Incubator Bank of Japan filed for bankruptcy on Friday, invoking the Japanese government's deposit protection scheme for the first time, The Wall Street Journal writes.

The bank, which holds 586 billion yen ($6.99 billion) in client deposits, was ordered by the Financial Services Agency to halt operations from 10 to 12 September as protection for its 110,000 depositors. The bankruptcy filing was attributed to lax lending practices leading to swollen bad loans, which exceeded assets by 180 billion yen in August 2010.

This is the first bankruptcy filed in Japan since 2003, when Ashikaga Bank announced its failure due to the recession. The government had then provided funds for rescue. In Incubator's case, all healthy assets will be transferred to a bridge bank within eight months, with the Deposit Insurance Corp acting as receiver. The Bank of Japan does not expect this filing to have any adverse impact on the Japanese banking system.

"The bank will continue to talk with potential investors including foreign investment funds from China and the US," Haruki Kohata, bank president, was quoted as having said.

The Deposit Insurance Law states that each deposit is entitled to a 10 million yen backup fund in principal plus interest. According to the FSA, about three per cent of Incubator's clients have over 10 million yen in savings, or 47.1 billion yen of total deposits.

Incubator Bank was created during the tenure of former prime minister Junichiro Koizumi. It has 114 branches across the country.