To the Editor:

In response to the July 14 comment piece by Karen Shaw Petrou, "Time for Japan to Bite the Bullet and Shut Down Troubled Banks," the following information is provided:

Contrary to the statement in the article that "the U.S. bank regulators have created only one bridge bank, and it was erected not to protect borrowers but to minimize the cost of resolution to the FDIC," both the FDIC and the RTC made extensive use of the bridge bank concept.

The FDIC used bridge bank powers 10 times between 1987 and 1994 to create 32 bridge banks to which the FDIC placed 114 individual insolvent banks. The RTC made use of the bridge banks - referred to as "conservatorships" - to resolve 706 out of a total of 747 failed savings and loan institutions.

The bridge bank is a vital tool for government regulators to deal with insolvent financial institutions, particularly large complicated institutions. It allows regulators to eliminate stockholder equity, subordinated debt, and other problems with the institutions while keeping the franchise intact. The regulators can then market the franchise's deposits and assets in an orderly fashion.

The alternative of immediately placing a large, complicated, insolvent institution into receivership could create chaos, particularly with respect to managing subsidiaries and servicing the loan portfolios.

The transition from an open institution to a bridge bank is well controlled and virtually transparent to the institution's customers; the loan officers, branch managers, and other employees of the institution remain in place to continue to serve the needs of the customers.

While operating an institution as a bridge bank, the regulators can structure and market it in an orderly fashion. Importantly, the lending policies of the institution can be reviewed and changed as needed, and problem loans can be dealt with through appropriate disposition strategies by government agencies.

In summary, the bridge bank is an effective tool to resolve failed financial institutions in an orderly fashion. It has been used quite extensively and effectively in the United States, and indeed any large bank failure would invariably involve the use of a bridge bank.

Therefore, Japan's decision to employ the bridge bank strategy in the same way it has been used in the United States is not inconsistent with "biting the bullet" and dealing directly and forthrightly with its banking crisis.

William Seidman

Former chairman of the FDIC and RTC

Thomas P. Horton

Former RTC vice president and FDIC deputy director of asset management and resolutions

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