Fed Would Aid Japanese Banks in U.S. if Crisis Arose : Finance: Congressman says Washington has assured Tokyo that funds would be provided in exchange for T-notes.

The Federal Reserve Board, in the latest sign of U.S. concern about the fragility of Japan’s banking system, has assured Japanese authorities that if there were a financial crisis it would provide emergency cash infusions to Japanese banks operating in the United States in exchange for the U.S. Treasury securities they hold, according to House Banking Committee Chairman James A. Leach (R-Iowa).

The arrangement with the Japanese, discussed by Leach at a banking panel hearing Monday, reflects the worries that Treasury Secretary Robert E. Rubin and other U.S. officials have expressed in recent months about the risks to the global financial system posed by Japan’s banking woes.

The plunge in Japanese real estate and stock prices has left Japanese financial institutions staggering under an estimated $400 billion to $800 billion in bad loans, raising fears that a sudden withdrawal of deposits at one or two of the bigger banks could spread to other institutions and wreak havoc in financial markets.

As the U.S. central bank, the Fed generally stands ready to provide emergency funds to prevent financial panics from damaging the banking system, but it is unusual for the Fed to prepare specific plans for dealing with a crisis in a particular country.

Although the Bank of Japan, that nation’s central bank, would be expected to play the main role in staving off any crisis by using its enormous financial resources to provide Japanese banks with the yen they need, the Fed has agreed that it would also play a role by making sure that the U.S. subsidiaries of Japanese banks have the dollars they need to continue operating and paying obligations as they come due, Leach said.

Citing private briefings that he had received from the Federal Reserve Board and Treasury Department, Leach said at Monday’s hearing: “While our government does not expect an unmanageable situation to arise, it is prepared to cooperate fully with Japanese authorities to facilitate in any emergency liquidity for Japanese banks operating in the United States.” Liquidity refers to ready cash.

Fed and Treasury officials declined to comment on the matter.

In an interview Tuesday, Leach explained that should a crisis arise, the Fed would provide instant dollars to the U.S. branches of Japanese banks that suddenly found themselves unable to borrow the funds they need on the money markets. In return, the banks would hand over equivalent amounts in Treasury bills and bonds they currently own.

“What has been established is a very common-sense arrangement,” Leach said. “There is no implication whatsoever of American dollars being used in a loan,” as was the case in Washington’s bailout of Mexico earlier this year, he said.