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Amendments to the Comprehensive Guidelines for the Supervision of Major Banks, etc. and Small- and Medium-Sized and Regional Financial Institutions
1. Introduction
On January 23, 2007, the Financial Services Agency (FSA) amended the Comprehensive Guidelines for the Supervision of Major Banks and Small- and Medium-Sized and Regional Financial Institutions (hereinafter referred to as ''Supervisory Guidelines'') regarding security measures for ATM systems and Internet banking. This article provides background to and an outline of the amendments to the Supervisory Guidelines.
2. Background to the Amendments to the Supervisory Guidelines
In March 2006, the FSA established the Study Group on Information Security together with the National Police Agency and financial organizations in consideration of the high incidence of ATM-related crime.
The Study Group, which was convened from March to June 2006, exhaustively gathered detailed information on the modus operandi of financial institutions' ATM systems and Internet banking and the foreseeable risks associated with the information security thereof, based on cases both at home and abroad, verified the effectiveness of various security measures, widely informed financial institutions of the study results, and published a summary of the results. The latest amendment to the Supervisory Guidelines was carried out for the purpose of reflecting the results of the study conducted by the Study Group.
Having invited public comments between December 15, 2006 and January 15, 2007 and responded to the questions received on January 23, the FSA decided to adopt the original draft as is.
3. Outline of Amendments
The latest amendments to the Supervisory Guidelines clearly set forth the supervisory aims, etc. with respect to security measures for ATM systems and Internet banking. The main amended provisions are as follows.
(1) Internal Control System
| - | Are financial institutions making efforts to develop the necessary systems pursuant to the study in accordance with the characteristics of their customers and operations? |
| - | Is the so-called plan-do-check-action (PDCA) cycle--consisting of risk analysis, formulation and execution of security measures and evaluation and review of the effectiveness of measures--functioning? |
(2) Ensuring Security
| - | Are financial institutions taking measures according to the characteristics of their customers and operations based on an understanding of the risks inherent to each stage, such as framework development point, during usage and when damage occurs? |
| - | Are financial institutions seeking to improve overall security rather than adopting ad-hoc measures on a case-by-case basis? |
| - | Have financial institutions selected appropriate personal identification methods commensurate with the risks of transactions, after verifying the robustness of individual authentication methods against various modus operandi (Internet banking)? |
(3) Response to Customers
| - | Do the financial institutions' policies involve taking measures to minimize damage in cases where customers need to be widely informed, such as developing frameworks to inform them promptly? |
| - | Are financial institutions taking measures to enable customers to check their transactions in a timely fashion so that customers themselves can quickly become aware of damage? |
| - | Have financial institutions developed systems to deal with customers in a sincere manner with a view to providing compensation for losses arising from unfair trading, in consideration of the objective of the Depositor Protection Law, in order to strictly enforce customer protection (Internet banking)? |
On January 25, 2007 the Financial Services Agency (FSA) released to the public the status of non performing loans as of the end of September 2006 (available in Japanese only).
A brief explanation of the status of non-performing loans as of the end of September 2006 is given as follows:
The balance of non-performing loans (NPLs) of all banks nationwide (on the basis of loans subject to disclosure under the Financial Reconstruction Law) totaled 12.3 trillion yen as of September 30, 2006, a 1.0 trillion yen decrease from 13.4 trillion yen as recorded on March 31, 2006.
The respective NPL ratios of major banks, regional banks and all banks nationwide were lower than on March 31, 2006, both of which represented record lows since data on loans subject to disclosure under the Financial Reconstruction Law became available to the public on March 31, 1999.
The NPL ratio of major banks has been steadily decreasing even after the fulfillment of the objective of halving the NPL ratio under the Program for Financial Revival (October 2002). The banks' NPL ratio decreased from 1.8% in the year ended March 31, 2006 to 1.5%.
The downtrend in the NPL ratio is also continuing at regional banks, where efforts to enhance region-based relationship banking functions are making steady progress. Their NPL ratio decreased from 4.5% in the year ending on March 31, 2006 to 4.4%.
The FSA will continue taking all feasible measures to prevent the NPL problem from recurring, by such means as properly identifying the risk management systems of financial institutions.
On January 30, 2007, the Study Group on the Internationalization of Japanese Financial and Capital Markets (chairperson: Kazuto Ikeo, Professor of Economics, Keio University) was established under the Sectional Committee on Financial System of the Financial System Council.
The Study Group was established in response to the need to position the financial services sector as a core industry that brings about further economic progress, in addition to further improving user convenience in the financial and capital markets--the basic infrastructure of the Japanese economy--for the purpose of increasing per-capita income, as we approach an era of dwindling population combined with an increasingly aging society with a declining birthrate, as well as globalization.
With such critical awareness, the Study Group will examine a wide range of issues from a broad perspective, addressing not only institutional aspects but also human resources, specialized services and infrastructure, in order to build internationally-appealing financial and capital markets.
In December 2006, the bill for the amendment of Money-Lending Business Control and Regulation Law, etc. was passed. With the amended law, the Japanese government intends to promote measures to solve the multiple debt problem in a comprehensive and effective manner by enhancing collaboration among relevant ministries and agencies (Article 66 of the amemdment).
In order to smoothly and effectively promote measures against multiple debts, the Task Force for Heavily-Indebted People (headed by Minister for Financial Services Yuji Yamamoto) was established by the Cabinet Secretariat in December 2006.
The Task Force will examine such topics as enhancing the counseling system and public safety net, strengthening financial and economics education, bolstering the executive framework including a thorough crackdown on loan sharks, and facilitating the enforcement of the amended law. It plans to formulate the ''Program to Remedy the Multiple Debt Problem (tentative name)'' this spring.
In this process, it is vital to maintain understanding of the current state of multiple debts as well as the underlying socioeconomic problems thereof, not to mention specialized knowledge and a broad perspective. Accordingly, the Expert Panel of Task Force for Heavily-Indebted People was established for the purpose of having experts discuss basic policies so as to serve as reference for studies conducted by the Task Force.
Expert members were selected primarily from among members of the Roundtable Conference on Moneylending System, etc. which had held a series of discussions on the multiple debt problem. Naoyuki Yoshino, Professor of Economics at Keio University, was again elected as chairperson. Director level staff of relevant ministries and agencies have also attended the Panel meetings and participated in discussions.
The Expert Panel has convened three times to date: Monday, January 29; Wednesday, February 7; and Thursday, February 22.
In the first meeting, the Financial Services Agency (FSA) provided an explanation of the amended Money-Lending Business Control and Regulation Law and issues, etc. to be studied by the Task Force following free discussion among members.
In the second meeting, staff in charge at Morioka City's Consumer Affairs Center, Iwate Prefecture's Consumers' Financial Co-op and the Iwate Bar Association, which are making progressive efforts with respect to the multiple debt problem, were invited to give a presentation on their efforts and then engage in discussion with the members.
In the third meeting, the Japan Federation of Solicitor Associations gave a presentation on their efforts in financial education, etc., which was followed by a discussion between members over the main opinions expressed in the previous two meetings.