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What are the principal governmental and regulatory policies that govern the banking sector?
The Financial Services Agency of Japan (FSA) says that the FSA’s mission is ‘to contribute to the national welfare by securing sustainable growth of national economy and wealth through achieving the following three sets of goals: (i) Financial stability and effective financial intermediation; (ii) Consumer protection and consumer benefit; and (iii) Market integrity and market vigor.’
Primary and secondary legislation
Summarise the primary statutes and regulations that govern the banking industry.
The Banking Law (Law No. 59 of 1981)
The primary statutes and regulations that govern the banking industry are the Banking Law and the regulations enacted under the Banking Law. The Banking Law covers the scope of businesses, capital adequacy requirements, accounting, licensing, loan limits, limitations concerning subsidiaries, major shareholders and bank holding companies, branches of foreign banks, and so on.
The Law Concerning Concurrent Business, etc, of Trust Business by Financial Institutions (Law No. 43 of 1943)
The Law Concerning Concurrent Business, etc, of Trust Business by Financial Institutions sets out regulations for banks that conduct trust business concurrently with their banking business.
The Deposit Insurance Law (Law No. 34 of 1971)
The Deposit Insurance Law governs the deposit insurance system and includes provisions regarding purchasing of deposits and treatment of failed banks.
The Financial Instruments and Exchange Law (Law No. 25 of 1948)
The Financial Instruments and Exchange Law applies to financial institutions, including banks, that conduct securities business.
The Insurance Business Law (Law No. 105 of 1995)
The Insurance Business Law applies to financial institutions, including banks, that act as insurance agents.
The Foreign Exchange and Trade Law (Law No. 228 of 1949)
The Foreign Exchange and Trade Law applies to financial institutions, including banks, that conduct foreign exchange transactions and engage in international transactions.
Which regulatory authorities are primarily responsible for overseeing banks?
The FSA is an affiliated agency of the Cabinet Office. The primary responsibility of the FSA is to inspect and supervise banks. Among others, the Inspection Bureau of the FSA conducts on-site inspections of banks to protect the best interests of consumers. The Supervisory Bureau of the FSA supervises banks by monitoring the soundness and appropriate management of the banks’ business to prevent problems related to their financial intermediation functions, payment and settlement functions, and so on.
The Bank of Japan (BOJ), the central bank of Japan, is responsible for overseeing payment systems and supervising banks through on-site examinations for the purpose of understanding the business operations and the asset status of the banks. The BOJ executes its responsibilities pursuant to the contracts it has with the banks.
Government deposit insurance
Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.
Deposits are protected by the Deposit Insurance System (DIS), operated by the Deposit Insurance Corporation of Japan (DICJ), which is a semi-governmental corporation established in line with the Deposit Insurance Law. Under the DIS, current deposits and other payment or settlement deposits are protected in full, and principal amounts and interests of deposits other than the above are protected if the principal amounts for such deposits are no more than ¥10 million per depositor at each financial institution. Any portion of such deposits in excess of that amount may be repaid based on the asset status of the failed financial institution (some amount may be cut off).
Neither the DICJ nor the FSA has the intention to maintain ownership interest in the banking sector; therefore, the DICJ will dispose the preferred shares, subordinated bonds and so on acquired for capital injections at a proper value that is hopefully above the acquisition value, when the soundness of the banks that received capital injections has improved and such disposition would not damage financial system stability.
Transactions between affiliates
Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.
The Banking Law provides for certain limitations on transactions between banks and their affiliates. Under the Banking Law, a bank and its affiliate (which is defined under the Banking Law as a ‘specified related person’, described below) are prohibited from engaging in a transaction based on terms that are disadvantageous to either party, in light of the ordinary terms and conditions of a similar transaction with an unaffiliated company. However, the amended Banking Law, enforced in April 2017, permits flexible application of this arm’s-length rule and allows exceptions to transactions between affiliate banks under their common holding company provided that their sound financial positions are ensured. This arm’s-length rule also applies to a bank’s transaction with a customer of its specified related person.
The ‘specified related person’ includes, without limitation:
- a subsidiary company of a bank;
- a major shareholder of a bank (as explained in question 21);
- a bank holding company (as explained in question 21);
- a subsidiary company of a bank holding company; and
- a bank agent for a bank.
What are the principal regulatory challenges facing the banking industry?
The FSA announced its 2017-18 ‘Strategic Directions and Priorities’ on 10 November 2017, which states that the FSA will encourage banks to realise the following matters:
- to establish sustainable business models (especially for regional banks);
- to address changes in the global economy and market environment; and
- to improve governance resilient to changes in the business environment.
Are banks subject to consumer protection rules?
Banks that sell financial instruments to consumers are subject to the Act on Sales, etc, of Financial Instruments (ASFI). The ASFI obliges the financial instrument providers to explain to the customer important matters such as risk for loss of principal at the time of the sale of a wide range of financial instruments including savings deposits, trusts, insurance, securities, securities derivatives, etc. Further, it stipulates an obligation to the financial instrument providers to set out and disclose its solicitation policy, etc. In the event that the financial instrument provider violates the duty of explanation and its customer incurs damages, the financial instrument provider bears liability for damages to the customer regardless of its negligence.
In addition, the banks will be required to provide proper explanation or information under the Banking Law and the Financial Instruments and Exchange Law (FIEL). The inducement of customers by unjustifiable means is prohibited under the Act against Unjustifiable Premiums and Misleading Presentations. The FSA is the competent authority of the Banking Law, the FIEL and the ASFI.
The Consumer Contract Act will be also applicable to the banking business. Pursuant to this Act, consumers may cancel any contract resulting from unjust solicitation, and if a contract contains any unjust contractual clause, that contractual clause itself will be invalidated.
As regards financial inspections on banks, the FSA conducts examinations on the development and establishment of customer protection management systems by bank management. The compilation of problem cases in financial inspections includes cases of inadequate customer protection when banks sell risky products, such as investment trusts or variable pension insurances to customers.
In what ways do you anticipate the legal and regulatory policy changing over the next few years?
The FSA’s 2017-18 ‘Strategic Directions and Priorities’ states that the FSA is trying to realise new supervisory approaches of substance, foresight and holisticism, as follows:
- From the Form to the Substance: ‘Focusing on whether minimum standards being formally met’ to ‘Focusing on whether high-quality financial services (best practices) are being provided’;
- From the Past to the Future: ‘Focusing on checking soundness at times in the past’ to ‘Focusing on whether sustainability of soundness are ensured in the long run’; and
- From Element by element analysis to Holistic analysis: ‘Focusing on responding to specific individual problems’ to ‘Focusing on whether responces to truly important problems are successful from the whole business point of view’.
Extent of oversight
How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?
The FSA supervises banks by both off-site monitoring and on-site inspections in accordance with the Banking Law, supervisory policies and inspection manuals.
Under the Banking Law, a bank must prepare and submit to the FSA an interim business report and an annual business report for each business year which describe the status of the bank’s business and property. If a bank has subsidiaries, etc, such bank must also prepare and submit the interim business report and annual business report on a consolidated basis. When the FSA deems it necessary to ensure sound and appropriate management of a bank’s business, the FSA may require the bank (and if necessary, its subsidiaries or a person to whom its business is entrusted) to submit other reports or material.
When the FSA deems it necessary, the FSA may conduct an on-site inspection by having its officials enter the bank’s premises, interview relevant personnel and inspect books, documents or other records. When necessary, the FSA officials may conduct a similar on-site inspection of the bank’s subsidiaries, etc, or a person to whom the bank’s business is entrusted.
The FSA is publishing the yearly Financial Monitoring Policy for supervision and inspection explaining the priority issues, in addition to the general guidelines for supervision and inspection manual.
The BOJ’s on-site examination is conducted by sending its staff to the banks’ premises and obtaining financial reports from the banks that have current accounts with the BOJ. The examination involves confirming:
- the quality of loans and other assets;
- the management of risks associated with borrowers’ credit standing;
- fluctuations in interest rates;
- foreign exchange rates and stock prices; and
- the reliability and accuracy of operations.
How do the regulatory authorities enforce banking laws and regulations?
If the FSA deems it necessary to ensure the sound and appropriate management of a bank’s business in light of the status of the business or property of such bank or the property of such bank and its subsidiaries, etc, it may instruct the bank to submit (or amend) a business improvement plan and, if and to the extent necessary, it may order the suspension of the whole or part of the bank’s operations for a specified period of time or may order the bank to deposit the bank’s property or to take other actions.
In relation to the capital adequacy requirements, certain actions may be taken as described in question 19. In addition, if a bank violates any laws or regulations, its articles of incorporation, administrative measures or disposition, or if a bank has committed an act that harms public interests, the FSA may order the suspension of the whole or part of the bank’s operations or order the removal of its management, or may revoke its banking business licence. The bank that violates certain laws or certain enforcement procedures of the FSA may be subject to criminal sanctions.
After conducting an on-site examination, the BOJ provides guidance and advice based on the findings of the financial and management conditions to ensure the soundness of the banks.
What are the most common enforcement issues and how have they been addressed by the regulators and the banks?
Upon its establishment in 1998, the FSA launched a policy of ‘ex post facto supervision with emphasis on rules’ in order to respond to urgent issues, such as problems with nonperforming loans. However, mechanically continuing such inspection and supervision methods merely centred on strict individual asset assessment and confirmation of compliance with laws and regulations would be detrimental. Furthermore, in responce to changes in the environment surrounding financial institutions, it is necessary to devise appropriate new inspection and supervision methods to encourage self-directed and diverse creative ingenuity by financial institutions themselves.
Therefore, the FSA has been working on reviewing the following inspection and supervision methods to date:
- ‘respecting the judgement of financial institutions as much as possible in assessing individual assets’;
- ‘promoting conversion to financing by business analysis, not excessive dependence on collateral or guarantees’;
- ‘voluntary improvement through raising questions and dialogue based on future issues’;
- ‘finding the best practices of financial institutions and providing information subsequently’; and
- ‘discovering issues surrounding financial institutions through dialogue with client companies of financial institutions’.
In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?
If the Prime Minister recognises that, unless certain measures are taken in respect of a failed bank that is unable to pay its debts using its assets, there may be extreme adverse effect on the preservation of credit orders in Japan or in the area where the bank operates its business, then measures will be taken for the DICJ to acquire all shares in such bank.
Although the applicable laws have changed and the relevant provision has been amended several times, measures’ predecessor was applied to the Long-Term Credit Bank of Japan and the Nippon Credit Bank in 1998 and to the Ashikaga Bank in 2003 pursuant to the provisions and laws applicable at that time.
Since the shareholders of a company (bank) with excessive debt have already lost their economic interests, the shares of stock of such shareholders may become void. The DICJ is able to fund the bank thereby protecting the whole amount of deposits. The DICJ must, at the earliest opportunity, merge the bank with another financial institution, transfer its business to another financial institution or transfer the shares to another financial institution.
There is another measurement for the purpose of overhauling the framework of orderly treatment of assets and liabilities of financial institutions, etc, to stabilise the financial system, where in the event that the Prime Minister gives specific approval that the prescribed measures should be taken, acknowledging the fact that otherwise it would bring considerable disruption to the financial market or other financial system. Under certain circumstances, the Prime Minister may order that the operation and the property of the financial institutions, etc, be managed by the DICJ when specific approval for specified type 2 measures has been given in respect of a financial institution, etc, with excessive debt or a suspension of payments (including threats).
What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?
When a bank is taken over by the DICJ, the FSA may request that the bank submit reports or materials regarding its business and financial status, and order the bank to prepare and submit a business plan and take such other measures as are necessary.
Are managers or directors personally liable in the case of a bank failure?
A bank taken over by the DICJ is required to file lawsuits and conduct other action to pursue the civil liability of directors, officers, and auditors of the bank under their official responsibilities. In addition, if a director, officer, or auditor of such bank believes that a crime was committed while they were fulfilling their duties, they must take necessary measures to initiate an accusation as regard to the crime. Managers and directors will be personally liable for their failure (if any) to perform their duties as managers or directors.
Describe any resolution planning or similar exercises that banks are required to conduct.
For the purpose of overhauling the framework of orderly treatment of assets and liabilities of financial institutions, etc, to stabilise the financial system, where the Prime Minister gives specific approval that the prescribed measures should be taken, acknowledging that otherwise it would bring considerable disruption to the financial market or other financial system, the following three types of resolution measures are prepared under the Deposit Insurance Law of Japan.
Type 1 measure
Financial institutions, subject to the above approval for the Type 1 measure, are able to (but are not obliged to) apply for capital injection from the DICJ. In this process, such a financial institution is required to submit a management reconstruction plan that will be examined and granted by the Prime Minister (the relevant authority is actually delegated to the FSA Commissioner). If the Prime Minister determines that the capital injection should be taken, then the management reconstruction plan will generally be disclosed to the public.
Type 2 measure
Insolvent financial institutions or financial institutions that are unable to repay all of their debts by its own property, subject to the above approval for a Type 2 measure, will be placed under supervision by the government aiming to merge with them or sell them to other financial institutions. Public funds may be provided in the process to enable the merger or the sales.
Type 3 measure
Banks, etc, that fall under insolvent financial institutions and are not able to repay all of their debts by their own property (only if it is impossible for them to avoid the above-mentioned disruption by implementing the Type 2 measure), all shares of such banks, etc, will be sold to the DICJ, the status of their assets and liabilities will be disclosed, the officers may be changed by the DICJ and may be required to submit reports, etc, pursuant to the order of the DICJ, the existing officers must be sued for their responsibility, and such banks, etc, are to be merged with, or sold to, the purchasing financial institution.
Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?
The new legal and regulatory capital adequacy requirements applicable to banks in Japan are generally prescribed parallel to the Basel III framework. The capital of a bank is classified into three tiers: common equity Tier 1 capital, other Tier 1 capital, and Tier 2 capital.
The target minimum standard capital adequacy ratio is set at 8 per cent, the minimum ratio for the Tier 1 capital ratio is set at 6 per cent, and common equity Tier 1 capital ratio at 4.5 per cent.
Banks are also required to maintain a capital conservation buffer, in addition to the minimum standard capital adequacy ratio set forth above, for the purpose of absorbing any threatened loss the bank may incur because of the fluctuations of the financial market and the economic conditions, among other capital buffers, starting from 2016, which will gradually be increased to 2.5 per cent in 2019. The countercyclical buffer will be also required to be maintained in the range of zero per cent to 2.5 per cent, which is also gradually implemented, and together with the capital conservation buffer, constitute the minimum consolidated capital buffer. For G-SIBs and D-SIBs, other buffer levels are set by the FSA in line with the Basel III framework.
Common equity Tier 1 capital primarily consists of:
- ordinary shares and warrants of ordinary shares;
- retained earnings; and
- other accumulated comprehensive income and other public reserve.
Other Tier 1 capital primarily consists of preferred shares other than the above, and preferred securities without step-ups (under certain conditions).
Tier 2 capital primarily consists of subordinated bonds and loans, etc (where there are five years or more until the first call date). Banks are not obliged to make contingent capital arrangements in Japan.
How are the capital adequacy guidelines enforced?
The capital adequacy requirements are enforced through off-site monitoring of the FSA. The FSA confirms biannually the status of capital enhancement through accounting interviews with the banks. The FSA may further confirm the bank’s evaluation system of capital, the bank’s analysis on how well its capital is being enhanced and its future capital policies through comprehensive interviews and management interviews.
Further, even before a bank actually becomes undercapitalised, the FSA may take preventive and comprehensive measures in order to further enhance the soundness of the bank. If the FSA finds that an improvement is necessary through the above off-site monitoring and interviews for maintaining the sound operation and appropriate management of the bank, the FSA may request the bank to submit reports and materials on the status of its operation and assets, or improvement plans, or both. In addition, if the FSA finds that there is a material problem, the FSA may issue a business improvement order.
In case the capital adequacy ratio of a bank actually becomes less than a target minimum standard capital adequacy ratio, then the FSA may take the actions set out in question 19.
What happens in the event that a bank becomes undercapitalised?
The level of undercapitalisation of a bank is classified into four categories and the actions to be taken by the FSA are stipulated for each level of undercapitalisation.
For a bank with international operations, the stipulated categories and actions that may be taken by the FSA are as follows:
- capital adequacy ratio of Tier 1 capital from ordinary shares, etc, ranging from 2.25 per cent to less than 4.5 per cent, Tier 1 capital adequacy ratio ranging from 3 per cent to less than 6 per cent, and the total capital adequacy ratio ranging from 4 per cent to less than 8 per cent would fall under category 1, in which case the FSA may order the bank to submit a business improvement plan including the measures for recapitalisation and order the bank to execute such plan;
- capital adequacy ratio of Tier 1 capital from ordinary shares, etc, ranging from 1.13 per cent to less than 2.25 per cent, Tier 1 capital adequacy ratio ranging from 1.5 per cent to less than 3 per cent, and total capital adequacy ratio ranging from 2 per cent to less than 4 per cent would fall under category 2, in which case the FSA may order the following:
- submission of a reasonable recapitalisation plan and execution of it;
- prohibiting or limiting the amount of dividend distribution or bonus payments to officers;
- ordering compression of total assets or ordering suppression of growth of total assets;
- prohibiting or limiting acceptance of deposits under terms that are less favourable to the bank determined on an arm’s-length basis;
- ordering downsizing of business operations in certain offices;
- ordering the closure of certain offices except for the head office; or
- ordering the taking of certain other necessary measures;
- capital adequacy ratio of Tier 1 capital from ordinary shares, etc, ranging from zero to less than 1.13 per cent, Tier 1 capital adequacy ratio ranging from zero to less than 1.5 per cent, and total capital adequacy ratio ranging from zero to less than 2 per cent would fall under category 2-2, in which case, the FSA may order the bank to execute measures for one of the following purposes:
- strengthening its capital;
- substantially downsizing its business operations; or
- merging with another bank or abolishing its banking business; and
- capital adequacy ratio of Tier 1 capital from ordinary shares, etc, less than zero, Tier 1 capital adequacy ratio less than zero, and total capital adequacy ratio less than zero would fall under category 3, in which case the FSA may order the bank to suspend all or part of its business operations.
In addition, even when the bank has cleared the minimum target capital adequacy ratio, if the bank is undercapitalised in terms of capital buffers, then the bank will be required to submit plans for restricting external capital outflow and the execution of it. The level of restriction required in the plan would depend on the level of how much the bank is undercapitalised in terms of the capital buffer. The restriction on external outflow means restriction on, for example, the following activities:
- dividend distribution from surplus;
- acquisition of its own shares;
- acquisition of its own warrants that can be included in the calculation of the Tier 1 capital from ordinary shares;
- distribution of dividend, payment of interest and repurchase or redemption towards the other Tier 1 capital procurement measures;
- payment of bonuses and similar property benefits to the officers and other key employees; and
- other activities similar to the above.
What are the legal and regulatory processes in the event that a bank becomes insolvent?
If the FSA determines that the bank is unable to repay all of its financial debts with its assets or that there is a possibility that the bank may suspend refunding deposits considering the conditions of its business or assets, then the FSA may order the bank to have its business and assets managed by a financial reorganisation administrator who will be appointed by the FSA concurrently with the issuance of order under the Deposit Insurance Law.
The financial reorganisation administrator has the sole power to represent the bank, operate its business and manage and dispose its assets. The DICJ may be appointed as financial reorganisation administrator. In principle, the financial reorganisation administrator is expected to end its duties within one year from the order by transferring the business of the bank to another bank, by merging the bank with another bank or by taking other measures as appropriate. This period may be exceptionally extended by one year with the approval of the FSA if a compelling reason exists.
Upon purchasing of business or merging with the bank, a financial institution that seeks the merger with the bank may apply for financial assistance from the DICJ. Such an application is subject to prior approval of the FSA. The FSA grants the approval only if the merger contributes to depositors’ protection, the financial assistance by the DICJ is essential for implementing the merger and the bank’s dissolution would be significantly detrimental to the smooth supply of funds and to the benefits of users in the region, or the field, that the bank operates its business. If necessary, the DICJ may decide to establish an acquiring bank to temporarily succeed the business of the bank.
Furthermore, if there is a possibility that failure of a bank causes an extreme adverse effect on the preservation of credit orders in Japan or in the area where the bank operates its business, public money may be injected in order to recapitalise the capital of the bank, provide financial assistance to protect the full amount of deposits as an exceptional treatment to the deposit insurance cap, or have the DICJ acquire all the bank’s shares. If the DICJ acquires all the bank’s shares, the DICJ must, at the earliest opportunity, merge the bank with another financial institution, transfer its business to another financial institution, or transfer the shares to another financial institution where, as a consequence, the bank will no longer be a subsidiary of the DICJ.
Insolvency procedures such as bankruptcy, civil rehabilitation, corporate reorganisation or special liquidation proceedings are also available.
Recent and future changes
Have capital adequacy guidelines changed, or are they expected to change in the near future?
The capital adequacy guidelines in Japan have changed in line with Basel III, where the amendments have already been enacted as set out in question 17, and will be fully implemented by 2019.
Ownership restrictions and implications
Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?
In general, both entities and individuals may own a controlling interest in a bank. However, if it is a company established under Japanese law, only a stock corporation with a board of directors, a board or a committee of auditors and an accounting auditor may become a bank holding company, which is one of the categories of controlling a bank’s shareholders.
Under the Banking Law, there are two categories of controlling a bank’s shareholders: a bank’s major shareholder and a bank holding company.
A bank’s major shareholder is an entity or an individual that holds 20 per cent (or 15 per cent, if the shareholder is expected to have a material influence on the bank’s decisions regarding financial and business policies) or more of the voting rights held by all shareholders of such bank. For the purpose of calculating the holding ratio of such an entity or individual, the number of bank voting rights held by the entity or individual includes the bank voting rights held by certain relevant entities or individuals of the entity or the individual. The relevant entities or individuals include consolidated subsidiaries and affiliates and joint holders (meaning other entities or individuals that hold the voting rights of the bank and have agreed with the entity or individual to jointly acquire or transfer the bank’s shares or to jointly exercise their voting rights, etc, as the bank’s shareholders).
A bank holding company is a company that holds more than 50 per cent of the bank’s voting rights held by all shareholders, and the aggregate amount paid by the company to acquire all of its Japanese subsidiaries, including the bank (or other amounts recorded in its latest balance sheet), exceeds 50 per cent of the total assets of the company (deducting certain amounts such as intercompany loan between the company and its subsidiaries). For the purpose of calculating the company’s holding ratio, the number of bank voting rights held by certain relevant entities or individuals of the company is included in the number of voting rights held by the company.
Are there any restrictions on foreign ownership of banks?
There is no restriction on foreign ownership of banks under the Banking Law.
Implications and responsibilities
What are the legal and regulatory implications for entities that control banks?
The Banking Law prescribes the FSA’s supervision of major shareholders of banks.
When it is necessary to ensure the sound and appropriate management of a bank’s business, the FSA may conduct off-site monitoring (including requesting a bank’s major shareholder to submit reports and material concerning the operation and financial conditions of the bank) and an on-site inspection (including interviewing the bank’s major shareholder on the operation and financial conditions of the bank as well as the major shareholder and inspecting books, records and other items of the major shareholder) that are helpful for understanding the status of the business or property of the bank.
When and to the extent necessary, the FSA may order the major shareholder to submit (or amend) and execute an improvement plan and to take other necessary measures.
Further, when the major shareholder no longer satisfies any of the requirements set out in question 29, the FSA may order the major shareholder to take necessary measures to satisfy the requirements within a designated time frame.
Similar to bank major shareholders, bank holding companies are also subject to the supervision by the FSA under the Banking Law. Furthermore, the Banking Law limits the activities of bank holding companies to managing and controlling banks and other subsidiaries, which they are authorised to hold under the Banking Law, and activities incidental to it. Bank holding companies are limited to hold, as subsidiaries:
- securities companies;
- insurance companies
- companies engaged in certain other financial business;
- certain business related to finance; or
- certain other business relating to businesses and bank operations.
The purpose of this restriction is to ensure the soundness of operations of banks by eliminating risks that may arise from being involved in activities of non-financial industries. A bank holding company will be required to obtain prior authorisation from the FSA before acquiring a new subsidiary company, or when its existing subsidiary company changes its business. In addition, unless the Japanese company becomes the subsidiary of the bank holding company, the bank holding company or any of its subsidiaries may not acquire or hold shares of a Japanese company if their aggregate interests in the company exceed 15 per cent of the voting rights of the company, with certain exceptions.
Bank holding companies are required to satisfy the capital adequacy requirements and maintain adequate capital on a consolidated basis. Such requirements are in line with the capital adequacy requirements for a bank.
Bank holding companies must comply with the rule on a credit limit granted to an individual or entity. The credit limit rule is in line with those applicable to banks. Under this credit limit rule, the grant of credit extended by a bank holding company or any of its subsidiaries, etc, is capped at 25 per cent if the credit is extended to an individual or entity or at 40 per cent if the credit is extended to an individual or entity as well as its parent companies or subsidiaries. The bank holding company is required to establish a proper system for appropriately handling the business-related information and controlling conflicts of interest among its group financial institutions and appropriately monitoring their business operations in order to protect the interests of customers of the banking business and certain other businesses of such institutions. This requirement is in line with those applicable to banks.
Directors and statutory executive officers engaging in the ordinary business of a bank holding company may not engage in the ordinary business of any other company except where it is authorised by the FSA.
Bank holding companies must prepare and submit to the FSA annual and biannual reports that contain consolidated statements on the status of business and property of the bank holding companies and their subsidiaries, and so on.
What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?
For the primary duties and responsibilities of a controlling entity or individual, see question 29, and for the primary filing obligations, see question 30.
What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?
There is no criminal or administrative sanction set out under the Banking Law that would be imposed on an entity or individual that controls a bank in the particular event that it becomes insolvent.
Changes in control
Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?
If and when an entity or individual intends to become a major shareholder of a bank or a company intends to become a bank holding company, the relevant prior authorisation of the FSA must be obtained, except in certain cases such as where shares of such bank are acquired upon enforcement of a security interest or upon payment in kind. The definition of ‘control’ for this purpose is the same as that defined in question 21.
Documents required upon application for prior FSA authorisation would include, in the case of a bank’s major shareholder, a document showing a framework for holding voting rights of the bank, prospective cash inflows, and net present value of cash inflow for the next five years generated from holding those voting rights, a document showing results of stress tests and relationships that the major shareholder plans to have. In the case of a bank holding company, a document would be necessary showing prospective income and expenditure and consolidated capital ratio of the company and the bank for next three fiscal years, among other documents.
Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?
The FSA is generally receptive to foreign acquirers, provided that such foreign acquirers satisfy the prescribed requirements for major shareholders of banks or for bank holding companies (for such prescribed requirements, see question 30). The regulatory process for foreign acquirers under the Banking Law is not materially different from that for Japanese acquirers.
Factors considered by authorities
What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank?
When an application for the authorisation of a major shareholder is filed, the FSA examines the following factors:
- whether there is any risk that the applicant would impair the sound and appropriate management of the bank’s business in light of the source of acquisition funds and the purpose of the acquisition and other matters relevant to its holding of voting rights;
- whether there is any risk that the applicant would impair the sound and appropriate management of the bank’s business in light of the status of property, income and expenditure of the applicant and its subsidiaries; and
- whether the applicant sufficiently understands the public nature of the banking business, and has a sufficient social reputation.
When an application for the authorisation of a bank holding company is filed, the FSA examines the following factors:
- whether the applicant and its subsidiaries have a prospect of achieving a good balance of income and expenditure;
- whether the applicant and its subsidiaries have the adequate capital in light of the assets owned by them; and
- whether the applicant has sufficient knowledge and experience that will enable it to carry out the management and operation of a subsidiary bank appropriately and fairly in light of its human resources structure, and has a sufficient social reputation.
Describe the required filings for an acquisition of control of a bank.
When an entity or individual intends to become a bank’s major shareholder, or a company intends to become a bank holding company, an application for authorisation of it must be filed with the FSA.
When it acquires the prior authorisation of the FSA, both a major shareholder and a bank holding company must file a simplified notice with the FSA without delay, stating that it has become a major shareholder or a bank holding company.
In addition, the following events, for example, will trigger filing obligations of a major shareholder or a bank holding company.
In the instance of a major shareholder:
- it has acquired more than 50 per cent of the voting rights of the bank;
- it no longer holds the threshold percentage of becoming a bank’s major shareholder (20 per cent or 15 per cent, as applicable);
- it has been dissolved; or
- its majority of voting rights has been acquired by one shareholder.
In the instance of a bank holding company:
- it has ceased to be a holding company;
- it intends to hold a subsidiary;
- its subsidiary is no longer its subsidiary;
- it has been dissolved;
- it intends to change the capital amount; or
- more than 5 per cent of its voting rights has been acquired by one shareholder.
Although not directly connected with the ‘control’ issue, any entity or individual that has become a holder of more than 5 per cent of the voting rights held by all a bank’s shareholders or a bank holding company is required to submit written notice to the FSA within five business days. The extended deadline of one month is applicable for a foreign acquirer. Also, written notice must be submitted if the holding ratio subsequently increases or decreases by 1 per cent or more, or if there is any change in the information included in previously submitted notice.
Timeframe for approval
What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?
The ministerial ordinance under the Banking Law provides that the FSA must endeavour to evaluate and determine whether it should grant authorisation for a bank’s major shareholder or a bank holding company within one month (or two months for certain banks designated by the FSA) after the formal filing of an application for the authorisation. This timeframe does not include a preliminary evaluation upon request of the applicant (if any) or the time spent for correction, amendment or supplementation of the application or application documents. Despite this provision setting out a standard time frame, the actual period required for such authorisation may differ significantly from case to case.
Update and trends
Update and trends
Updates and trends
As stated in questions 6 and 8, in the ‘Strategic Points and Directions’, published in November 2017, the FSA emphasised the importance of creating a sustainable business model and maintaining financial health for regional banks, establishing key performance indicators for their finance intermediary capabilities, assisting in their reinforcement of human resources and valuable know-how, and pursuing a balanced relationship between government and non-governmental financial institutions. Reinforcement of overall governance and risk management capabilities were also stated as important parts of such strategic points.
For mega-banks, the FSA stressed, in its publication, the importance of flexibility and enhancement of their control and governance system in the rapidly changing global economy and to market environments, also by appropriately managing various risks involved in foreign exchanges, share prices, new financial instruments or technologies. The FSA publication also mentioned the reformation of FSA itself; its reinforcement of global networking among the financial supervisory authorities of various states, and early finalisation of Basel III, as well as the strong need for new and appropriate policies for fintech, cybersecurity and virtual currencies, among others.
In line with the publication, the FSA published the draft ‘Supervisory Approaches’ in December 2017 and proposed to transform its supervisory approach from a backward-looking and compliance check on formalistic or element-by-element basis to a forward-looking, substantive and holistic analysis and judgement, and to enhance the FSA’s own governance level, using feedback from outside the FSA to restructure its internal organisation and infrastructure, and reforming its human resources policy. For this approach, the FSA even proposed to repeal various inspection manual documents that have been heavily used in regular supervisory activities.