Credit Bank of Japan Ltd. to the U.S. leverage-buyout group Ripplewood Holdings LLC, according to a source close to the transaction.
A spokesman for Ripplewood in New York confirmed that the company is "in discussions" with Japanese authorities but declined to elaborate.
According to the sources, Japan would sell Long-Term Credit Bank, which has more than $200 billion of assets, to New York-based Ripplewood for as much as $1.16 billion.
The deal would mark the first foreign ownership of a major Japanese bank, highlighting Japan's increasing need for foreign investors to help it bail out its troubled banking industry.
Ripplewood, which already runs a $430 million U.S. buyout fund, set up a separate fund specifically to bid for the Japanese bank. Among the investors in the Long-Term Credit Bank fund are Citigroup Inc., GE Capital Corp., ABN Amro Holding NV, and PaineWebber Group Inc.
The buyout firm is spangled with the biggest names in finance, including former Federal Reserve Chairman Paul A. Volcker, who is acting as an adviser. Others include Christopher Flowers, a former investment banker at Goldman Sachs Group Inc., and Masamoto Yashiro, former president of Citibank in Japan.
Ripplewood would pay $96 million for operating rights to the bank and make a $1.2 billion cash infusion, according to Bloomberg News. In exchange the government would inject $2.9 billion into the bank and contribute as much as $4.8 billion in loan-loss reserves.
In return for the government's contribution, Long-Term Credit Bank would not put ailing Japanese companies out of business. Doing so could jeopardize an economy that is just beginning to emerge from seven years of stagnation.
Timothy Collins, chief executive of Ripplewood, founded the firm in 1995 after managing the U.S. operations of Onex Corp., a Toronto-based equity firm.
"My personal impression is that this is a done deal, even though nothing official has been announced," said Reiko McCarthy, Japanese banking analyst at Moody's Investors Service. "It's a significant move, because it represents a break with previous regulatory and political practices, and because LTCB is a fairly large institution."
Long-Term Credit Bank was declared insolvent and taken over by the government last year, after loans on its books soured, many of which were leftover from Japan's real estate craze of the 1980s and early 1990s.
"It would be interesting to see them turn this around -- if they can -- and how long this will take," said David Smith, a portfolio manager for Newport Pacific Management in San Francisco. Mr. Smith, who buys Japanese stocks only, has steered clear of bank shares.
Ripplewood has not been a major player in the buyout world. It and its affiliates have made 35 purchases in the last four years, including an English muffin baker, an Atlanta car dealership, and the Weekly Reader, a children's magazine.
Japan's government has been talking to potential buyers of Long-Term Credit Bank since February. The bank had $231 billion in assets and $48 million of bad debt when it was nationalized last October. It was once a mainstay of Japan's economy, as one of the country's three large long-term lenders to major corporations.
The key to the deal could be Mr. Yashiro, the ex-Citibank official, who would be chief executive of the bank, said Scott Pardee, former chairman of Yamaichi Securities' U.S. division. "They would have to have a Japanese guy who knows the ropes and could relate to LTCB management."
James R. Kraus contributed to this story.