Japan’s Banking Regulation Tightens Capital Adequacy Requirements
Strengthening Financial System and Ensuring Bank Stability
The Financial Services Agency (FSA) has announced a series of changes to Japan’s banking regulation, aimed at strengthening the country’s financial system and ensuring the stability of its banks. As of March 31, 2014, local banks without international operations are now required to maintain a minimum risk-adjusted capital ratio of 4% on both a non-consolidated and consolidated basis.
Capital Adequacy Requirements
- Local banks without international operations must maintain a core capital ratio of 4%
- Banks employing the Internal Ratings-Based (IRB) approach must maintain a core capital ratio of 8%
- Bank-holding companies are also subject to these requirements
- The new requirements apply to bank-keeping companies as well
Changes to Capital Adequacy Calculation Formula
As of March 31, 2014, banks have had to adjust their capital ratios accordingly. Local banks without international operations are now required to maintain a core capital ratio of 4% from March 31, 2014, while those employing the IRB approach will be required to maintain a core capital ratio of 4.5% from March 31, 2015.
Monitoring and Enforcement
The FSA will closely monitor the capital adequacy of banks and may require them to prepare and implement a capital reform plan if their ratios fall short of the minimum requirements. In extreme cases, the agency may take measures such as:
- Reducing assets
- Restricting asset growth
- Prohibiting deposit acceptance
Customer Relationships and Confidentiality
The FSA has also announced new rules governing banks’ relationships with customers and third parties. The “arm’s-length rule” prohibits banks from entering into transactions that are less beneficial to them compared to similar transactions with unrelated parties.
Additionally, Japanese banks have a duty of confidentiality to their customers, which is not mandated by law but rather based on commercial practice and contract. However, the FSA has issued guidelines requiring banks to establish internal management systems for handling customer information.
Personal Information Protection
The article highlights the importance of personal information protection in Japan, particularly under the Act on the Protection of Personal Information (APPI). Banks are required to comply with the APPI’s rules on handling personal information and may be subject to penalties if they fail to do so.
Dispute Resolution
Finally, banks are required to enter into an agreement with the Japanese Bankers’ Association for dispute resolution with respect to banking businesses.