Banking Regulation Update: New Capital Adequacy Ratios Introduced

In an effort to strengthen financial stability, Japan has introduced new capital adequacy ratios for banks. The revised regulations aim to ensure that banks maintain sufficient capital buffers to withstand potential risks and shocks.

New Capital Adequacy Ratios

The new ratios are as follows:

• Tier 1 Capital Ratio: may not be less than 8% (calculated by dividing the sum of Common Equity Tier 1 plus other Tier 1 by risk-weighted assets).
• Tier 1 Capital Ratio: may not be less than 6% (calculated by dividing the sum of Common Equity Tier 1 by risk-weighted assets).
• Common Equity Tier 1 Ratio: may not be less than 4.5% (Common Equity Tier 1 divided by risk-weighted assets).

In addition, banks are required to maintain:

• Capital Conservation Buffer: a buffer of 2.5%.
• Countercyclical Buffer: up to 2.5% (with a minimum of 0% within Japan).
• Global Systemically Important Bank (G-SIB) or Domestic Systemically Important Bank (D-SIB) Buffer: up to 3.5%.

Early Correction Measures

Banks that fail to meet the new capital adequacy ratios may be subject to early correction measures, including:

• Business improvement orders
• Orders for business reduction, suspension, or discontinuation

Domestic banks are required to maintain a minimum capital adequacy ratio of 4%, while internationally active banks are subject to more stringent requirements.

Customer Protection

Banks are also required to take measures to ensure the proper management of customer information and prevent unauthorized access. Additionally, banks must provide customers with clear information on deposits, including:

• Interest rates
• Commissions
• Deposit insurance coverage

Large Exposure Restrictions

Under the Large Exposure Restrictions, banks are prohibited from extending credit to certain parties in excess of 25% of their equity capital, unless an exception applies. This restriction aims to prevent excessive exposure to a single counterparty.

Arm’s Length Rule

Banks are prohibited from conducting transactions with related parties or their customers that would prejudice the bank or unduly prejudice any of the specified related parties, unless:

• An unavoidable reason applies
• The transaction has been approved by the authorities

Prohibited Acts

The Banking Act prohibits banks from engaging in certain acts, including:

• Making false statements to customers
• Providing conclusive judgments regarding uncertain matters
• Offering credit on the condition that customers carry out transactions with the bank or a specified person

These new regulations aim to enhance financial stability, protect customers, and prevent unfair business practices. Banks must comply with these requirements to maintain their licenses and operate in Japan.