Risk-Taking and Remuneration: A Concern for Bank Directors

In recent times, concerns have been raised about the remuneration system of banks in Japan, particularly regarding its potential to drive excessive risk-taking among directors, executive officers, and employees.

Remuneration Committee Oversight

To address this concern, the Financial Services Agency (FSA) has stressed the need for the remuneration committee of a bank to play an active role in supervising and managing the remuneration system. The committee must ensure that the system is properly established and managed, taking into account the potential impact on the bank’s core capital.

Communication with Risk Monitoring Department

The FSA has also highlighted the importance of communication between the remuneration committee and the risk monitoring department of a bank. This collaboration can help identify potential risks and ensure that the remuneration system is aligned with the bank’s overall risk strategy.

Challenges in Remuneration Practices

• Short-Termism and Performance-Based Remuneration: The FSA has cautioned against remuneration systems that encourage excessive short-termism or become overly performance-based. Such systems can create incentives for directors, executive officers, and employees to prioritize short-term gains over long-term sustainability.
• Independence of Risk Monitoring and Compliance Departments: The FSA has emphasized the need for the remuneration system to treat staff in the risk monitoring and compliance departments independently from other business departments. The roles of these departments are crucial to ensuring the bank’s stability, and their remuneration should reflect their importance.

FSA Intervention

If a bank’s remuneration system is deemed problematic during regular off-site monitoring or inspection, the FSA may require the bank to submit a report under Article 24, Paragraph 1 of the Banking Act. In cases where serious problems are recognized, the FSA may take administrative action, such as issuing an order for business improvement under Article 26 of the Banking Act.

Anti-Money Laundering and Know-Your-Customer Regulations

In addition to remuneration practices, banks in Japan must also comply with anti-money laundering (AML) and know-your-customer (KYC) regulations. The FSA has issued guidelines to clarify the required actions and expected actions for financial institutions, including banks.

Customer Due Diligence and Record-Keeping

• Verify customer identification data
• Record transactions
• Keep verification records for seven years
• Report suspicious transactions to the competent administrative authority

Depositor Protection Regime

The Deposit Insurance Corporation (DIC) administers Japan’s deposit insurance system, which protects depositors up to a statutory limit. Insured financial institutions include banks and other deposit-taking financial institutions licensed in Japan, with some exceptions.

Conclusion

In conclusion, the FSA has emphasized the importance of a well-designed remuneration system that does not encourage excessive risk-taking among bank directors, executive officers, and employees. The agency has also highlighted the need for effective AML/KYC practices and depositor protection measures to ensure the stability of Japan’s financial system.