20, Section 2 of the Bank of Japan Law of 1942 but has not been deemed eligible by the Bank can be pledged as collateral under the following conditions:
     1. (a) Each collateral item will be appraised at not more than 80 percent of the market value (or the face value if no market value is available), taking into consideration its marketability and credit standing;
     2. (b) The applied official discount rate will be those for loans secured by collateral other than Japanese government securities, specifically designated securities, or bills similar in nature to commercial bills will be applied (0.75 percent as of the date of the decisions).
  2. (2) Should there not be sufficient collateral available even after application of (1), the Bank will, in accordance with the conditions mentioned below, extend loans on bills not secured by collateral as defined in (1) or by loans on deeds approved as collateral by the Minister of Finance on December 13, 1990 (No. 2669).
     1. (a) Amount: The minimum amount necessary for each bank to continue payment of funds, including repayment of deposits, determined with due regard to the liquidity position of each bank.
     2. (b) Period: The period deemed appropriate by the Bank for each bank.
     3. (c) Interest rate: The official discount rate applied to loans secured by collateral other than Japanese government securities, specifically designated securities, or bills similar in nature to commercial bills (0.75 percent as of the date of the decisions).

  Note: The Board considers that, until a resolution scheme for each bank is put into effect, provision of funds by the Bank is necessary to avoid a shortage of liquidity needed for the repayment of deposits, and to thereby maintain the stability of Japan's financial system.
  The Board, however, judges it unlikely that the loans can be secured by the collateral usually required by the Bank for loans on bills. Therefore, the Bank decides to apply the special measures.

3. Other Matters

• Policy Board decision : Loan extension to Fuji Bank for provision of funds to Yamaichi Securities(Nov. 24, 1997)

  The Policy Board decides, as an extraordinary measure, to extend loans to Fuji Bank under Article 25 of the Bank of Japan Law of 1942 in order for the bank to provide Yamaichi Securities with funds necessary for operations until the dissolution of the firm.
  The loans on bills will be treated as those to Yamaichi Securities secured neither by collateral stipulated in Article 20, Section 2 of the Bank of Japan Law of 1942 nor by loans on deeds approved as collateral by the Minister of Finance on December 13, 1990 (No. 2669). The terms of the loans will be as follows:

  1. (1) Amount: The minimum amount necessary to proceed smoothly with the closing down of business and dissolving of Yamaichi Securities, determined with due regard to its liquidity position.
  2. (2) Period: A period the Bank deems appropriate.
  3. (3) Interest rate: The official discount rate applied to loans secured by collateral other than Japanese government securities, specifically designated securities, or bills similar in nature to commercial bills (0.75 percent as of the date of the decision).

  Note: Yamaichi Securities faced declining profits after the burst of the "bubble" economy, and the loss of market confidence in the firm became more prominent in Japan and overseas from spring 1997, following downgrading by credit rating agencies and scandals involving sokaiya (corporate extortionists). In November 1997, Yamaichi Securities informed the authorities that there was a strong possibility that it holds a large amount of off-the-book liabilities. In such circumstances, Yamaichi Securities decided at a special board meeting to suspend its business operations as a step toward closing down its business and dissolving the firm.
  The direct cause of the firm's management troubles is the revelation of the large amount of off-the-book liabilities. However, because the firm conducts a wide range of business globally and has a large number of clients, it is extremely important to realize a smooth closure of the firm to ensure the stability of domestic and overseas financial markets.
  Therefore, the Policy Board considers that the Bank should provide funds in cooperation with the "main banks" of Yamaichi Securities to enable the firm to return client assets, settle outstanding transactions in an orderly manner, and withdraw from overseas activities.
  The Board considers that a loan extension by the Bank is necessary to fulfill the Bank's responsibility of maintaining the stability of the financial system, and confirms that this loan extension meets the four principles for the provision of central bank funds. The four principles are as follows:

  1. (1) There is a possibility that systemic risk will materialize should smooth closure be impeded, in view of the severe situation of Japan's economy and financial system and the extensive business of the firm;
  2. (2) Provision of the central bank's funds is indispensable to the smooth closure and dissolution of the firm, in that there are no other sources of funds;
  3. (3) The firm's closure and dissolution will prevent moral hazard; and
  4. (4) Financial soundness of the Bank will not be threatened since the firm is not considered insolvent, and the government will take adequate steps to establish a comprehensive resolution framework by legislating for the Securities Deposit Compensation Fund, enlarging the fund's financial base, and strengthening the fund's functions.
     The Bank releases a statement by the Governor on this issue.

• Policy Board decision : Governor's vote at a meeting of the Financial Crisis Management Examination Board (FCMEB)(Feb. 26, 1998)

  The Policy Board deliberates on the Bank of Japan Governor's vote at the forthcoming second meeting of the FCMEB. At the second meeting, a vote will be taken on the proposed rules for the injection of public funds to enhance the capital bases of financial institutions: namely, (1) the criteria for the injection of public funds; and (2) the essentials for the restructuring plans to be submitted by financial institutions.
  The Policy Board judges that, to prevent any loss of injected public funds, the criteria should rule out injection of public funds to financial institutions experiencing deterioration in business condition to a certain degree. The Board, however, considers that enhancing the capital bases of financial institutions will be in line with the objective of the Law on Emergency Measures for Stabilizing the Financial Function, which is to restore domestic and overseas confidence in the credit-creating functions of Japanese financial institutions and thereby maintain the stability of Japan's financial system and economy. As to the restructuring plans of financial institutions, the Board judges that plans should include adequate disposal of nonperforming loans and streamlining of business to prevent loss of injected public funds.
  The Board concludes that the proposed criteria and requirements are consistent with the above thinking of the Bank, and decides that the Governor should vote in favor of the proposal.

  Note: The FCMEB is a panel established within the Deposit Insurance Corporation (DIC) in accordance with the Law on Emergency Measures for Stabilizing the Financial Function, which came into effect on February 18, 1998. The Governor of the Bank of Japan is a member. The new law establishes a scheme for the use of public funds to strengthen capital bases of financial institutions. Specifically, public funds can be used to purchase, through the DIC's Financial Crisis Management Account, preferred stocks and subordinated bonds issued by financial institutions. (For details of the scheme, see "Notes" of the Policy Board decision on March 24, 1998.) The FCMEB has been working on the establishment of rules governing purchase.
  It is considered that the criteria for the purchase of preferred stocks or subordinated bonds must be established to ensure that a purchase will not be made for the purpose of rescuing individual financial institutions, but rather solely for the purpose of maintaining the stability of the financial system. Further, it is thought that issuer financial institutions must submit restructuring plans to ensure their solvency as well as the streamlining of their business operations.

• Policy Board decision : Terms and conditions of loans to the Financial Crisis Management Account and Special Account of the Deposit Insurance Corporation (DIC)(Mar. 24, 1998)

  The Policy Board decides the terms and conditions of (1) loans to the DIC's Financial Crisis Management Account under Article 11, Paragraph 2 of the Law on Emergency Measures for Stabilizing the Financial Function, which came into effect on February 18, 1998; and (2) loans to the Special Account under Article 20, Paragraph 2 of the Supplementary Provisions of the Deposit Insurance Law.
  The interim terms and conditions of the loans are as follows.

  1. (1) Amount: The minimum amount necessary in each account for the DIC's operations and repayment of existing loans (including redemption of bonds issued), not exceeding the limits determined by Cabinet orders pursuant to the respective laws.
  2. (2) Type of lending: Loans on bills.
  3. (3) Period: Loans to the Financial Crisis Management Account extended in the January-March quarter will be due on the first business day of the following August, those extended in the April-June quarter will be due on the first business day of the following November, those extended in the July-September quarter will be due on the first business day of the following February, and those extended in the October-December quarter will be due on the first business day of the following May; loans to the Special Account will be due with the following collection of special insurance premiums by the DIC, as was decided on September 6, 1996 for the former special accounts.
  4. (4) Interest rate: The official discount rate applied to loans secured by collateral such as Japanese government securities, specifically designated securities, or bills similar in nature to commercial bills, on condition that the loans will be guaranteed by the government, or secured by the Japanese government bonds delivered to the two accounts.

  Note: A "Financial Crisis Management Account" has been established at the DIC pursuant to the Law on Emergency Measures for Stabilizing the Financial Function. The government has delivered 3 trillion yen worth of government bonds to this account. The DIC is able to cash these bonds for the purpose of "financial crisis management operations," such as purchase of preferred stocks and subordinated bonds issued by financial institutions, until the end of March 2001. Further, the government has made available government guarantees worth 10 trillion yen to provide for the smooth financing of the Account. The DIC will delegate the purchase of preferred stocks and subordinated bonds to the Resolution and Collection Bank (RCB) and, accordingly, extend loans to the RCB to finance the purchases. When necessary for financial crisis management operations, the DIC is able to borrow funds from the Bank of Japan and private-sector financial institutions.
  A "Special Account" has been established at the DIC in accordance with the revision of the Deposit Insurance Law in February 1998, by merging the former "special account for ordinary financial institutions" and the "special account for credit cooperatives." To strengthen the financial base of the DIC, the government has delivered 7 trillion yen worth of government bonds to the Special Account. The DIC can cash these bonds to cover losses arising from the resolution of failed financial institutions. The government has also made available government guarantees worth 10 trillion yen to provide for the Account's financing for purchasing assets from failed financial institutions. When necessary for financial crisis management operations, the DIC is able to borrow funds from the Bank of Japan and private-sector financial institutions.
  Under the Law on Emergency Measures for Stabilizing the Financial Function and the Supplementary Provisions of the Deposit Insurance Law, the Bank is able to extend such loans to these accounts regardless of Article 27 of the Bank of Japan Law of 1942 and Article 43 of the Bank of Japan Law of 1997, which prohibits the Bank from conducting any business other than those stipulated by the Law.

B. Improvement of Payment and Settlement Systems

• Policy Board decision : The framework for real-time gross settlement (RTGS) over the BOJ-NET Funds Transfer System(Apr. 1, 1997)

  The Policy Board decides the pillars of the framework for restructuring the Funds Transfer System of the Bank of Japan Financial Network System (BOJ-NET) as follows.

  1. (1) Abolish designated-time settlement in principle and make RTGS the only settlement mode by the end of the year 2000; and
  2. (2) Provide intraday credit to cover a liquidity shortfall for individual participants on the following terms.
     1. (a) Intraday liquidity will be provided to all BOJ current account holders that apply for the liquidity facility.
     2. (b) Liquidity will be provided in the form of overdrafts which are to be repaid by the close of the business day. The Bank will extend the intraday credit within the value of eligible collateral submitted to the Bank.
     3. (c) Interest will not be charged on intraday overdrafts at the outset of the restructured system. If the provided intraday liquidity is not repaid by the close of the business day, a considerable penalty interest rate will be applied.

  Note: In the preparation of the framework, the Bank released a paper in December 1996 that outlined its proposal to restructure the BOJ-NET Funds Transfer System and requested comments from current account holders with the Bank, the administrators of private-sector clearing systems, and other parties concerned. Overall, the Bank received strong support for its proposal, and received a number of constructive comments and suggestions which proved invaluable in establishing the framework.

  On the basis of its December proposal and the comments and suggestions received, the Bank released on April 1, 1997 a framework for abolishing designated-time settlement and making RTGS the only settlement mode in the BOJ-NET Funds Transfer System ("The Framework for Restructuring the BOJ-NET Funds Transfer System").