Discussion Papers

Findings from research and studies conducted at the Financial Research Center (FSA Institute) are organized and published as Discussion Papers to stimulate further discussion and comment.

The views expressed in the papers are those of the authors and do not necessarily reflect the views of the Financial Services Agency or the FSA Institute.

Discussion Papers (FY 2018)

No.	Title/Author(s)
DP2018-4 (September 2018)	Analysis and Thinking on Making “Evaluation of Customers’ Business Potential” Economically Viable for Establishing it Among Financial Institutions Kazuhiro Kanazawa, Naoko Tomita, Makoto Inaba, Masaki Inada, Yoshiyuki Shimizu Abstract | Full text (PDF:818KB)(Full text is available only in Japanese.)
DP2018-3 (September 2018)	Study on Structural Changes in Securities Markets with Advances in IT and Ensuring Fair and Transparent Securities Markets Yoichi Samejima Abstract | Full text (PDF:1.43MB)(Full text is available only in Japanese.)
DP2018-2 (July 2018)	Sale of Financial Instruments in Line with Fiduciary Duty Daisuke Matsumoto, Tomohide Maekawa Abstract | Full text (PDF:5.71MB)(Full text is available only in Japanese.)
DP2018-1 (June 2018)	The Regional Economy and Lending Activity: A Quantitative Assessment of Economic Variables and Individual Bank Factors for Financial Institutions in a Regional Prefecture of Japan Kazuki Hiraga, Masashi Manabe Abstract | Full text (PDF:691KB)(Full text is available only in Japanese.)

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Abstracts

DP2018-4
Analysis and Thinking on Making “Evaluation of Customers’ Business Potential” Economically Viable for Establishing it Among Financial Institutions

Kazuhiro Kanazawa, Special Research Fellow, Financial Research Center (FSA Institute)
Naoko Tomita, Makoto Inaba, Masaki Inada, Yoshiyuki Shimizu

Many regional financial institutions have started to recognize “evaluation of customers’ business potential” as an effective initiative to build “shared values” with customers, with a view to revitalizing the regional economy and ensuring a stable customer base and profits for financial institutions. However, the business models and specific effects of such business potential evaluation are still not clear, and therefore to further establish the initiative, it is necessary to demonstrate the likelihood of business potential evaluation becoming a sustainable business model that contributes to customer firms and the regional economy as well as regional financial institutions themselves. Given that the standing and the aim of the evaluation in the overall management of bank business differs by regional financial institutions depending on their business management policies or strategies, to establish evaluation of customer’s business potential as a method for regional banks, efforts should be made taking into account how to leverage business potential evaluation in business management policies or strategies.
With the cooperation of regional financial institutions, this paper identifies what kind of business models exist depending on the standing and the aim of business potential evaluation in financial institutions’ business management, and also analyses the qualitative and quantitative effects of such evaluation. Through identification of requirements for realizing initiatives for business evaluation, we study crucial factors and the possibility of promoting business evaluation potential across the industry.
Our study shows that at regional financial institutions that have fully implemented the evaluation of customers’ business potential, both quantitative and qualitative effects are observed to a certain extent. At the same time, the study suggests that, to further achieve positive effects of the evaluation, the standing and the aim of the evaluation need to be specified, reforms need to be undertaken by the top management, and initiatives for establishing business potential evaluation need to be taken on a medium to long term.

Keywords: evaluation of customers’ business potential; regional financial institutions; bank management; business model; quantitative and qualitative effects.

DP2018-3
Study on Structural Changes in Securities Markets with Advances in IT and Ensuring Fair and Transparent Securities Markets

Yoichi Samejima, Special Research Fellow, Financial Research Center (FSA Institute)

With advances in FinTech, such as blockchain technology (Distributed Ledger Technology; “DLT”) and artificial intelligence (AI), the financial market environment will transform, making it difficult to grasp transactions. Therefore, the operations of market surveillance authorities are expected to be affected significantly. Given such a prospect, it is essential to consider future developments in advanced IT services and associated institutional and technical issues in order to identify challenges that authorities need to address to strengthen their market surveillance function.
From this viewpoint, this study examines the expected future challenges and necessary technical adjustments, based on progressive cases observed at home and abroad in “primary and secondary markets” and “money distribution.”
Regarding “primary and secondary markets,” proposals are made on surveillance measures for unfair transactions in the stock market where algorithm transactions have been increasing recently, and challenges and necessary implementation for market surveillance are identified with an anticipation of structural changes in securities markets based on cases from the use of DLT, an advanced technology. Proposals are also made regarding how a relationship between authorities, operators and third parties should be in order to achieve necessary implementation.
As for the “money distribution,” the study refers to the traceability of transactions and proposes progressive and regressive measures to identify suspicious transactions by grasping the movement of funds, based on cases using advanced technology such as DLT and open API (a scheme where the application program interfaces of banks’ systems are disclosed).
The study also examines the possibility of comprehensive and cross-functional surveillance. In order to implement the surveillance, digitalization and digital transformation are essential.
-Digitalization is to mean standardizing digitalizing processes and data.
-Digital transformation is to mean accelerating the transformation in the environment, such as the organization and the operational processes.
The study provides a vision to achieve this from the viewpoints of these two factors.

Keywords: FinTech; DLT; open API; structural changes in securities markets; strengthening of market surveillance function; digitalization; digital transformation.

DP2018-2
Sale of Financial Instruments in Line with Fiduciary Duty

Daisuke Matsumoto, Special Research Fellow, Financial Research Center (FSA Institute)
Tomohide Maekawa, Special Research Fellow, Financial Research Center (FSA Institute)

The notion of “from savings to investment” has long been called for in Japan, but the ratio of investment assets in the total assets of households has not risen so much, according to surveys such as the Family Income and Expenditure Survey (Statistics Bureau, Ministry of Internal Affairs and Communications) and the Financial Literacy Survey (Central Council for Financial Services Information). To find out the causes that are preventing accumulation of investment assets by households, we conduct a comprehensive survey through the Internet on their views about investment, financial literacy and financial institutions’ practice of fiduciary duty.
The results of the survey reveal that factors preventing households’ investment include reluctance to investment due to low financial literacy, uncertainty due to the absence of reliable experts, and feelings that financial instruments recommended by financial institutions do not necessarily meet their needs.
We analyze two types of households. One has experience in investment and is willing to accumulate investment assets. The other does not have investment experience but recognizes the need for building assets. We discuss the features of these two groups. We also examine the relationship between services offered by financial institutions and their effects on households, and the relationship between services offered by financial institutions and the level of customer satisfaction.
Through survey and analysis, it has become evident that to improve customers’ financial literacy and promote purchases or accumulation of investment assets, it is important that financial institutions listen closely to the needs of customers, propose financial instruments that meet their needs, and also allow time for in-depth consultations and proposals for asset and time diversification in investment as well as periodic assessment of investment management.

Keywords: Fiduciary duty; financial literacy; households survey; and survey on investment.

DP2018-1
The Regional Economy and Lending Activity: A Quantitative Assessment of Economic Variables and Individual Bank Factors for Financial Institutions in a Regional Prefecture of Japan

Kazuki Hiraga, Special Research Fellow, Financial Research Center (FSA Institute)
Masashi Manabe, Special Research Fellow, Financial Research Center (FSA Institute)

This study investigates quantitatively regional financial institutions’ lending behavior using the loan value data of branches of financial institutions that are located in a regional prefecture of Japan. We divide the prefecture into 10 areas, and conduct analysis using data compiled for each area. Each financial institution’s individual operational effects are grasped by conducting regression analysis of loan values and loan-to-deposit ratios by socio-economic variables such as population, income and production, which are represented by resident tax revenues, and by property tax revenues, which are variables representing land prices. The estimated individual operational effects of financial institutions are considered to include loans that are not dependent on economic or regional factors and the land prices or collateral value of properties. The individual operational effects of financial institutions that have aggressive lending attitudes or make great operational efforts have relatively large positive values, and therefore we consider that the quantitative approach taken in this study has a certain level of significance. We also conduct analysis on market concentration (Herfindahl-Hirschman Index) and non-performing loan (NPL) ratios, but cannot derive significant meaning from either analysis. This suggests that the merger of regional financial institutions does not constrain lending in regional financial markets, nor does it necessarily increase NPLs even if economies of scale are pursued and loans are extended actively.

Keywords: Regional financial institutions; lending behavior; collateralized lending (properties as collateral)