The Financial Reconstruction Commission took over Tokyo-based Kokumin Bank after the bank conceded it could not restructure on its own.

Kokumin customers rushed to withdraw their money from the bank

"We deeply apologise for causing enormous trouble for our clients and shareholders," Kokumin Bank president Yokio Okonogi told an emergency news conference.

The Financial Supervisory Agency, another bank regulator, found last week that Kokumin had built up a huge capital deficit of 50bn yen ($413m), and warned it would be dissolved unless it came up with fresh funds.

It sparked on a run on deposits with frightened customers, fearing a collapse, withdrawing a combined 70bn yen ($578m) from the bank last Thursday and Friday.

Reforming fragile bank system

Japanese financial watchdogs acted under reforming legislation introduced last year to help prop up the country's ailing banking system which is crippled with bad debt.

The Bank of Japan will provide special loans to support Kokumin

It was designed to avert the threat of a general banking collapse following major failures like that of Long-Term Credit Bank of Japan Ltd and Nippon Credit Bank.

The government has pledged to protect all Kokumin deposits and the bank will continue operations under the management of three government-appointed administrators.

Meanwhile, the FRC will look for a private financial institution to take over Kokumin.

The bank's operations will be transferred to a public bridge bank if a buyer is not found and Kokumin's bad loans will be absorbed by the state-run Resolution and Collection Corporation.

The Bank of Japan will also provide special loans to guarantee Kokumin's operations.

'More on brink of collapse'

The FSA has recently been shifting the focus of its investigations from major banks and has been inspecting the books of Japan's 64 regional banks and 60 second-tier regional banks.

Analysts said the nationalisation of Kokumin, which had 745 employees as of the end of September, would not rock the nation's financial system.

But many said it could be a prelude to more failures at Japanese regional banks.

"Banking authorities will likely find more and more debt that regional banks had not disclosed, so probably more than 10 regional banks may turn out to have virtually negative equity," said Yushiro Ikuyo, a senior analyst at Commerz Securities.