1. Utilizing a Holding Company System
(1) Basic Approach
a. In Japan, while the Anti-Monopoly Law has prohibited the establishment of, or transformation of corporate structures into holding companies, for over the past fifty years, a bill revising the Anti-Monopoly Law to abolish this holding company restriction was passed in the 140th Diet.
Lifting the ban on holding companies is expected to contribute
to the vitalization of activity by business persons through practical
use of this organizational structure. Regarding the use of holding
companies in the financial arena, it is necessary to consider
this matter from the perspectives of the meaning of financial
system reform, such as improving users' convenience and of protecting
depositors, investors and insurance policy holders. In the Financial
System Research Council, discussions centering on bank holding
companies have been carried out. Discussions focusing on the
use of holding companies by securities firms and insurance companies
have been carried out in the Securities and Exchange Council and
Insurance Council, respectively.
b. The following summarizes the significance and role of utilizing holding companies on the part of banks in the financial system reform
A) Lifting the ban on bank holding companies will create much greater choice in bank operational structure. Holding companies may be practically used to facilitate operations, such as the possibility of providing specialized and sophisticated financial services, banks' entry into new financial related businesses, entry into the banking business by others, and for use in smoothly withdrawing from particular businesses. Moreover, it is expected that sister financial subsidiaries under the same holding company may enjoy synergistic effects.
Therefore, this type of holding company usage is expected to promote
competition in the finance area and bank operational efficiency,
as well as contributing to user's benefits, developing and offering
financial services that provide higher convenience and efficiency
in asset management.
B) In addition, between sister companies under the same holding company, the direct ownership will be weak as compared to that between the subsidiary and the parent. Basically, under the holding company structure, it will be difficult for the condition of one subsidiary's business operations to directly influence other subsidiaries' operations, as compared with the parent-subsidiary, depending on the holding company's management style. Thus, the sister company relationship is thought to be superior at shielding one subsidiary from the risks associated with another subsidiary's worsening operational condition, as compared with the parent-subsidiary relationship.
Further, holding companies, through the creation of subsidiary
networks, are thought to provide a substitute for mergers and
make strengthening ties between businesses more possible. This
is thought to contribute to the strengthening of banks' foundations,
and improving operational effectiveness while also being expected
to contribute to the stability of the financial system.
C) Utilization of holding companies is expected to contribute to the promotion of financial efficiency and users' benefits, and financial system stability, and is thought to play an important role in the financial system reform.
Also, holding companies have been utilized as an organizational
structure for banks in foreign countries.
(2) The Range of Business Activities for Subsidiaries of a Holding Company that Posses Banks
a. In order for the active use of holding companies to be possible,
it is necessary that the range of business operations for subsidiaries
of holding companies that posses banks, have a high degree of
freedom to enter new finance related areas. Considering the fact
that there is less mutual operational influence between subsidiaries
of the same holding company, as compared to that between parents
and subsidiaries, it is proper to enable holding companies that
posses a bank to establish sister companies flexibly and broadly
in the finance related areas, without being limited to only establishing
new subsidiaries.
b. Specifically, it is necessary to enable holding companies that posses a bank to hold separate subsidiaries, in cases where the bank is divided into separate subsidiaries, or there have already been measures to allow cross-sectoral entries into different financial businesses, such as securities and trust businesses, through the creation of separate subsidiaries.
In addition, regarding insurance companies for which no measures have been taken for cross-sectoral entry through the creation of separate subsidiaries, and investment trust companies which are licensed businesses, it is necessary to enable holding companies that posses a bank to establish separate subsidiaries for those businesses.
Further, those companies who operate businesses having a synergistic effect in the finance area will contribute to the promotion of users' convenience and effective finance (for example, the investment advisory and bank commercial real property management businesses). Thus, it is appropriate for such companies to be able to operate in a system that affords flexibility through the expansion of subsidiary companies under the umbrella of a holding company that possesses a bank.
Regarding companies conducting the above businesses, if one considers
the function and significance of holding companies in the financial
system reform, it is appropriate to enable holding companies that
posses a bank to have these companies as subsidiaries, conducting
operations that contribute to the promotion of users' benefit,
as soon as possible, while system preparation is simultaneously
finished when the ban on holding companies that posses a bank
be lifted.
c. Regarding operating commercial entities under the same management of holding company as banks, from the perspective of securing banks' soundness, banks are prohibited from entering other businesses (efficiency will be demonstrated by concentrating on banking operations, conflicts of interest will also be prevented, and the inherent risks of other businesses will be avoided, and so forth). In addition, since banks have a public character, there are such things as the safety net. For these reasons, it is basically thought to be inappropriate for bank holding companies to also posses commercial entities.
However, even though limitations are placed on possessing both
banks and commercial entities under the same holding company,
it has become more difficult to clearly segregate commercial businesses
from finance related businesses due to the development of sophistication
and diversity in financial services, such as technological evolution
in the telecommunications industry. Therefore, considering such
changes in conditions, it is thought to be necessary to respond
flexibly from the perspective of contributing to users' benefit
and financial efficiency.
d. Regarding the subsidiaries of holding companies that posses securities or insurance companies, the range of business activities should be consistent with the range which has been separately deliberated in the Securities and Exchange Council and Insurance Council.
It is thought to be significant for the financial system reform for a holding company that possesses a securities or insurance company to also possess a bank, as well as for a bank holding company to also posses a securities or insurance company.
However, the approach taken in c. above is common to all holding
companies that posses a bank, and this approach should also apply
to holding companies established from banks, securities companies,
insurance companies or commercial enterprises, if such holding
company has a bank subsidiary.
e. Also, as there is a limitation on a commercial enterprise
existing as a sister company with banks, it is thought to be necessary
to have some limitations, from the perspective of such matters
as securing the soundness of bank management, on the holding company's
ownership of the commercial enterprises' stock.
(3) Regulating Holding Companies, Sister Companies and Holding Company Groups
a. Measures to prevent harmful effects
Under the management of a holding company, there could be transactions that involve conflicts of interest between the bank and holding company or sister companies. Through such transactions, a bank could fail to be prudently managed. To prevent such harmful effects, it is necessary to implement regulations, such as an arms length and other rules, to secure fair transactions
Also, it is thought to be appropriate to take measures to prevent such harm as customer misconceptions and to secure the market's function of fair pricing. However, while individual harm prevention measures are necessary, it is also important to ensure that such measures have the least possible diminishing impact on the effectiveness of using holding companies.
Further, from the perspective of promoting users' convenience,
it is necessary to pay attention to the fact that there is a trend
in the US to relax measures to prevent harmful effects between
banks and securities companies under the same holding company
umbrella.
b. Holding companies, sister companies, and holding company groups
Concerning disclosure of information regarding banks' businesses, financial affairs, and management policies, its importance has been pointed out from the perspective of promoting sound bank management and allowing users to obtain information in order to judge banks, and measures have been taken to expand such disclosures.
From the perspective of securing the soundness of bank management, it is important for holding companies to disclose information on all of the businesses, financial affairs, and management policies of the holding company group that includes a bank subsidiary, because of its function of organizing the group's entire activities, while simultaneously functioning as a bank's management control division. Such informational disclosure promotes prudential bank management under the holding company umbrella by strengthening the holding company's ability to be self-regulating, while simultaneously allowing users to obtain information necessary for them to judge a bank's soundness. This is also thought to contribute to the effectiveness of supervisory agencies' monitoring. Therefore, it is considered necessary for holding companies' disclosure to be on a consolidated basis.
Also, considering such matters as the holding company's management
control function toward the bank, and the possibility of the business
and financial conditions of individual sister companies and the
holding company group impacting the bank's management, it is necessary
to implement regulations on maintaining certain capital ratios,
and providing restrictions on large exposures on a consolidated
basis, as well as conducting tests to determine whether the bank
holding company is fit and proper. Further, it is also necessary
to establish measures for reporting requirements, physical inspection,
and administrative enforcement action where violations of law
occur, in order to secure the effectiveness of these regulations,
and the above measures to prevent harmful effects. Moreover,
such supervision of the holding company group has been conducted
in the US and Europe, and the fact should be noted that the international
community will consider as a factor in its evaluation of Japanese
banks that such proper supervision of the holding company group
is conducted in Japan.
(4) Other
a. The issue of procedures concerning establishment
Considering the role and significance of holding companies in
the financial system reform, it is necessary that holding companies
used by banks be made easy to use. Therefore, it is considered
necessary to be discussed such areas as preparing for the individual
holding company establishment by banks and other financial companies,
including reducing procedural or tax burdens.
b. Stock ownership by banks
Limiting banks' stock holdings is an important task to consider
as it poses such issues as banks' large stock holdings possibly
effecting their management's' soundness and the securities markets,
and coordination with the Anti-Monopoly Law's five percent rule.
c. Possession of a large amount of bank stock
Regarding possessing a large amount of bank stock, with reference
to the experience in the US and Europe, and from the perspective
of securing sound bank management, some appropriate measures may
be thought to be necessary.
(5) Considering the importance of holding company utilization
in the financial system reform, it is desirable that necessary
legal preparations will be carried out as quickly as possible,
in line with implementation of the Anti-Monopoly Law revision.
2. Asset Backed Securities (ABS): Transforming Loans and
Other Assets Into Liquid Forms
(1) Basic Approach
a. ABS (Asset Backed Securities) means securities that are secured by numerous assets, that are transferred from the originator to the intermediary, such as an SPC (Special Purpose Corporation), who issues the securities. As the liberalization of finance and the further development of internationalization are being advanced, the risks surrounding financial and commercial entities are becoming more diverse and complex. Therefore, transforming loans into liquid assets (securitization of assets) utilizing ABS, is thought to be one of the most effective methods for dispersion of credit risk and ALM (asset liability management - the general management of assets and liabilities).
Loan sales and securitization, such as ABS, are also expected to be actively utilized to promote diversification of measures for corporate funding and offering attractive investment products.
In the transformation of loans into liquid forms, the finance
intermediation function of financial institutions has been broken
into such functions as making initial credit review, extending
credit, loan management, and risk management, and these functions
will be performed by financial institutions and investors who
have unique advantages in each function. As a result, it is expected
that more efficient financial services, as a whole, will be achieved.
Therefore, the area of loan sales and securitization is expected
to develop in the future as a new means of financial intermediation,
and thus, there is a need to take proper measures to prepare the
environment.
(2) Simplifying of the Method of Perfection of Asset Sales Against Third Party Claims
a. If there is no perfection of transferred assets against third party claims in the course of issuing ABS, SPC cannot claim the effectiveness of the asset transfer to the receiver if the originator goes bankrupt, creating investor protection problems.
However, in the situation where there exists a large number of
debtors, it is difficult to perfect interests in transferred assets
against third party claims under the procedures of the current
Civil Law. Thus, it has been pointed out that the securitization
of a large number of loans through ABS may be difficult as a practical
matter.
b. Regarding this point, the report of the "Study Group
on the Legal System Affecting Asset Transfers", a private
research group of the Director General, Civil Affairs Bureau,
of the Ministry of Justice, was published in April 1997. The
adoption of a registration system was proposed in this report
in order to simplify the procedures for the perfection of asset
sales against third party claims. Thus, based on the results
of this discussion, we hope that necessary legal measures will
be taken during 1998.
(3) Investor Protection Measures
a. As a measure for investor protection, in the ABS scheme, appropriate
disclosure is prescribed regarding the issuing scheme and the
content of the transferred assets under the Securities and Exchange
Law. Additionally, if one considers the unique characteristics
of ABS, which are issued based only on the transferred assets
as collateral, it is necessary to consider the manner of investor
protection at the level of the scheme's structure.
b. For example, an SPC has been established for the sole purpose of receiving assets transferred and issuing securities. If an SPC conducts businesses other than those discussed above, there is increased risk that the SPC could go bankrupt. Thus, from the perspective of ABS investor protection, it is a problem if the SPC conducts other businesses. Also, in situations where the ABS's asset collateral is diverted to purposes other than ABS repayment, there is a potential hindrance in collecting the invested money.
From this point of view, it is necessary to discuss the minimally
required treatment, including legal measures.
(4) Reducing the Burden Related to Establishing SPCs
a. Under the current Commercial Law, SPCs are subject to rules for maintaining minimum capital of 10 million yen and at least three directors, etcetera. These rules create cost burdens in establishing and maintaining SPCs when separate SPCs are established for each individual package of loans that they are trying to securitize. This may eventually cause the decline in the product appeal of ABS.
Therefore, it is necessary to discuss legal measures concerning
the simplification of the procedures for establishing SPCs, as
well as the legal status of SPCs.
b. Also, once SPCs are established (obtain corporate status),
they are subject to claims and obligations related to ABS issuance
and the transfer of original assets. Thus, with respect to taxation
under the current corporate income tax system, like such position
under the private law, an SPC is treated as a corporation. However,
considering the fact that SPC would play the role of a conduit,
it is thought necessary to consider special tax treatment for
SPCs satisfying predetermined conditions.
(5) Improving the Liquidity of Money Loan Trust Certificates
Among trust certificates, except for securities investment trusts and loan trusts, there is a limitation on its liquidity because the transfer of rights takes place through the method of designated asset transfers. Considering this issue, it is necessary to consider necessary measures which enable the issuance of securities based on money loan trust certificates, and makes it possible to choose to distribute them.
Regarding the various measures in (3) - (5) above, it is hoped
that a bill will be submitted in the next regular Diet session
concerning necessary legal measures.
(6) Banks' Handling of ABS
a. Until now, banks have conducted businesses to make assets
liquid using ABS. Active efforts have begun to be made, for example,
by issuing commercial paper as a means to gain liquidity from
assets (ABCP - asset backed commercial paper). Also, regarding
ABS by the investment trust method, under the guidance of "The
Comprehensive Package to Stimulate Real Estate Liquidity",
issued by the government's Consolidated Conference on Real Estate
Collateral, at the end of March 1997, the range of assets which
are subject of trust certificates and regarded as securities under
Securities and Exchange Law has been expanded to financial institutions'
loan receivables from home loans. The banks and securities firms
are allowed to handle such assets and thus it is hoped that loan
sales and securitization will further progress.
b. The financial asset backed securities, including ABS, are
issued based on the value of the particular assets owned by the
issuing entity. They have a different economic character than
corporate backed financial securities which are issued using the
creditworthiness of the issuing entity as a whole for support.
If one considers the appropriateness of the service providers,
it is thought to be proper to take a position that is consistent
with the economic character of the securities in question. Therefore,
it is thought to be unnecessary for the service providers of the
asset backed financial securities and corporate backed financial
securities to be the same.
c. Activities like ABS, which transform financial assets into liquid forms, are expected to develop beyond the conventional framework of direct and indirect financing. Also, this is an area requiring greater creativity than ever before to construct schemes by which financial assets are made liquid. Therefore, it is thought to be important for the development of financial asset liquidity through sales, that a framework be prepared whereby a greater number of service providers compete, regardless of their business types.
d. In making financial assets liquid by utilizing ABS, there
are separate functions, such as constructing the entire scheme
("Arranger"), and providing asset management, administrative
services ("Servicer"), credit enhancement of the ABS,
sale of the ABS, and so forth. However, banks and other institutions,
are expected to participate in each stage of developing financial
assets into liquid forms by applying their ability for information
production and risk management.
e. On the other hand, it has been pointed out that there is an
issue of a conflict of interest between the bank's position as
"loan originator" and as "intermediary of securities"
when it sells securities to undefined numbers of investors. Considering
the content of the legal measures discussed above, examination
should be conducted to broadly approve the banks' handling of
transforming asset backed financial type securities into liquid
forms, including preventative measures for such things as conflicts
of interest.
(7) Bringing Liquidity to Real Property Collateral
a. Under the "Comprehensive Package to Stimulate Real Estate
Liquidity" discussed above, it is said that measures will
also be implemented to make liquid such assets as real property
collateral, not only loan receivables. This countermeasure advances
the transformation of real estate collateral into liquid forms,
promotes the disposition of financial institutions' problem assets,
and vitalizes the market. The promotion of real estate profitability,
securitization, and preparing the requisite informational networks
are pillars of this comprehensive countermeasure.
b. The background of the problem asset issue is the fact that conventional loans were extremely dependent on the collateral value of real property and that risk management for individual projects was not adequate. With respect to these points, promoting project finance, which focuses on the individual property's profitability, is expected to create conditions where the price formation of real property will equal the profit recovery price based on profitability and market principles. It is thought to be important to use various methods in the Japanese market, and the infrastructure should be prepared for transforming financial assets into liquid forms.
As a step toward this, The New Comprehensive Land Policy Promotion
Measures", issued in February 1997, also stated that , "consideration
should progress on advancing the variety of methods supplying
capital, such as project finance and real property securitization".
c. From this, under "The Comprehensive Package to Stimulate
Real Estate Liquidity", regarding the securitization of real
property collateral, it is said that securitization related to
real property should be targeted as an object for investment funds
in the future. Currently, however, it says diversification, simplification
and lowering of costs by deregulation and review of the current
system should be promoted.
d. Specifically, in addition to the utilization plan for investment
trusts and SPCs discussed above, from the perspective of smoothly
advancing problem asset securitization, examining the necessary
measures regarding tax treatment related to trust certificates
on land and SPC's real property is required.
e. As stated above, it is an important task to transform real
property collateral into liquid forms to promote the resolution
of the problem asset issue as well as reforming the financial
markets. Therefore, in order for Japan's economy to preserve
its vitality, it is hoped that various measures will be promptly
implemented, including the policies discussed above.
3. Derivatives Transactions
(1) Basic Approach
a. As developments progress in the liberalization of finance
and the relaxation or abolishment of regulations related to foreign
exchange and capital transactions. It has become more important
to manage risks for business operations as market participants,
including financial institutions, are affected by such market
risks as interest rates, foreign exchange and financial product
price changes. In such a situation, the needs for derivatives
are growing as an appropriate means of hedging risk. Also, derivatives
transactions are useful as a method for providing various combinations
of risks and returns which are consistent with the needs of individual
investors who attempt to obtain gains by actively taking risks
depending upon their "risk taking" ability.
b. In this manner, derivatives transactions make it possible
to reallocate risks that cannot be adequately covered by trading
actual securities between the economic subjects with different
valuations of future risks. Through this, derivatives transactions
bring about a more welcome risk sharing for the national economy.
Thus, it is considered that the sound development of derivatives
transactions would contribute to the efficiency of Japanese financial
markets .
c. If one looks at the Japanese derivatives market, there are legal limitations. For example, under the Securities and Exchange Law and Commodity Exchange Law, it is prohibited to make contracts for differences, which are calculated using the market price of the exchange.
However, considering the importance of the derivatives transactions
discussed above, there should be plans for diversifying derivatives
transactions and securing the international competitiveness of
Japan's financial markets by conducting necessary legal preparation.
Also, examination of the Financial Futures Exchange Law's limitations
on derivatives transactions should be promptly conducted.
d. Based on the conditions discussed above, a report was issued
earlier by the Securities and Exchange Council on measures to
be taken in order to lift the ban on over-the-counter derivatives
transactions, where securities are original assets (May 20, 1997
"Concerning Securities Related Over-The-Counter Derivative
Transactions"). It is expected that necessary preparation
of the system will be conducted based on this report.
(2) Securities Related Over-the-Counter Derivatives Transactions by Banks
a. The customers' needs for over-the-counter derivatives transactions are considered to be receiving the most appropriate cash flows for that particular customer by properly matching (mixing) the cash flows which result from such things as changes in interest rates, foreign exchange and securities prices. Therefore, from the perspective of users' benefit, it is thought to be inappropriate to limit the providers of over-the-counter derivatives transactions by types of original assets.
For the development of over-the-counter derivatives transactions, it is hoped that the appropriate principles of competition would work through the participation of a larger number of service providers.
In view of the foregoing, considering the service providers of
such transactions, the matter should be reviewed from the perspective
of whether that provider possesses the ability to manage risk,
instead of whether that provider can handle the underlying asset.
b. Also, among the securities related over-the-counter derivatives
transactions, particularly with transactions where there is no
delivery of the underlying asset, transactions are merely the
transfer of cash flows between customers. Also, with such transactions
where there is no delivery of the underlying asset, the service
providers basically bear credit risk as long as they manage the
risk associated with changes in securities prices by effectively
hedging those risks.
c. From this perspective, if transactions do not involve the
delivery of underlying assets, and based on the assumption that
proper risk management can be conducted by effectively hedging
the risks arising from changes in securities prices, securities
related over-the-counter derivatives transactions should be a
permissible business for banks. Therefore, together with revising
the Securities and Exchange Law in order to lift the ban on the
securities-related over-the-counter derivatives transactions,
it is necessary to take measures which enable banks to engage
in this business.
d. Banks and others engaged in securities-related over-the-counter
derivatives transactions as their businesses should follow the
rules of fair practice under the Securities and Exchange Law.
In addition, when banks engage in equities-related over-the-counter
derivatives transactions as their businesses, it is necessary
to establish proper measures to prevent conflicts of interest
between their position as investor and as service provider.
(3) Risk Management Systems
a. With derivatives transactions, because they may be entwined
with complex risks, it is possible to have unexpected losses when
one does not have an adequate understanding or risk management
techniques. Therefore, from the perspective of securing sound
bank management, banks should be required to have appropriate
risk management systems when handling securities-related over-the-counter
derivatives transactions.
b. As referenced in the May 1995 Report of the FSRC's Fundamental
Issues Deliberation Committee, regarding the issue of how to simultaneously
achieve both the sound development of derivatives transactions
while securing banks' sound management, the basic position of
other major developed countries' supervisory agencies is to request
individual banks to maintain the proper level of capital and establish
proper risk management systems. The supervisory agencies, as a
matter of policy, provide guidance to banks in developing measures
to meet these requirements.
c. In Japan, efforts should also be made to maintain sound management, based on the position discussed above, for banks handling securities-related Over-the-Counter derivatives transactions.
However, it is not appropriate to request individual banks to
establish the same risk management system at the same level since
the types and volumes of transactions are different depending
on the bank. Rather, individual banks' should establish risk
management systems which are consistent with its business operations
and forms of transactions.
(4) Commodity Related Over-the-Counter Derivatives Transactions
a. Considering the significance of Over-the-Counter derivatives transactions as discussed above, from the perspective of making flexible product design possible, that is consistent with customers' diverse risk management needs, it is hoped that necessary measures promptly will be taken by which various commodity related derivative products may soon be carried out on the Over-the-Counter market.
Also, similar to securities related Over-the-Counter derivatives
transactions, banks should be allowed to broadly participate in
commodities Over-the-Counter derivatives transactions, except
for transactions which involve acquisition of the underlying asset.
b. Additionally, when qualification to conduct transactions at the commodity exchange are reviewed, from the perspective of broadening market participation, it is hoped that the participation of banks in commodities futures transactions will be approved.
4. Sales of Securities Investment Trusts
(1) Basic Approach
Securities investment trusts perform the function of providing
investors the means to indirectly participate in securities investments
who would otherwise have difficulties directly participating in
the securities market. Securities investment trusts are thought
to be one of the most powerful investment methods for effectively
investing the assets of individual investors, an amount which
has climbed to 1,200 trillion yen. Therefore, expanding the sales
channels for securities investment trusts should be considered.
(2) Sales of Investment Trusts by Banks
a. Trust certificates of securities investment trusts are securities
under the Securities and Exchange Law. Thus, the sales channels
have been limited to the direct sales by investment management
companies, which are the issuing bodies for such securities.
Securities firms are the only other entities that may sell these
securities. It is hoped that expanding the sales channels of
investment trusts to banks will contribute to improving users'
convenience since such expansion will increase their accessibility.
This will also promote more competition in the sales of investment
trusts. It is expected that this will unveil the potential demand
for investment trusts and contribute to the improvement of the
effective investment of individuals' assets.
b. From this perspective, it is hoped that necessary measures
will be taken to revise the Securities and Exchange Law so that
banks may conduct sales of investment trusts as new sales channels.
In addition to sales by banks themselves, it is also appropriate
that investment trust companies may conduct direct sales by using
banks' branches.
(3) Measures for the Protection of Investors and Depositors
If the investment trusts sales by banks are approved, the Securities
and Exchange Law's rules should be applied to these sales in order
to secure fair sales and protect investors. Further, the possibility
that customers may misunderstand the existence of risks regarding
investment trusts sold by banks cannot be denied since banks handle
deposits whose principals are guaranteed. Therefore, in addition
to the measures for investor protection under the Securities and
Exchange Law, additional measures are necessary to prevent customers'
misunderstanding regarding the sales of investment trusts by banks.
5. Sales of Insurance Products
(1) Basic Approach
a. In recent years, due to the increasing needs for the saving
potential of insurance products, insurance products are becoming
close to other financial products in terms of their function,
increasing the competition between insurance products and other
financial products. Customers are choosing the more profitable
product based on a comparison of the returns and liquidity of
insurance products with other financial products. Thus, it is
thought that the users' comparison of financial products will
be facilitated by allowing banks to conduct sales of insurance
products. Also, it will become possible for banks to create the
most appropriate combination of deposit products and insurance
products depending on users' needs.
b. Further, it is expected that competition in the sale of insurance
products will be promoted by the new participation of sales networks
of banks' branch systems. Thus, efficiency at the sales level
will be improved. On the other hand, it is thought that there
will be the effect of lowering the costs to new entrants into
the insurance industry and that more competition in the insurance
industry will be promoted.
(2) Sales of Insurance Products by Banks
a. As discussed above, it is basically proper to approve the
sales of insurance products by banks since that will contribute
to the improvement of users' convenience, diversification and
improvements the efficiency in sales channels, and diversification
and sophistication of insurance products through promotion of
competition in the insurance industry.
b. However, in cases where banks are allowed to conduct sales of insurance products, the possibility of the following harmful effects are being pointed out, toward which it is proper to take preventive measures. The possible harmful effects include: i) the possibility of using its influence to carry out insurance sales, ii) the possibility that information obtained through conducting banking businesses (deposits, loans, foreign exchange, etcetera.) is unfairly used to conduct insurance sales, and, iii) the possibility that parties to an insurance contract may misunderstand the existence of risks in insurance products when the insurance products are sold by banks.
In reflecting on the matters discussed above, and taking the results
of the discussion of the Insurance Council related to this issue
into consideration, positive efforts should be made regarding
this matter.
6. Reconsidering the Business Scope for the Subsidiaries
of Entities in Different Financial Industries and Preventative
Measures Against Harmful Effects
(1) Basic Approach
a. Under the financial system reform which has been implemented
since 1993, goals were set to realize ideas, such as "Reforms
for Users" and "Enhancement of Internationality",
by responding to developments in financial liberalization, internationalization
and securitization, reconsidering the vertically divided financial
system and taking measures to develop the efficiency of the financial
system and a fair market.
b. Considering these ideas of system reform, it was thought to
be proper that financial institutions in different areas should
mutually participate in a broad range of different businesses
to respond to the diversified and sophisticated needs of users',
while using the character which is unique to each financial institution.
As one of the methods to achieve this, banks, securities firms
and trust companies were permitted to participate in each others
businesses through their subsidiaries.
c. At the initial stage of implementing the new system, there
were certain restrictions imposed on the range of businesses allowed
to individual securities and trust bank subsidiaries as securing
fair competition between financial institutions needs to be considered.
d. Considering the aims of the financial system reforms discussed
above, and the current financial system reform, it is necessary
to promote competition between financial institutions in a broad
range of business sectors as well as to enable individual financial
institutions to respond to users' diverse needs. Therefore, the
range of business activities for securities and trust bank subsidiaries
should be expanded to include all types of securities and trust
businesses as soon as possible. However, except for those businesses
approved as businesses incidental to banks' core businesses, it
is proper that approved trust side businesses, such as real property
broking, should be continuously handled with prudence. It is
also necessary to continue exploring whether banks themselves
should operate trust businesses.
(2) Terminating Restrictions on Business Scope of Separate Subsidiaries by Industry
a. Under the guidance of "Regarding the Revision of the Plan
for Promoting Deregulation" which was agreed to by the cabinet
at the end of March 1997, the ban will be lifted so that securities
subsidiaries will be able to conduct all securities businesses
except for the business related spot entities and that trust bank
subsidiaries will be able to conduct all money trust businesses
except for pension trust and joint money trust in the latter half
of the 1997 financial year. However, it is appropriate to lift
the remaining restrictions on business scope by the latter half
of the 1999 financial year.
b. Also, regarding the measures to prevent harmful effects, which
have been established for transactions between parents and subsidiaries,
necessary reconsideration should be performed on a timely basis
considering the post-financial reform conditions, and activities
of the financial reforms of other countries.
(3) Cross-Sectoral Entry Between the Insurance and Banking Businesses
Further more, while promoting competition between financial institutions
in a broad range of businesses, from the perspective that individual
financial institutions should be enabled to respond to users'
diverse needs, it is thought to be preferable that there be a
wide range of cross-sectoral entry between insurance companies
and the banking, securities, trust businesses, not only among
banking, securities and trust businesses. This matter has been
discussed by the FSRC and Insurance Council, and basically, it
is hoped that cross-sectoral entry, such as an insurance companies'
entry into banking and other financial businesses, in the form
of separate subsidiaries, and the entry of banks, trust banks,
and securities companies into insurance businesses, in the form
of separated subsidiaries, will be carried out.
Therefore, in consideration of the influence that cross-sectoral
entry will have on related businesses, and the aim of this financial
system reform, implementation of these cross-sectoral entries
should be carried out by the year 2001, at the latest.
7. Abolishing Restrictions on the Short- and Long- Term
Finance System for Commercial Banking
(1) Under the post-war short- and long-term financial system, from the perspective of advancing a steady supply of funds when funds for capital investment were short in supply, commercial banks generated funding through deposits and focused on discounts of commercial bills and short-term bill loans in terms of utilization of funding. On the other hand, long-term credit banks generated long-term funding through issuing bank debentures ( "bank bonds" hereafter), based on the provisions of the Long-Term Credit Bank Law, in order to provide long-term funding.
Later, as the underlying basis of Japanese financial markets shifted from "insufficient funding" to a "chronic funds surplus", people's needs for diversified financial products and services have increased while the number of long-term loans made by commercial banks have increased. As a result, a reconsideration of the distinction between short-term and long-term in bank's funding supply has been sought.
Under these circumstances, in Japan, there has been reconsideration of the various regulations related to the short- and long- term financial system, including the abolishment of time limitations on the maximum length for keeping deposits.
(2) Under the current financial reform, constructing a system which further utilizes principles of competition is required in order to provide financial products and services which are more convenient and efficient to users, and to achieve the maximum utilization of individual savings and the efficient supply of funds.
And also, further diversifying the method of procuring long- term funds, which is consistent with the increase in long-term loans of commercial banks, is necessary from the perspective of further preventing risks to commercial banks.
It is also expected that the market will perform a supervisory
function toward commercial banks which will be greatly enhanced
by diversifying the commercial banks' method of generating funding
from the market.
(3) As for remaining restrictions related to business under the
short- and long-term financial system, measures such as prohibiting
the issuance of corporate bonds are being taken. However, considering
the purpose discussed above, it is appropriate that the issuance
of corporate bonds by commercial banks should be permitted by
the latter half of the 1999 financial year and the restrictions
under the short- and long-term financial system should be abolished.
(4) Considering the diversification of products provided by commercial
banks, one might have an opinion that commercial banks should
be allowed to issue bank bonds. However, for the following reasons,
it is not appropriate to approve the issuance of bank bonds by
commercial banks: i) the bank bond system enables long-term credit
banks upon which limitations are imposed, such as the range of
businesses, including loans and the acceptable customers whom
long-term credit banks may take deposits from, to issue large
amounts of bonds continuously in lieu of deposits, , ii) even
from the standpoint of its relation with commercial companies,
which follow general principles of the Commercial Law, expanding
the issuance of bank bonds to commercial banks is not reasonable,
as bank bonds are a special system (a special case under the Commercial
Law) which is intended to respond to the special roles of the
long-term credit banks discussed above, iii) currently, there
are only small differences in issuing procedures for bank bonds
and corporate bonds.
8. The Specialized Foreign Exchange Bank System
Regarding the Specialized Foreign Exchange Bank System,
a. Against the background of the developing internationalization of the Japanese economy, foreign exchange operations have been liberalized through the revision of the Foreign Exchange and Foreign Trade Control Law. As a result, in addition to the specialized foreign exchange bank, other financial institutions will be naturally able to conduct foreign exchange operations.
b. Also, the bond issuing operations which were allowed under the system, will lose its significance due to the fact that commercial banks will be able to issue regular corporate bonds.
Considering the above, the significance of maintaining this system, assuming banks would start operations by being newly licensed as specialized foreign exchange banks, has been lost when there are currently no banks operating under the provisions of this system.
Therefore, it is proper to promptly abolish the Foreign Exchange
Bank Law, which is the basis for this system.
9. The Role of Regional Financial Institutions
(1) Basic Approach
As discussed in "On the Future of Regional Finance"
(interim report issued by the First Committee of this Council
in July 1990), regional financial institutions have been playing
important roles at the regional level by utilizing both the hard
and soft aspects of their information networks in their particular
regions, such as dense branch networks and personal contacts.
In other words, regional financial institutions have been playing
the important role of providing a detailed response to the various
needs of regional residents and corporations, which city banks
are unable to adequately perform, by utilizing their rich information
on regional economic activities, regional residents, and corporations.
Also, since regional financial institutions conduct activities which are based on that particular region, and are well acquainted with the special character and realities of that region, they have been contributing to the vitalization of their regions by participating in projects, such as regional development projects led by the region.
Considering these regional financial institution functions, even
in the current financial system reform, it is expected that the
regional financial institutions will continue to play important
roles, such as spreading the results of the reform to each region
and responding to the new needs for financial services at the
regional level.
(2) Measures for the Vitalization of Regional Financial Institutions.
a. At the previous financial system reform, considering the roles of regional financial institutions, it was said that, among the operations which can be conducted by regional financial institutions, without interrupting the orderly provision of credit, are operations necessary for satisfying the financial needs of regional residents and assisting regional development. Currently, as a result, such operations as real property development trusts and charitable trusts are being conducted by regional financial institutions.
Continuing in this manner is considered reasonable, and from the
perspective of improving real property development trusts and
charitable trusts to contribute to users' convenience, it is proper
to take measures such as permitting operation of real property
management trusts in the 1997 financial year.
b. In advancing the current financial system reforms, securing
sound management of financial institutions is also an important
task. Thus, from the perspective of enhancing banks' capital,
it is proper to take necessary measures, such as including subordinated
loans of cooperative financial institutions in capital calculations,
by April 1998. At the same time, it is desirable to explore additional
measures for the enhancement of cooperative financial institutions'
capital.
c. It is hoped that measures will be taken to further vitalize
the operations of these cooperative financial institutions by
continuing to use the function of union organization, since the
size of these institutions is small and some institutions may
not be able to handle sophisticated and diversified financial
products.
d. Regarding the cooperative financial institutions' operations,
the range of business activities has been expanded, based on the
idea that proper measures are necessary to enable such institutions
to be flexibly managed in line with the changing financial environment
and the state of the regional economy, within the meaning of what
constitutes a cooperative organization. As such an idea is congruous
with the current financial reform, it is appropriate to continue
consideration of how such organizations can be flexibly managed
within their organizational capacities as cooperatives.
10. Electronic Money and Electronic Payment Systems
(1) Basic Approach - Development of Information and Communication Technology and Electronic Payment Services
a. With recent developments in information and communication technology,
electronic payment services have also been developed. These activities
were traditionally more significant in the area of settlements
between banks or large corporate. Recently however, various attempts
are being made worldwide to increase users' convenience in the
area of small, consumer and retail payments by using electronic
means and ways of payment. While Japan has historically attempted
to use advances in electronic payment services, only recently
has expanding the range of small amount and retail payment been
targeted.
b. As the background for this type of developing electronization,
corporations have been developing the electronic disposition of
administrative tasks and there has been a diversification in consumers'
life styles, and consequently, there has been a growing need among
users for more effective payment services which apply information
and communication technology.
c. Also, it is thought that the digital data of electronic money
possesses monetary value and payments can be conducted through
the exchange or increase-decrease of digital data using the telecommunication
lines. Electronic money attempts to overcome such drawbacks of
using cash as its transfer between parties in distant locations
is difficult, it cannot be divided when change is necessary, it
is inconvenient to carry in large amount, and the drawback with
deposits that users have to access banks and pay transaction costs
whenever money is transferred. Also, electronic money is superior
as compared to the traditional prepaid card in terms of its extensive
use and its liquidity. Therefore, compared with the existing
means of payment, it is thought that electronic money can become
a more efficient means of payment and that electronic money has
potential to take over existing means of payment.
d. The sound development of electronic money and electronic payment
systems provides efficient methods of payment and settlement and
contributes to the improvement of users' convenience in the information
society. In particular, from now on, as information and communication
technology developments, electronic money and electronic payment
development will be the underlying basis for the diffusion and
development of smooth electronic commerce, since the further expansion
of electronic commerce is expected. Thus, such development is
an important task for Japan's economic development in the information
age. Also, the development of electronic money and electronic
payment systems, for banks, is a movement toward sophistication
of its settlement function which is as important as its financial
intermediation function. Thus, such development is an extremely
important task for the development of the financial industry in
the future. It is necessary to appropriately prepare the environment
so that electronic money and electronic payment systems will develop
and spread soundly and smoothly.
(2) Preparing the Environment Toward the Development of Electronic Money and Electronic Payment Systems
a. The safety of electronic money and electronic payment systems
is supported by sophisticated information and communication technology,
including encryption technology. While the rapid development of
the technological innovation is taking place, the electronic money
and electronic payment systems are yet at the early stage of development.
Therefore, it is proper to encourage better development of electronic
money and electronic payment systems through the free development
by the private sector based technological development and creative
ideas, and through the users' selection of appropriate services
from the variety of services, according to their needs. In order
to prepare an environment where such better development can take
place, it is necessary to take measures to promote new entries,
and to clarify related legal issues.
b. On the other hand, for many individual users, it is difficult
to understand the sophisticated information and communication
technology which is the basis for the electronic money and electronic
payment systems. It is necessary for its development in small
amounts in the retail area to prepare the environment so that
individual users, who have limited expert knowledge and limited
ability to absorb losses, can use such electronic money and electronic
payment without anxiety. Thus, taking appropriate measures from
the perspective of protecting individual users, such as formulating
fair transaction rules and ensuring service providers are qualified,
is required.
c. Electronic money and electronic payment systems can be used
to fund transfers beyond national boundaries, and allows business
development to be conducted from an international perspective.
Therefore, from the perspective of achieving the proper development
of electronic money and electronic payment systems in Japan, it
is necessary to pay attention to international harmonization for
protecting individual users and preventing unfair conduct, as
well as preparing for technological development and telecommunication
infrastructure.
d. Preparing the environment for the development and diffusion
of electronic money and electronic payment systems is a task which
should be tackled as part of the financial system reform heading
into the twenty-first century. Thus, based on the recommendations
and discussions of "The Working Group on Electronic Money
and Electronic Payment Systems" report, it is considered
necessary to promptly advance consideration of the steps necessary
to promote progress, and to implement necessary measures.
11. Diversifying Non-bank's Funding
(1) Basic Approach
a. Non bank lending institutions ("Non-banks", hereinafter) have been playing an important role in the national economy during times when users' needs are being diversified, by providing funding to sectors, such as the small customer sector, highly specialized sectors, and promising sectors with high-risk, by utilizing their freeness and mobility.
However, currently, many non-banks, particularly those for businesses,
have a significant amount of problem assets because of an excessive
inclination toward real property related lending which, during
the bubble economy, departed from their original specialty areas.
Going forward, it is expected that non-banks will change their
easy attitude toward making loans and act with thorough risk management.
At the same time, it is expected that non-banks will develop
soundly in the Japanese economy by providing funding to growth
businesses of the next generation and providing various services
responding to users' diverse needs.
b. Non-banks, since they do not receive deposits, are unregulated
and unsupervised in connection with maintaining the soundness
of their management, which is different from banks which are directly
connected to the orderly provision of credit in the payment system.
Therefore, the soundness of non-bank management depends basically
on the rules of the market and non-banks who fail due to their
unsound management are forced to leave the market promptly.
Historically, such supervision of the market did not adequately
function toward the non-banks. However, going forward, it is expected
that individual banks, who finance non-banks, will further improve
their credit review and credit controls over the non-banks and
enhance their monitoring functions. It is also thought that preparing
a system where the supervisory function of the market can be more
effective is necessary.
(2) Diversifying Non-bank's Funding Sources
a. Currently, under paragraph 3 of section 2 of the "Law
Concerning Accepting Investments and Control Over Accepting Deposits
and Paying Interest" ("Capital Subscription Law"
hereinafter), non-banks are prohibited from obtaining funding
from the general public through the issuance of corporate bonds
for the purpose of lending. Based on this paragraph of the Capital
Subscription Law, a notice has been issued which restricts the
raising of funds through the use of commercial paper.
b. During the post-war era when this law was initially enacted,
as the corporate sector was short of a funding supply, the effective
allocation of limited funding for the purpose of developing the
national economy was an unavoidable requirement for Japan as a
nation. There was also a need to protect the general investing
public. During that time, the financial imtermediation business,
under which funds obtained from the general public were in turn
used to provide financing, was recognized as a business of great
public significance. Thus, there was a need to limit the providers
of such businesses to banks. However, in recent years, preparations
have further advanced in the areas of establishing market rules,
and various systems for investor protection, such as the Commercial
Law and Securities and Exchange Law. Also, the corporate sector's
funding shortage no longer exists. Considering these facts, it
is thought that the significance of prohibiting Non-banks from
issuing such instruments as corporate bonds as a funding source
for lending is diminishing.
c. In addition, regarding the liberalization of funding through
corporate bonds by non-banks, it is thought that there are merits
of making the financial system more transparent and stable by
efficient funds allocation in the economy through the diversification
of financial intermediary channels, as well as by introducing
the market's supervisory function. Based on the above, it is
thought that the limitations under paragraph 3 of section 2 of
Capital Subscription Law should be basically abolished. It is
expected that the necessary bill will be submitted to the next
ordinary Diet session.
d. In addition, regarding various services, including such financial
imtermediation business, going forward, it is thought that deliberation
should be conducted toward constructing horizontal rules based
on the assumption that investors will take responsibility for
their market activities. However, in the course of the liberalization
of corporate bond issuance by non-banks for the purpose of financing
business, while paying close attention to the direction of such
deliberations, from the perspective of investor protection and
elimination of unfair trades, it is thought that there is a need
to strengthen disclosure on the status of problem assets, and
seek a minimum personnel structure (for the risk management system)
and financial foundation (capital, etcetera).