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Major Japanese Bank to Get Government Bailout - 2003-05-19

Japan's fifth largest bank is to get a government bailout after it admitted it does not have enough capital to stay in business. But despite more bad news in the debt-laden banking industry, there is no sign of panic among depositors.

At an emergency meeting, Prime Minister Junichiro Koizumi decided to rescue Resona Bank and place it under state control, saying it is necessary to prevent a system-wide financial crisis.

The government will throw a $17 billion lifeline to the beleaguered bank.

The bailout will raise the bank's capital-adequacy ratio, which has dropped below four percent, to the internationally-acceptable level of around 10 percent.

Despite the news, there were no lines of nervous depositors anxious to withdraw their savings as Resona opened its doors for the new week. One customer, in front of a Resona branch in Tokyo, said he is not worried because he knows his deposits are insured by the government.

Stock investors reacted differently. Shares of Resona lost 17 percent of their value Monday after massive sell orders at the opening bell. The stock was the day's volume leader with 100 million shares changing hands.

Market players also unloaded other banking shares, sending the key Nikkei index in the morning session below the psychologically important eight-thousand level. Analysts say investors are worried that more Japanese banks could face a similar plight.

But Chief Cabinet Secretary Yasuo Fukuda said he does not think the Resona crisis will lead to the failure of other lenders. The top government spokesman added that the bailout with public funds is needed to maintain a healthy financial system so that the bank can continue to make loans to industry.

Economics and Financial Services Minister Heizo Takenaka says the government is structuring the bailout in an unprecedented way, in part by giving the government common shares in Resona and voting rights on the board.

Resona Holdings, created this year by the merger of four regional banks, was forced to appeal for a government bailout because of difficulty in disposing of bad loans amid plunging stock prices.

The bank has announced that it will reduce employee wages by nearly one-third and slash jobs. The bank's two top executives will also step down to take responsibility for the mess.

The Resona rescue is being discussed at the two-day Bank of Japan policy meeting that began on Monday. Analysts say, however, they do not expect any major policy shifts. Most likely, some observers predict, the central bank will increase its reserve target to ensure the stability of Japan's financial system.