a case of one major national bank acquiring an urban commercial bank. accumulating examples like these would help raise social awareness of how the financial stability is secured apart from the failure of individual banks. ( 3 ) deep understanding of the markets'reaction the third point is that it is important to pay attention to how financial markets respond to various policy measures for strengthening financial stability. when faced with financial stress, the resolution of financial institutions, the disposal of a large amount of nonperforming loans, and financial system reform are inevitable in order to protect and strengthen the financial system. however, the authorities'actions could cause strong reactions by the financial markets, which might have counter - productive effects on financial stability itself. let me introduce two cases from japan's experience. the first case is the default of sanyo securities in the interbank market in 1997. sanyo securities, a medium - sized securities firm, was not a depository institution, and the amount of the default was relatively small. nevertheless, the impact on the financial markets was significant. as this was the first - ever default in the japanese interbank market since world war ii, market participants became skeptical that those to whom they lent money might fail at any time. financial institutions showed strong reluctance to provide even short - term funds, and as a result a severe credit crunch occurred. actually, the financial crisis in japan was triggered by this small default event in the financial markets. the second case relates to what was called the japan premium. in 1997 to 1998, when a number of major financial institutions failed, japanese banks were required to pay a premium for raising funds in u. s. dollars. at that time, the japanese government was promoting deregulation of financial markets under the " big bang " reform programs and expediting the painful disposal of the nonperforming loans of financial institutions. market participants were concerned about whether or not financial institutions were able to withstand the drastic reform and the disposal. in this situation, the japanese banks, including even those with strong balance sheets, had to pay a premium of up to 100 basis points when raising funds in u. s. dollars. this was a heavy burden for the japanese banks, and some market participants were concerned about a spillover of the financial crisis in japan to the rest of the world, which fortunately did not happen. these examples show that financial markets sometimes react strongly to events when faced with financial stress. as a result, their reaction itself may amplify financial instability

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