Deposit Insurance Corporation of Japan ARC 8th Annual Meeting & International Conference on January 18-20, 2010 in Goa Funding Mechanism in Japan Yosuke Kawakami Executive Director Deposit Insurance Corporation of Japan (DICJ) January 18, 2010

Deposit Insurance Corporation of Japan International Comparison - Funding - 1 1

Deposit Insurance Corporation of Japan Insured Banks Insured Financial InstitutionsNumberInsured Deposits (JPY billion) Banks City Banks 6229,688.6 (29.9%) Regional Banks 64193,291.8 (25.2%) Regional Banks 44 54,740.3 ( 7.1%) Trust Banks 22 38,099.9 (5.0%) Others 13102,016.2 (13.3%) Sub-Total149617,836.8 (80.5%) Shinkin Banks279113,842.3 (14.8%) Credit Cooperatives162 16,330.0 ( 2.1%) Labor Banks 13 15,336.3 ( 2.0%) Federations 4 4,018.8 ( 0.1%) Total607767,364.5 (100.0%) Number of Insured Financial Institutions and Insured Deposits by Financial Institution (End of March 2009) 2 2

Deposit Insurance Corporation of Japan Insured Deposits 3 3 Uninsured Deposits a. Deposits b. Installment savings c. Installment contributions d. Money in trusts with guarantee of principal (including loan trusts ) e. Bank debenture (custody products) and etc. a. Foreign currency deposits b. Negotiable certificates of deposits (NCD) c. Deposits in special international financial transaction accounts (Tokyo off-shore market accounts d. Deposits, etc., from the Bank of Japan (excluding treasury funds) e. Deposits, etc., from insured financial institutions (excluding those related to the investment of defined-contribution pension reserves) Deposits, etc., from the DICJ Anonymous bank accounts g. f.

Deposit Insurance Corporation of Japan Funding Channels Premium from insured banks Pre-funding (de-facto post-funding, as the general account is currently in deficit.) Flat premium (Differential premium can be adopted under the current legal framework.) External financing (Government guaranteed) Issue of DICJ Bonds (2 to 7 years) Borrowing from private financial institutions and BOJ (in principle, up to 1 year) Premium from insured banks Pre-funding (de-facto post-funding, as the general account is currently in deficit.) Flat premium (Differential premium can be adopted under the current legal framework.) External financing (Government guaranteed) Issue of DICJ Bonds (2 to 7 years) Borrowing from private financial institutions and BOJ (in principle, up to 1 year) 4 4

Deposit Insurance Corporation of Japan Insurance Premium 5 5 Premium rates were raised during the crisis, and has been kept at 0.084% on a weighted average basis. Premium rates were raised during the crisis, and has been kept at 0.084% on a weighted average basis. (Note) The rate from FY1996 to FY2001 includes a rate of special insurance premium (0.036%). From FY2002 onward, the rate is a weighted average of two different premium rates.

Deposit Insurance Corporation of Japan Reserves 6 6 Fund balance (general account) has been in deficit since the previous crisis, but the deficit is narrowing. Fund balance (general account) has been in deficit since the previous crisis, but the deficit is narrowing.

Deposit Insurance Corporation of Japan Funding in Extraordinary Situation Introduction of Special insurance premium (0.036%, from FY1996 to FY2001) Borrowing limit (government guaranteed) raised substantially during the crisis Use of Grant bonds (issued in FY1997 / FY2000, redemption completed at end FY2002) Cf. A deposit insurance system should have available all funding mechanisms necessary to ensure the prompt reimbursement of depositors claims including a means of obtaining supplementary back up funding for liquidity purposes when required. 7 7

Deposit Insurance Corporation of Japan Borrowing 8 8 Proportion of long-term financing has risen to secure stable funds. Proportion of long-term financing has risen to secure stable funds.

Deposit Insurance Corporation of Japan Pre-funding --- Pros and Cons (Advantages) Fostering depositor confidence Faster intervention (prompt payout) Avoiding pro-cyclicality (Disadvantage) Opportunity cost Cf. Extraordinary depositor protection should be replaced with limited- coverage deposit insurance in stages, as long as the system remains stable. For credibility, post-crisis insurance schemes need adequate ex-ante funding. (emphasis added) 9 9

Deposit Insurance Corporation of Japan Agenda in the future Possible issues for discussion when the fund balance (general account) returns to surplus include: Sufficiency (optimal size) of Deposit Insurance Fund Currently, Japan has no target level of DIF. No consensus on optimal size of DIF internationally. Appropriate premium rate setting Effective rate unchanged since FY1996 in response to the previous crisis. New rate (either flat / differential), on what rationale? 10

Deposit Insurance Corporation of Japan Possibility of Introducing Differential Premium Differential premium can be adopted under the current legal framework. Risk-based premium is, in principle, desirable in terms of supplementing market discipline.(…) Although the framework of a risk-based insurance premium should be studied at an early opportunity, the application of the framework is not feasible at this juncture. The Study Group discussed what options would be available when the condition of the financial system is stabilized and the time comes to Japan to consider the introduction of differential premium system. 11

Deposit Insurance Corporation of Japan Other issues DICJ invests surplus funds (funds other than general account) in safe & liquid market. JGB, government guaranteed bonds, highly rated municipal bonds, general secured corporate bonds, fiscal investment and loan institution bonds, etc. In Japan, no tax on premium / income on investment. 12

Deposit Insurance Corporation of Japan Thank you. Deposit Insurance Corporation of Japan (DICJ) ARC 8th Annual Meeting & International Conference on January 18-20, 2010 in Goa