Unofficial and Provisional Translation

Readers are advised to refer to the original Japanese text before quoting from this document.

Summery of the Report Regarding the Reform

of the Japanese Financial System

- The Financial System Research Council -

This financial system reform aims to contribute to the vitalization of the national economy by vitalizing the financial sector's intermediation and payment functions. For this purpose, a) establishing a market that properly reflect users' preference, and, b) supplying funds to growth industries for the next generation and overseas countries, and using personal financial assets efficiently, should be promoted.

To achieve these, the following tasks should be addressed, with users in mind, and implemented according to the schedule leading to the year 2001.

(1) Liberalizing and Diversifying Products, Businesses, and Organizational Structures

It is important that users are given a variety of choices and that various transactions are made in a highly competitive market, by drastically liberalizing and diversifying products, businesses, and organizational structures.

→ Each financial institution will have maximum ability to engage in unique businesses in which it has advantages to meet users' needs.

(2) Preparing Infrastructure and Rules for Markets and Transactions

In the process of liberalization, to promote vitality in transactions under market principles, it is necessary to prepare the infrastructure for markets and transactions, such as information disclosure, the accounting and legal systems, as well as to clarify rules.

Appropriate user protections should be promoted in line with permeation of the principle of users' taking responsibility.

Improvement of the inspection and supervisory systems, and the strengthening of penalties for false reporting should be considered.

→ International competitiveness and transparency as a financial market will be improved.

(3) Ensuring the Soundness of the Financial System

The soundness of the financial system is essential to implement this reform. Therefore, bad loans must be disposed of as soon as possible in the process of the reform.

→ Through the introduction of Prompt Corrective Action, financial institutions will be required to improve their management by taking responsibility in the early stage.

* It is very deplorable that scandals involving financial institutions have occurred often. It is necessary for financial institutions to restore trust as soon as possible, with the awareness of its social responsibility and public nature, by ensuring that corporate ethical standards are pervasively employed.

Main Items of the Reform and Time Schedule

(1) Liberalizing and Diversifying Products, Businesses, and Organizational Structures

a. Utilizing the Holding Company System

measures:

While allowing utilization of holding companies, measures necessary for depositor protection, such as preventative measures for harmful effects, limitations on the business scope of sister companies, and consolidated financial disclosure, should be taken by preparing such things as the legal systems.

time schedule:

The necessary legal framework should be prepared as soon as possible in line with the implementation of the revised Anti-Monopoly Law.

b. Transforming Loans into Liquid Forms, such as Asset Backed Securities (ABS)

measures:

The legal framework for Special Purpose Companies, that issue ABS, should be prepared.

time schedule:

Related bills will be submitted to the next ordinary Diet session.

measures:

The legal grounds for issuing securities based on money loan trust certificates should be established so that they may be distributed widely.

time schedule:

Related bills will be submitted to the next ordinary Diet session.

measures:

Permitting banks and other depository institutions to handle ABS in various stages should be considered.

c. Derivatives Transactions

measures:

Banks and other depository institutions should be permitted to deal in over-the-counter securities and commodities derivatives transactions, provided they do not engage in transactions in the underlying assets.

time schedule:

Related bills will be submitted to the next ordinary Diet session.

d. Securities Investment Trusts Sales

measures:

The introduction of the sales by banks and other depository institutions should be promoted.

time schedule:

Related bills will be submitted to the next ordinary Diet session.

measures:

Direct sales by investment management companies at the premises of banks and other depository institutions should be considered.

time schedule:

This will be implemented within the 1997 financial year.

e. Insurance Sales

measures:

Consideration should be as positive as possible, while taking the conclusion of the Insurance Council's deliberation into account.

f. Scope of Separate Subsidiaries' Businesses

measures:

Restrictions on the business scope of securities and trusts subsidiaries of banks and other depository institutions should be abolished.

time schedule:

This will be implemented in the latter half of the 1999 financial year.

measures:

Cross-sectoral entries between insurance companies, banks and other depository institutions or other financial businesses should be permitted.

time schedule:

This will be realized by the year 2001.

g. Abolishing Operational Regulations on Ordinary Banks in the Short- and Long-term Finance System

measures:

The issuance of bonds by ordinary banks should be permitted.

time schedule:

This will be implemented in the latter half of the 1999 financial year.

measures:

The Foreign Exchange Bank Law should be abolished.

time schedule:

Related bills will be submitted to the next ordinary Diet session.

h. Electronic Money and Electronic Payment Systems

measures:

Consideration of clarifying the legal status, promoting new entries, and protecting individual users, should be promoted, and necessary measures should be taken.

time schedule:

Examination of specific measures should be promptly progressed and necessary measures should be taken.

i. Diversifying Non-banks' Funding Sources

measures:

The prohibition on Non-bank lenders' issuance of bonds and CP, prescribed in the Regulatory Law for Loan Business and other laws and regulations, should basically be abolished.

time schedule:

Related bills will be submitted to the next ordinary Diet session, as necessary.

(2) Preparing the Infrastructure and Rules for Markets and Transactions

a. Financial Futures Transactions

measures:

Consideration of developing new products, improving the environment for transactions, and promoting investor protection measures should be conducted.

time schedule:

Spread transactions system on short-term Japanese yen interest rate futures will be introduced in the year 1998.

b. Short-term Money Market

measures:

Revision of market practices and introduction of the Real Time Gross Settlement system to BOJ-NET.

time schedule:

The RTGS system will be introduced within this century.

c. Protecting Users of Financial Institutions

measures:

Necessary measures should be taken while considering the introduction of an integrated consumer credit law.

time schedule:

Conclusions will be reached within the 1997 financial year, and necessary measures will be promptly taken.

measures:

Measures, such as the establishment of obligatory rules requiring explanation of non-deposit products to customers, should be taken.

time schedule:

This will be implemented within the 1997 financial year.

(3) Securing the Financial System's Soundness

a. Introducing Prompt Corrective Action

measures:

Prompt Corrective Action, a transparent supervisory method to secure banks' sound management, should be introduced.

time schedule:

PCA will be introduced in April 1998.

b. Promoting Reduction of Settlement Risk

measures:

Preparations of the payment system should be initiated to strengthen measures to reduce risks.

time schedule:

Bills related to Close-out Netting Agreements are targeted for submission to the next ordinary Diet session.


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