Japan has taken another step toward cleaning up its banking industry by declaring the long-troubled Nippon Credit Bank (NCB) insolvent and putting it under state control. Prime Minister Keizo Obuchi said the decision was made after the government's financial watchdog determined that NCB was swamped with liabilities.

Such a move had long been advocated by financial analysts and the surprisingly fast action is expected to help restore confidence and demonstrate that the traditional "convoy" system to protect weak banks was over.

NCB is the second Japanese bank in two months to become state-owned under a plan to nationalise failing banks and revive its fragile financial system.

The nationalisation of NCB, which followed similar government action in October on the Long-Term Credit Bank of Japan Ltd, was inevitable to eliminate worries about the nation's financial system, government officials said. The bank had a total 3.74 trillion yen (£21 billion) worth of problem loans at the end of March and it suffered a capital shortage of 94.4 billion yen once it took the necessary loan loss charges, the government watchdog Financial Supervisory Agency said.

Obuchi said he was assured that the bank's deposits, debentures and inter-bank transactions will be fully protected.

"The government will continue to take all possible measures to protect depositors and others, to maintain order in the financial system and to stabilise financial markets both in Japan and abroad," the prime minister said.

But executives at Nippon Credit, set up in 1957 to finance Japan's post-war industrial revival, refused to give in and lodged a last-minute written appeal early yesterday insisting the bank had never been insolvent.

"We feel this government decision is extremely regrettable. The government's decision is extremely abrupt," bank president Shigeoki Togo said.

Togo said he would resign but insisted his bank was not insolvent and should not have been nationalised, although he admitted bad loans were hard to write off in the face of the country's worst post-war recession.

The news of NCB's demise was widely expected but some traders said it could hit Japanese banking shares today as investors look to who could be next.

NCB had hoped to take steps to boost its capital - such as a merger - but ultimately failed to find a suitor.