I  Basic Concepts concerning Financial Conglomerates Supervision

I-1  Definition of Financial Conglomerates

''Financial Conglomerates'' refer to financial conglomerates set forth in Article 8, paragraph 4, item 1 of the Financial Services Agency Organization Rules (hereinafter referred to as ''the Rules''). More specifically, they are categorized into the following four groups.

(1)  Financial Holding Company Group

''Financial holding company group'' refers to a corporate group set forth in Article 8, paragraph 4, item 1(d) of the Rules in which a financial holding company (Note 1) serves as the management company (Note 2).

  • (Note 1) ''Financial holding company'' refers to a holding company that falls under one or more of the following categories: ''Bank Holding Company'' set forth in Article 2, paragraph 13 of the Banking Law; ''long-term Credit Bank Holding Company'' set forth in Article 16-4 of the Long-term Credit Bank Law; ''Insurance Holding Company'' set forth in Article 2, paragraph 16 of the Insurance Business Law; ''Small-claims and Short-term Insurance Holding Company'' set forth in Article 272, paragraph 37-2 of the said Law; or a holding company that owns, as a subsidiary, a securities firm set forth in Article 59, paragraph 1 of the Securities and Exchange Law (a holding company set forth in Article 9, paragraph 5, item 1 of the Law relating to Prohibition of Private Monopoly and Methods of Preserving Fair Trade), and has subsidiaries (referring to subsidiaries set forth in Article 8, paragraph 3 of the Rules Concerning Terms and Forms to Be Used in, and Method of Preparation of, Financial Statements, etc.) engaged in at least two different types of the following businesses: banks (including long-term credit banks), insurance companies (including small-claims and short-term insurance businesses), securities firms, etc. (securities firms, securities investment advisers and investment trust management companies) (hereinafter referred to as ''financial institutions'').

  • (Note 2) ''Management company'' refers to a company (including corporations other than companies) managing the operations of a financial conglomerate that corresponds to either ''financial holding company,'' ''de-facto holding company,'' ''financial institution parent company'' or ''foreign holding company, etc.'' Companies other than the management company within the group are called ''group companies''.

(2)  De-facto Holding Company Group

''De-facto holding company group'' refers to a corporate group set forth in Article 8, paragraph 4, item 1(d) of the Rules in which a de-facto holding company (Note 3) serves as the management company.

  • (Note 3) ''De-facto holding company'' refers to a company that does not correspond to a Financial Holding Company, and is a non-financial institution whose subsidiaries are financial institutions that engage in at least two different types of the said businesses.

(3)  Financial Institution Parent Company Group

''Financial institution parent company group'' refers to a corporate group set forth in Article 8, paragraph 4, item 1(d) of the Rules in which a financial institution parent company (Note 4) serves as the management company.

  • (Note 4) ''Financial institution parent company'' refers to a company that corresponds to one of the types of financial institutions whose subsidiaries are financial institutions that engage in types of the said businesses that are different from its own.

(4)  Foreign Holding Company, etc. Group

''Foreign holding company, etc. group'' refers to a corporate group set forth in Article 8, paragraph 4, item 1(e) of the Rules in which a foreign holding company, etc. (Note 5) serves as the management company.

  • (Note 5) ''Foreign holding company, etc.'' refers to a corporation whose head office or principal place of business is in a foreign country and owns financial institutions in the form of subsidiaries or branches in Japan, and the corporation and its subsidiaries in Japan or in a foreign country are financial institutions engaged in at least two different types of the said businesses.

(Reference)

Financial Services Agency Organization Rules (Ordinance No.81 of Prime Minister's Office, 1998)

Article 8

  • 4. The Financial Conglomerate Office shall be in charge of the following affairs under the jurisdiction of the Supervisory Coordination Division.

    • i. Matters relating to the general coordination of the supervision process targeted at entities referred to in (a) through (c) below (referred to as ''banks, etc.'' in this paragraph) that constitute a financial conglomerate (refers to a corporate group set forth in (d) or (e) below, hereinafter the same).

      • (a) An entity engaging in banking business

      • (b) An entity engaging in insurance business

      • (c) An entity engaging in securities business, investment trust management business or investment advisory business (referring to investment advisory business set forth in Article 2, paragraph 2 of the Law Concerning Regulation, etc. of Investment Advisory Business Relating to Securities (Law No.74, 1986))

      • (d) A corporate group consisting of entities referred to in (1) and (2) below (including entities referred to in (3) or (4), if any)

        • (1) A corporation whose head office or principal place of business is in Japan, and the corporation and its subsidiaries (referring to subsidiaries set forth in Article 8, paragraph 3 of the Rules concerning Term and Forms to Be Used in, and Method of Preparation of, Financial Statements, etc. (Ordinance of Ministry of Finance No.59, 1963, referred to as ''Rules Concerning Financial Statements, etc.'' in (3)), hereinafter the same) include at least two entities referred to in (a) through (c) above.

        • (2) A subsidiary of the entity referred to in (1).

        • (3) An affiliate of the entity referred to (1) (referring to affiliate set forth in Article 8, paragraph 5 of the Regulations Concerning Financial Statements, etc., same as in (e)(3)).

        • (4) Other than the entities referred to in (1) through (3), a company in which directors or employees who perform internal control operations are the same as the entity referred to in (1) or its subsidiary bank, etc.

      • (e) A corporate group consisting of the entities referred to in (1) and (2) below (including entities referred to in (3) or (4), if any).

        • (1) A corporation whose head office or principal place of business is in a foreign country, owns banks, etc. in the form of subsidiaries or branches in Japan, and the corporation and its subsidiaries include at least two entities referred to in (a) through (c) above.

        • (2) A subsidiary or branch in Japan of the entity referred to in (1).

        • (3) An affiliate of the entity referred to (1).

        • (4) Other than the entities referred to in (1) through (3), a company in Japan in which directors or employees who perform internal control operations are the same as the entity referred to in (1), or a bank, etc. which is its subsidiary or branch in Japan.

    • ii. Matters relating to the oversight of affairs concerning the formulation of guidelines for the supervision process targeted at banks, etc. that constitute a financial conglomerate

    • iii. Matters relating to the planning, formulation and promotion of basic policies for matters requiring general processing for measures associated with the supervision process targeted at banks, etc. constituting a financial conglomerate (including risk management measures for operations or assets of a financial conglomerate)

I-2  Purpose and Methods of Supervision

(1)  Purpose of Supervision

Japan has adopted a single-business scheme in which banks are exclusively engaged in banking business, insurance companies in insurance business, and securities firms in securities business. However, with the lifting of the ban on the mutual business entries through subsidiaries in respective business fields as a result of the financial reform in 1993, the lifting of the ban on financial holding companies and the development of regulations concerning subsidiaries by the Financial System Reform Law in 1998, the present financial system in Japan is undergoing conglomeritization and other new developments.

Every group within the so-called four major banking groups has a securities firm and trust bank under the holding company system with its bank forming its core. In addition, some groups other than the four major banking groups have banks and insurance companies within their groups, whereas some securities firms or insurance companies form groups with financial institutions which are engaged in different types of business. Thus, groups encompassing different types of business are widely observed, and furthermore, foreign financial institutions conducting business in Japan often take the form of conglomerates having a bank, insurance company and securities firm within their groups. In light of these emerging trends, it becomes necessary to clarify from what standpoints administrative financial supervision shall be organized.

Even if a business complex consisting of financial institutions engaged in different types of business is formed, respective group financial institutions are independent entities and required to ensure their own financial soundness and enhance customer protection and provide better services under the principle of self-responsibility and market disciplines. The first and foremost goal of administrative financial supervision is to ensure the financial soundness and operational appropriateness of group financial institutions, and through which to ultimately ensure the soundness of the financial system as a whole and proper financial functions.

Accordingly, insofar as there exists no concern about the soundness of individual financial institutions or the financial system as a whole, it is a matter of business judgment of individual financial institutions under the principle of self-responsibility to adopt what form of business management in terms of their business development, which will be basically respected by financial authorities, and the financial authorities will not opt to take the initiative for encouraging conglomeratization or on the contrary to curbing conglomeratization. As far as the financial supervisory authorities are concerned, it is deemed important to identify the unique risks arising in connection with conglomeratization and properly cope with them from the standpoint of ensuring the soundness and appropriateness of financial institutions.

On one hand, financial conglomeratization may help strengthen the business structure of financial institutions and improve the quality of services. On the other hand, new risks associated with the grouping of companies may surface. For example, it has been pointed out that among the risks associated with financial conglomerates are inefficient business operations resulting from the complex organizational structures, occurrence of conflicts of interest, increased inducements for tie-in sales, intra-group risk contagion, risk concentration and so on.

As discussed above, the basic goal of financial supervision is to ensure the soundness and appropriateness of individual, group financial institutions. However, the presence of these risks may make it impossible to ensure the financial soundness and operational appropriateness of the group as a whole by solely pursuing the soundness, etc. of individual financial institutions, and as a result, it may effect the group financial institutions and the financial system as a whole. Consequently, for the purpose of enabling individual financial institutions or the group to appropriately cope with the foregoing risks associated with financial conglomerates, it is important for financial authorities to fully grasp the actual state of affairs concerning the management system of the group as a whole, and the financial soundness and operational appropriateness as a group, in accordance with the focal points described in this Guideline and take timely and appropriate supervisory measures as necessary.

(2)  Supervision Techniques

In the event that any concern arises as to the governance system, financial soundness and operational appropriateness of a financial conglomerate as a group in connection with the supervisory focal points described in this Guideline, in-depth hearings, concerning the causes and remedial measures, with a management company, group financial institutions or other group companies shall be conducted, and in cases where necessary, reporting pursuant to applicable laws and regulations shall be requested, among others measures, to urge effective improvements. Furthermore, in cases where it is deemed that there exists a serious concern about ensuring the soundness of group financial institutions, business improvement orders or other administrative action shall be taken pursuant to applicable laws and regulations.

(3)  Focal Points

Financial conglomerates may vary in form, and so do the characteristics of risks and the risk contagion process of each group. Consequently, the management system of each group and the roles of management companies have varied characteristics. This Guideline was prepared fully taking into consideration the actual state of affairs at these financial conglomerates so that they can be applied to various cases, and not all of the supervisory evaluation points described in this Guideline are to be uniformly applied to all of the Management Company and group companies.

Accordingly, when applying this Guideline, it should be noted that even in cases where all evaluation points are not observed to the letter, the situation shall not be judged inappropriate insofar as there is no concern from the viewpoint of ensuring the financial soundness and the operational appropriateness of group financial institutions, and due consideration shall be paid so that the Guideline shall not be applied in a mechanical and uniform fashion. On the other hand, it should be noted that even if the functions concerning evaluation points are perfunctorily satisfied, there could be cases which may not be deemed adequate from the viewpoint of ensuring the financial soundness and the operational appropriateness of group financial institutions.

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