Financial Crime World

Japanese Financial Sector Takes Precautions to Avoid Systemic Risks

Mitigating Risk of Harm to National or Regional Financial Systems

Japan’s Prime Minister may authorize the Deposit Insurance Corporation of Japan (DICJ) to intervene in troubled banks, taking proactive measures to mitigate the risk of harming national or regional financial systems. According to recent regulations, the DICJ may be allowed to:

  • Subscribe for shares or subordinated bonds
  • Provide financial aid
  • Acquire all shares of a bank that has suspended deposit repayment or is on the verge of doing so

Protecting Client Assets

Japanese banks are required to participate in the deposit insurance system operated by DICJ, which provides protection up to ¥10 million per customer. Notably:

  • Non-interest-bearing deposits repayable on demand and used for payment purposes are protected without any maximum limit.
  • Deposits denominated in foreign currencies, negotiable certificates of deposit, and deposits with foreign banks’ branches in Japan are not covered under the system.

Implementing Bail-in Tool

Japan has adopted a contractual bail-in approach in its capital adequacy regulation, which requires that certain capital instruments incorporate provisions for:

  • Writing off principal or converting them to common equity when public finance aid is necessary.
  • This provision will be triggered if the Prime Minister authorizes DICJ to intervene in a bank’s operations.

Total Loss-Absorbing Capacity (TLAC) Requirement

Japan plans to implement the TLAC requirement, which aims to ensure that global systemically important banks (G-SIBs) have sufficient capital and debt to absorb potential losses without disrupting the financial system. The FSA has outlined its plan to require G-SIB-designated bank holding companies to:

  • Meet minimum external TLAC requirements
  • Cause their material subsidiaries to maintain a certain level of internal TLAC

The Financial Services Agency (FSA) is reforming its supervisory approach from a rule-based to a principle-based, forward-looking approach. This shift aims to better address the current environment and needs of Japanese banks. The FSA has also established a study group to consider fundamental changes to financial regulatory frameworks, which may lead to:

  • Unbundling and re-bundling of financial services

Biggest Threat to Financial Sector

The FSA has expressed concerns about the sustainability of regional banks’ business models due to demographic changes, low yields, and technological innovations. The agency suggests that creating a “shared value” with customers through high-quality services may enhance business model sustainability and ensure stable revenue flows.

In summary, Japan’s financial sector is taking proactive measures to mitigate systemic risks, protect client assets, and address potential threats to its stability.