(1) In consideration of the above transformation in the financial environment and the aim of reforms, it is thought necessary to discuss what items should be taken up, with users' benefit in mind, in terms of both financing and asset management, while acknowledging that the vertically divided regulatory system makes less and less sense.
Important to this approach, is providing users various choices and carrying out diverse transactions in an environment thoroughly consistent with principle of competitiveness: in other words, to establish fair, efficient and internationally standardized markets that properly reflect users' preference. In the above process, it is necessary to tackle various tasks arising in the reform from the perspective that new entries to the banking business will bring dynamism and also is effective for the vitalization of markets.
To achieve this, the liberalization and the diversification of financial products and financial institutions' business scope and organization are imperative. At the same time, establishing infrastructure, as well as defining rules and penalties, for financial market and transactions so that financial transactions occur subject to proper market discipline is required. Securing financial system soundness is also an important task in the process of reform, as well as taking measures that complete the introduction of the principle of competition.
The supervisory authority is required to transform its methods
from unofficial preventive supervision to a transparent one that
is based on market discipline.
(2) It is also important that the results of the reform be spread
throughout the country for users' benefits, and financial institutions
are expected to contribute to the vitalization of each regions'
economy by providing appropriate services.
(3) This financial system reform will complete the previous reform
of 1993. The basic philosophy and direction of the previous reform
should be seen as the basis for carrying out this reform. Therefore,
matters that have already been addressed in the Council report,
"On a New Japanese Financial System" in 1991, must be
implemented as soon as possible, according to the report's recommendations.
1. Liberalizing and Diversifying Products, Businesses, Organizational Structures
(1) To implement the financial system reform for the benefit
of users and to encourage the convenient and efficient distribution
of financial services, it is necessary to have an environment
in which each financial institution can make the most of their
creativity and compete with each other subject to market discipline.
To realize such an environment, drastic liberalization and diversification
in financial institutions' products, businesses, and organizational
structures are necessary.
(2) Liberalization and diversification of products, businesses,
and organizational structures will give financial institutions
a wide range of free choices in their businesses. It cannot be
denied that liberalization has been piecemeal. Because many financial
institutions were inclined to start newly permitted businesses
with each reform, their business structures have tended to be
basically the same. On the contrary, in this financial system
reform, a financial institution will be required to concentrate
its business where it has comparative advantage for users, because
the range of possible choices will be greatly widened in a prescribed
(short) period.
(3) As discussed above, it is thought that, based on its managerial
judgment, each financial institution, in the future, will respond
to its users' needs by conducting unique and creative businesses,
that makes full use of its advantage. For example, a financial
institution that aims to be a so-called money-center-bank will
characteristically offer highly sophisticated financial services
that freely utilize the latest financial and information technology
as well as expanding its business internationally, while institutions
that aim at engaging in retail or regional business will offer
individualized services for each of its users.
(4) It was pointed out in our discussions that appropriate rules
for ensuring financial institutions' sound management, that counterbalance
the widened range of products and business operations they are
permitted to handle, are naturally required.
2. Preparing the Infrastructure and Rules for Markets and Transactions
(1) As is central to its role, the financial authorities need
to create infrastructure and rules, to prepare the environment
in which both financial institutions and users actively conduct
transactions, in addition to pursuing comprehensive deregulation.
By quickly advancing these matters with an international standard
continually in mind, the international competitiveness and the
transparency of the financial markets will be increased.
(2) The increased market competition among financial institutions
means that gaps between financial institutions' management soundness
will occur easily; and the market will act as a check on the soundness
of each institution's management. In a free and effective market,
the cost of funds for a financial institution that lacks credibility
or risk management ability would necessarily go up, and the institution
would eventually be expelled from the market. In addition to
deregulation, it is necessary to enhance the disclosure, accounting
and related legal systems which are vital to facilitating the
market's monitoring function. In particular, the disclosure system
should be reviewed continuously, in light of current practice
and the Prompt Corrective Action that is soon to be introduced.
It is also thought to be necessary to examine how to ensure neutral
rating agencies.
(3) At the same time, progress in liberalization forces users
to cope with risks that are incidental to diversified and sophisticated
financial services. Users are required to act basically under
the principle of taking responsibility as market participants,
and this notion must permeate the marketplace. On the other hand,
as individuals' technical knowledge and the ability to bear the
burden of losses in financial transactions is limited, it is necessary
to prepare adequate user protections. Effort should be exerted
to disclose appropriate information in plain form in order that
users are able to correctly understand the nature of various financial
products, etcetera.
(4) To ensure sound financial systems in the course of liberalization,
and to establish a transparent and fair financial market, it is
necessary to enhance the inspection and supervision systems.
To secure the effectiveness of the inspection and supervision
systems, strengthening the penalties for making false reports,
etcetera. should be considered.
3. Securing the Financial System's Soundness
(1) In the late 1980's, financial liberalization progressed under the trend of surplus funds, many financial institutions expanded their businesses without adequate risk management. As a result of the extreme rise and fall of asset prices, a large amount of assets turned into bad loans.
However, the total amount of those bad loans, and the amount necessary to be disposed of, are decreasing steadily. Although some financial institutions may be in difficulty, the financial sector as a whole seems to be able to solve the bad loans problem.
The financial system reform may cause various difficulties to
those institutions that are pressed in the post-bubble economy.
However, the reform is vital for financial institutions' users
and for the Japanese economy in the twenty-first century. Therefore,
the reform has to be carried out, on the one hand, while the financial
institutions' bad loans are disposed of, on the other.
(2) This time, the financial system reform will cover a broad
range of matters that affect banks, securities companies, insurance
companies and Non-banks, and thus necessarily includes the revision
of the accounting, legal and tax systems. When considering that
the organizational reform of financial administrative bodies,
and the reform of the Bank of Japan are progressing at the same
time, the effect of these reforms is expected to be much larger
than the reforms that took place in other countries, such as the
Big-Bang in the UK. As the liberalization will bring an increase
in new business and intense competition, each financial institution
is required to expend great effort on establishing risk management
systems so that the reform for users may not bring instability
instead of benefits. Risk management systems are also important
to strengthen financial institutions' business management.
(3) Since competitions will become tougher, there may be banks that are in financial difficulty and forced to leave the market as a result of the course of their business. The framework to protect all deposits and allow depositors not to share any cost of disposal of future bank failures, until the end of the financial year 2000, was established by the so called three financial acts.
However, according to the FSRC's report, titled "Measures
for the Maintenance of Stability in the Financial System",
issued in December 1995, preparation of the environment in which
depositors are required to take responsibility needs to be finished
by the end of the financial year 2000. The report also suggests
that paying off depositors will be one of the possible measures
in a bank failure, though consideration must be paid to its effect
on the credit system.
(4) In this regard, introduction of the Prompt Corrective Action
("PCA" hereinafter) is planned. PCA is a new market-oriented
supervisory tool to ensure the sound management of financial institutions.
The introduction of PCA, that is based on each financial institutions'
self-assessment, is expected to urge financial institutions to
improve their management in a timely and quick manner, based on
the principle of taking responsibility.