Thus, it was judged that an immediate legal liquidation would very likely pose a systemic risk. The Bank of Japan, therefore, decided to provide Yamaichi with an unlimited amount of liquidity to support the orderly closure of its business operations. However, because the disclosure of off-balance-sheet liabilities occurred suddenly and financial markets were unstable, there remained uncertainty about the value of Yamaichi’s net assets.
The premise of Bagehot’s rule is that the counterparty financial institutions are solvent so that they can submit good-quality collateral. Since this was not the case, it was all the more difficult for the Bank of Japan to decide the proper course.