Banking Regulation
(1) Bank Supervision and Inspection
In Japan, the Financial Services Agency (FSA) serves as a regulatory authority of financial institutions. In the past, the Ministry of Finance had responsibility for bank supervision and inspection, but the Ministry of Finance has no regulatory authority over financial institutions today.
Banks are corporations that have been established in accordance with the Commercial Code (presently, the Companies Act) and have obtained a license to conduct banking business in accordance with the Banking Act. The Banking Act empowers the Commissioner of the FSA to demand reports and materials concerning the business or financial conditions of a bank (including its agencies), to conduct on-site inspections at bank premises, to penalize misconduct (suspension of a bank's operations or revocation of its license) and to order a bank to hold a part of its assets within Japan. The Banking Act delegates detailed provisions necessary for its enforcement to cabinet/ministerial ordinances from administrative bodies. In order to provide interpretations of laws and ordinances related to financial institutions and guidance/standards for their application in actual business, guidelines and supervision policies have been issued.
Since 2007, the FSA has advocated the initiative of “better regulation.” This initiative is based on the view that enhancing the attractiveness and competitiveness of Japan’s financial and capital markets and enabling financial firms to provide high-quality financial services to meet user needs are major challenges for Japan’s economy and society. To this end, it is vital to improve the business and regulatory environment for both users and providers of financial services. “Better regulation” is one of the initiatives incorporated in the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets, which was published by the FSA in December 2007. The FSA supports the concept of the “optimal combination of rules-based and principles-based supervisory approaches,” as one of the pillars of the “better regulation” initiative, and subsequently published “The Principles in the Financial Services Industry” in 2008.
On the other hand, the Bank of Japan (BOJ) is not a regulatory authority per se under the Banking Act, but it conducts on-site examinations in order to maintain a safe and sound financial system. These examinations are based on bilateral agreements between the BOJ and financial institutions that have current accounts with it under the Bank of Japan Act. In practice, this includes all city banks, regional banks, regional banks Ⅱ and trust banks as well as foreign banks in Japan, shinkin banks, securities firms and money market dealers. The BOJ also conducts examinations of banks' overseas branches.
FSA Guidelines
| Guidelines | Outlines |
|---|---|
| Principles | The Principles are a set of key codes of conduct or general behavioral rules that are the underlying basis for statutory rules such as laws and regulations, and should be respected when financial firms conduct their business as well as when the FSA takes regulatory actions. |
| Inspection Manual | The Inspection Manuals were formulated as handbooks to be used by FSA inspectors when they inspect financial institutions. They put emphasis on self-assessment and risk management by financial institutions. |
| Guidelines for Supervision |
The guidelines states way of the thinking behind banking supervision, evaluation points for banking supervision and focal points for operational procedures at banks. |
(2) Other Principal Laws Concerning Banking
Banks are subject to various laws in addition to their primary law, the Banking Act. Other principal laws concerning banks are described below.
Other Principal Laws
| The Antimonopoly Act |
|---|
| The Antimonopoly Act stipulates that no bank or other corporation engaged in financial business may hold more than 5% of the outstanding shares of a domestic company. The Fair Trade Commission may, however, grant exemptions with prior approval when an acquisition of more than 5% of shares does not impair fair competition based on the Act’s guideline. Banks are given unconditional permission to own more than 5% of shares of financial companies. |
| Act on Limitation on Shareholding by Banks and Other Financial Institutions |
To reduce the market risks in conjunction with equity shares held by banks, the Act on Limitation on Shareholding by Banks and Other Financial Institutions established in 2001 stipulates that the equity shares held by a bank are limited to the amount equivalent to its equity capital (Tier 1). The Act required banks to reduce their shareholdings to that level by the end of September 2006 and established the Banks’ Shareholding Purchase Corporation (BSPC) to purchase banks’ shareholding outside of the market to prevent sales of banks’ shareholdings from exerting a negative influence on stock market prices. (BSPC purchased shares of 1,587 billion yen during the purchase period from 2002 through September 2006. With the occurrence of the global financial crisis, the BSPC resumed purchase operations in March 2009.)
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| The Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Laws |
| The Japanese Government has required Japanese financial institutions, etc. to identify and verify customers under the Act on Prevention of Transfer of Criminal Proceeds and the Foreign Exchange and Foreign Trade Act, as part of countermeasures against money laundering activities and the financing of terrorism. Under these circumstances, banks will identify and verify customers when they open a new account and/or perform large cash transactions, domestic cash transfers of more than 100,000 yen and overseas remittances, etc. Banks are also required to report transactions that are suspected of being related to criminal proceeds by the Act. |
| The Financial Instruments and Exchange Act |
| The Securities Exchange Act was revised in June 2006 and reenacted as a new law under the name of the Financial Instruments and Exchange Act, in order to provide a cross-sectoral scheme for customer protection regarding financial instruments with strong investment characteristics. The Act went into effect in September, 2007. Rules of sales and solicitation for customer protection have been also established across sectors, and thereby the regulations for protecting customers in transactions of financial instruments that are not directly regulated by the Act, such as foreign currency deposits, derivatives-embedded deposits and variable insurance, were also established by revising the relevant laws such as the Banking Act. As a result of revisions made to the Financial Instruments and Exchange Act in June 2009, a financial ADR system was established and financial institutions are now required to use a designated dispute resolution institutions. |
| The Depositor Protection Law |
| The full name of the Depositor Protection Law is the Act on Protection, etc. of Depositors and Postal Saving Holders from Unauthorized Automated Withdrawal, etc. Using Counterfeit Cards, etc. and Stolen Cards, etc. The Law was enacted in 2005 and enforced from February 2006. It was made to cope with the frequent occurrence of damages caused by counterfeit/stolen cash cards which depository institutions such as banks and postal savings issue. The Law obliges these financial institutions in a certain case to compensate damages that depositors suffer when a cash card is counterfeited or stolen by an unidentified person and bank deposits or postal savings are withdrawn illegally from ATMs. |
| The Deposit Insurance Act |
| The Deposit Insurance Act defines that deposits are protected in the case of a bank failure. “The Payment and Settlement Deposits” (current deposits, non-interest bearing ordinary deposits, etc.) that satisfy three conditions (bearing no interest, redeemable on demand and providing normally required payment and settlement services) are fully protected. The other deposits, mainly time deposits, are protected up to a maximum principal of 10 million yen including interest per depositor per financial institution. The insurance premium rates for fiscal 2009, based on which the insured financial institutions pay in insurance premiums to the Deposit Insurance Corporation of Japan, are 0.107% for Payment and Settlement Deposits and 0.081％ for general deposits. |
