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Closures rock Japan's banking system

TOKYO — TOKYO -- Japan's banking system suffered a major blow as regulators moved yesterday to close Hyogo Bank Ltd., the country's 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 the Ministry of Finance, said people familiar with the ministry's plan.

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The operations of Hyogo will be shifted to a new bank, which will be financed in part by the Hyogo Prefecture government, Japanese news reports said.

The governor of Osaka, where Kizu is based, said the thrift's operations will cease except for withdrawals. Kizu had unrecoverable loans of 600 billion yen ($6 billion), said Gov. Isamu Yamada.

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Regulators said Kizu's 1.2 trillion yen ($12.5 billion) in deposits will be protected and the thrift's operations shifted to another institution.

Finance Minister Masayoshi Takemura, Bank of Japan Governor Yasuo Matsushita and the heads of Hyogo and Kizu planned separate news conferences to assure nervous depositors that the banking system will survive.

The Japanese yen fell against the U.S. 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 vaults since the closure of Cosmo Credit Union, Tokyo's largest thrift, on July 31, Mr. 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 debts of around 60 billion yen left over from loans made in the late 1980s. In the year ended in March, it recorded a current loss of 10 billion yen as it wrote off some of the loans. Hyogo has 3.6 trillion yen in assets.

In addition to the exposure to loans to troubled land developers,observers say Hyogo Bank is saddled with a huge burden of nonperforming loans paid out to its nonbank financial affiliates. Hyogo's nonbank affiliates reportedly have borrowed a total of 1.47 trillion yen, of which 240 billion yen came from Hyogo Bank.

Its affiliates also reportedly owe more than 100 billion yen to Sumitomo Trust and Banking, Mitsui Trust and Banking, and Yasuda Trust and Banking.

To make matters worse, the Kobe earthquake tipped many more of the bank's loans into the nonperforming bin, the economic observers said.

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After the Jan. 17 earthquake, which killed more than 5,000 people, the bank suffered a rapid withdrawal of deposits by people who needed cash to rebuild their lives. Also, the bank's bad loans apparently swelled because many of Hyogo's customers are owners of small businesses in the Kobe area who lost their fortunes in the disaster.

The Japanese press has reported that the Ministry of Finance is orchestrating Hyogo's bailout by calling on the Bank of Japan, other private banks and even the super- market chain Daiei to help rescue the bank.

The collapse of Kizu and Hyogo comes as the Japanese financial system struggles through one of its worst crises this century. Government officials estimate that Japan's banking system 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, between 70 trillion and 100 trillion yen.

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

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

Authorities and analysts played down those fears, noting that the Cosmo failure was not followed by depositor runs elsewhere in the system and that the Kizu failure was not unexpected.


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