How and how much should depositors be protected? The Japanese case

The issue of depositor insurance has great immediacy and saliency in Japan today. After March 31, 2002 the government's unlimited guarantee of all deposits is scheduled to revert to 10 million yen (about $95,000) per depositor in each bank. Three major concerns will accompany this transition. First, a number of weaker banks will fail as the bad loan problems are gradually resolved. Second, if deposit insurance is limited, then weak banks will be made even weaker by depositor withdrawals in favor of deposits in stronger banks, or other financial assets, and hence are even more likely to fail. Third, until March 31, 2002 government financia1 aid to assist the merger of weak financial institutions can be greater than the amount of formal deposit insurance coverage. On March 23, 2000, the Center on Japanese Economy and Business and the Mitsui USA Foundation, co-sponsored a symposium to discuss whether Japan should develop and maintain market discipline on banks to reduce moral hazard, or to provide additional deposit insurance coverage, or other forms of guarantees for depositors and even banks. The symposium featured Professor Mitsuhiro Fukado of Keio University and Curtis Milhaupt, Fuyo Professor of Law and Director of the Center for Japanese Legal Studies at Columbia Law School. Frederick Mishkin, Alfred Lerner Professor of Banking and Financial Institutions, Columbia University, and David Weinstein, Carl S. Shoup Professor of the Japanese Economy served as commentators. The symposium was moderated by Professor Hugh Patrick. Excerpts of the presentations are presented below along with highlights of the intrapanel discussion