Ibaraki Shogin, one of dozens of "shogin" credit unions serving Korean residents in Japan, went belly up Friday, Financial Services Agency sources said.
Ibaraki Shogin asked the FSA to take measures to protect its deposits in accordance with the financial-system revival law, giving up attempts to rehabilitate itself.
The FSA plans to shortly declare the credit union, based in Mito, Ibaraki Pref., insolvent and send in government-appointed administrators, they said.
Under the law, the government is empowered to fully refund deposits at the lender on demand.
Ibaraki Shogin is one of 19 shogin credit unions that signed an agreement last month to merge into a new commercial bank around July.
The bank is intended to take over the assets and liabilities of failed shogin credit unions, including Osaka-based Kansai Kogin and Tokyo Shogin, two large credit unions that collapsed in December.
Shogin unions funnel credit mainly to businesses run by Korean residents loyal to Seoul.
The Association of Korean Credit Cooperatives (Kanshinkyo), whose membership comprises the 19 shogin credit unions, is leading efforts to set up the bank.
Ibaraki Shogin has suffered from mounting bad loans, the sources said.
It recently faced an FSA demand to increase its loan-loss provisions by an amount that would have caused it to slip into negative net worth, they said.
The credit union had a deposit base of 11.6 billion yen as of March 31, 2000, they said.
The South Korean government earlier expressed readiness to provide financial assistance to the commercial bank being eyed by the shogin credit unions.