The regulatory regime applicable to banksi The Banking Act and the Financial Instruments and Exchange Act
The principal source of regulation for banks engaging in business in Japan is the Banking Act, to which all banks are subject. It regulates their corporate governance, banking business and capital adequacy as well as their principal shareholders and subsidiaries. The Banking Act also regulates holding companies that have banks as subsidiaries (bank holding companies).
The Japanese regulatory framework regulates commercial banking activities and investment banking activities separately. The Banking Act is, in principle, applicable only to the former (i.e., acceptance of deposits, provision of loans and transfer of funds: the core banking business). A large number of banks also engage in investment banking activities, which generally include securities and derivatives-related businesses. These activities are subject to separate restrictions (discussed in subsection iii), and these banks are concurrently regulated under the Financial Instruments and Exchange Act (FIEA) for this purpose. Some banks also have affiliated securities companies engaging in investment banking business; these companies are also regulated by the FIEA.ii Regulators
The principal regulator of the banking industry is the Financial Services Agency of Japan (FSA), whose authority to supervise banks in Japan is delegated by the Prime Minister. The Commissioner of the FSA also delegates a part of his or her authority to the directors of local finance bureaus in relation to local banks and the supervision of investment banking activities. On-site and off-site inspections of investment banking activities are performed by the Securities and Exchange Surveillance Commission. The Bank of Japan also has supervisory authority over banks, based primarily on its contractual agreements and transactions with them.
The regulator's powers as prescribed in the Banking Act include receipt of various reports, the ability to carry out on-site inspections (where a bank must, in practice, disclose any and all information it holds to the regulator), and the power to make orders of business improvement and suspension.iii Entry into banking industries
Two organisational structures are available to overseas banks for establishing a core banking business in Japan. One scheme consists of the establishment of a joint-stock company with limited liability in Japan as a subsidiary or affiliate in accordance with the Companies Act of Japan. This subsidiary or affiliate must obtain a banking licence from the Prime Minister of Japan, pursuant to the Banking Act (a local entity bank). The alternative consists of the establishment of branches of the foreign bank within Japan, and obtaining a foreign bank branch banking licence. For the foreign bank branch scheme, the opening of subsequent branches (which are also known as sub-branches) is also subject to prior approval by the FSA. The granting of the necessary licences and approvals is at the discretion of the relevant authority in each instance.
To engage in investment banking activities, such as securities and derivatives business, a bank must also be registered with the competent local finance bureau, pursuant to the FIEA. Registered banks are generally permitted to operate a wider range of derivatives and securities businesses, such as brokerage of government bonds and sales of unit trusts or non-discretionary investment advisory services; however, for historical reasons, banks are generally prohibited from engaging in certain categories of securities business, including brokerage and underwriting of corporate stocks and corporate bonds, and discretionary investment management services. To conduct these activities, banks must establish a subsidiary or affiliate that is a separate legal entity, and register it pursuant to the FIEA as a financial instruments business operator.
In this connection, the scope of business of a subsidiary or affiliate that a bank may have is restricted to certain financial and related businesses, but it has been expanded to some extent (to include fintech business) by an amendment of the Banking Act in 2016.iv Cross-border activities by overseas banks not having a branch
Overseas banks may not, in principle, enter into any part of the core banking business or investment banking business in Japan or with persons in Japan without establishing a branch and obtaining a banking licence as a foreign bank branch. Even where an overseas bank has a licensed foreign bank branch in Japan, it is generally understood that the other unlicensed overseas branches of the bank are prohibited from engaging in transactions, or with persons, in Japan.
In this regard, another regulatory framework – the foreign bank agency business – was implemented in December 2008, under which both overseas banks without a licensed foreign bank branch and the unlicensed branches of an overseas bank may conduct a core banking business with persons in Japan through either a local entity bank or a foreign bank branch of the bank acting as an agent or intermediary. Both options require the local entity bank or foreign bank branch to obtain separate approval from the FSA.