The Financial Services Agency (FSA) revised the Comprehensive Guideline for Supervision for Small- and Medium-Sized and Regional Financial Institutions (hereinafter referred to as ''Supervision Guideline for RFIs'') intended for small- and medium-sized and regional financial institutions (hereinafter referred to as ''RFIs'') on December 22, 2005.
The latest revision is primarily aimed at making the Supervision Guideline for RFIs properly reflect the ongoing changes in the environment and new awareness for supervisory purposes that are reflected in a wide range of provisions incorporated in the Comprehensive Guideline for Supervision of Major Banks, etc. (hereinafter referred to as ''Supervision Guideline for Major Banks''), which was newly established recently (October 28, 2005).
The revision process has involved examining the necessity and suitability of applying individual provisions of the Supervision Guideline for Major Banks to RFIs, while retaining the basic structure of the Supervision Guideline for RFIs and its status as an ''all-in-one-type handbook'' for Local Finance Bureau staff to supervise RFIs, which pursue business models that are different from those of major banks, focusing on region-based relationship banking. The revised Supervision Guideline for RFIs also reflects the views indicated in the Program for Further Financial Reform released on December 24, 2004, such as thorough implementation of user protection rules, improvement in the management (governance) of financial institutions, and enhancement of information disclosure.
As a result, the Supervision Guideline for RFIs, as a whole, has adopted a large number of provisions that require RFIs to be supervised in a manner identical to major banks, as a natural consequence for being deposit-taking institutions, including provisions for governance and general risk management. On the other hand, quite a few provisions have been deliberately excluded, such as requirements applied to major banks per se, provisions characterized as ''best practices,'' and provisions with a limited scope of application.
Specifically, new provisions to deal with violation of laws and regulations by executives and those relating to the screening for the approval of major shareholders have been introduced into the Supervision Guideline for RFIs, due to their growing importance in recent years. Furthermore, such provisions as those on the sharing of system networks among financial institutions, Internet banking, and system integration risk and project management have also been added in response to RFIs’ efforts in the area of system enhancement. Other additions include provisions on security measures for ATM systems, which aims at protecting users from financial crime, while allowing a certain degree of flexibility in the measures taken to ensure security.
Furthermore, a number of provisions have been incorporated to enhance and clarify the already-existing provisions; they include provisions on governance at companies with auditors and accompanying provisions to introduce regular interviews regarding internal audits, provisions to tackle organized crime, and provisions on the management of general risks concerning systems. Provisions regarding the appropriateness and sufficiency of information disclosure have also been enhanced, where the concept of the standard interest rate for determining restructured loans is clarified. Other than the above, substantial enhancements in crisis management systems have been sought by incorporating a part on business continuity plans (BCPs), while provisions on supervisory checkpoints with respect to various risks, provisions on coordination with the inspection branch, and provisions on the supervision of bank holding companies have been included in the Supervision Guideline for RFIs after being modified as necessary for RFIs and staff of the Local Finance Bureaus.
On the other hand, a number of provisions in the Supervision Guideline for Major Banks have not been brought into the Supervision Guideline for RFIs, as they are either unique to major banks or more like ''best practices,'' and are deemed not appropriate to be uniformly applied to RFIs, such provisions include those on the quality of required capital, improvement of profitability, and integrated risk management. Also, provisions such as those on governance at companies with overseeing committees, country risks and overseas operational control, and private banking have been deliberately left out from the latest revision due to their highly limited applicability at present, in light of the business and other features of RFIs. Instead, reference is made to the Supervision Guideline for Major Banks.

The major amendments are as described above. Most of these provisions became applicable on their announcement on December 22, 2005. The FSA will strive to reflect them smoothly in the actual supervision process.
As a reminder, since the revision has been made basically in response to the establishment of the Supervision Guideline for Major Banks, there are issues that require further study. Further revision will be performed, for example, to clearly define specific checkpoints of the provisions on the qualifications of executives of financial institutions (''Fit and Proper'' rule), develop rules and systems for risk management of financial institutions and structures for the inspection and supervisory authority towards the introduction of Basel II (new capital adequacy requirement), and develop provisions in response to the review on the bank agent system through the revision of the Banking Law.