7.10.2002
Financial Services Agency

Measures to promote merger and consolidation of financial institutions with emphasis on regional financial institutions´╝łProvisional Translation´╝ë

In the policy statement on ''Measures for Developing Stronger Financial System'', announced on 12 April, 2002, the Financial Services Agency (FSA) stated that ''In order to strengthen the Japanese financial system, measures will be promoted to further strengthen the basis for increasing the profitability of financial institutions. At that time, with a view to ensuring smooth financing of small and medium sized enterprises (SMEs), measures will be explored expeditiously to promote consolidation of financial institutions, with regional institutions in mind''. The FSA has deliberated on this issue and has drawn up a draft on this issue, which follows.

1. Basic points of view

(1) As Minister Yanagisawa for Financial Services expressed in his statement of 1 April, 2002, ''With the removal of blanket deposit insurance, while depositors will come to select financial institutions based on their own judgment and responsibility, financial institutions will need to devote themselves more vigorously to their business management with a heightened sense of commitment in order to win depositors' confidence.'' Japanese financial institutions are currently engaged in management efforts in various ways.

It is an important challenge under the continuing severe economic circumstances, for the management of each financial institution to strive to further enhance profitability, in order to win depositors' confidence and to ensure their financial soundness in the medium- to long-term.

(2)

Considering these points above, the coming years will be an important period for Japanese financial institutions in their efforts to further strengthen their profitability and soundness through improving their credit assessment and risk management ability, providing attractive financial services and expanding their customer base. Efforts towards further strengthening of profitability and soundness could lead to increase of lending opportunities to SMEs through improvement of risk-taking ability. It is also expected to lead to revitalization of the real economy.

Although individual financial institution is expected to make efforts to enhance its profitability and soundness based on its own management decision and judgment, it is also appropriate for the government to take supportive measures which help such self-efforts, and thereby strengthen the financial system and revitalize our economy and finance.

(3)

Reorganization of financial institutions through merger and consolidation under way in recent years could provide an opportunity to reallocate management resources for selection and concentration of businesses and to secure necessary human resources, develop highly sophisticated systems and build up optimum management organization for provision of attractive financial services. Such reorganization is an effective means to further strengthen their profitability and soundness. Therefore, the FSA will take measures to facilitate mergers and consolidation, mainly targeting regional financial institutions that are more likely to receive merits from merger and consolidation.

2. Framework of measures

Based on the basic points of view above, the following concrete policy measures are to be taken, in order that merger and consolidation may be a serious option when each financial institution decides its management strategy based upon its prospects, which would in turn help to revitalize local economies.

Note: ''Merger and consolidation'' include, in addition to merger, transfer of business, acquiring a company as a subsidiary, and establishing a business group through a holding company structure.

Developing environment facilitating merger and consolidation

* Institutional constraints (such as legal procedures) in conducting merger and consolidation are to be reviewed with a view to deregulation.
* In addition, issues unique to cooperatives such as treatment of unsubscribe of shares outstanding are also to be reviewed to minimize constraints in the merger and consolidation procedures.

Measure to further strengthen financial system through improving profitability and soundness

* Fundamental framework
 
- The framework of measures will presume self-effort by the financial institutions concerned to further strengthen their profitability and soundness. It is expected that such self-effort leads to maintenance and strengthening of financial intermediation and contributes to revitalization of local economies.
- Measures will be designed with a view to requiring concomitant commitment on the part of financial institutions undergoing merger and consolidation to improve its management and business that reflect the nature of support measures provided.
- These measures are to be special measures with a time limit. (E.g. until there is sustained recovery of the economic environment surrounding financial institutions.)
* Based on the fundamental framework above, the following support measures are to be examined.
 
- Measure to reduce costs for merger and consolidation such as those related to systems integration.
- Measure to strengthen capital base to effectively carry out management strategy.

Others

Interim measures on deposit insurance will be considered so that movements of deposits will not undermine the objective of merger and consolidation.

3. Future steps

Based on the above-mentioned draft, the final draft on measures promoting merger and consolidation of financial institutions with emphasis on regional financial institutions will be drawn up, taking account of various views of the parties concerned.

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