Why is the regulatory authority of banks important

FSA Guidelines. Other authorities A portion of the FSA's authority is delegated to the Securities and Exchange Surveillance Commission SESC in relation to onsite inspection and offsite monitoring of investment banking activities and other securities businesses. If a bank becomes insolvent, the DIC's main role is to protect the depositors and the entire financial system see Question 21 and Question It is a juridical person established under the Bank of Japan Act, and it is not a government agent.

The BOJ's objectives are to contribute to maintaining the stability of the financial system by:. Issuing banknotes and carrying out currency and monetary control.

Ensuring the smooth settlement of funds among banks and other financial institutions. The supervision of banks is considered to be the role and responsibility of the government. The BOJ is not a government agent and does not have the regulatory power to supervise banks. However, as the lender of last resort, the BOJ can provide liquidity to banks in the case of their insolvency to achieve its objectives.

In playing the role as the lender of last resort, the BOJ may enter into agreements with banks, under which the BOJ is authorised to audit the banks. Others The Ministry of Health, Labour and Welfare, and the Ministry of Agriculture, Forestry and Fisheries, also have roles in the supervision of certain co-operative financial institutions see Other Banks. For the role of auditors, see Question Bank Licences 3.

What licence s are required to conduct banking services and what activities do they cover? A licence from the Prime Minister must be obtained to engage in banking business paragraph 1, Article 4, Banking Act. The following activities constitute the core business that must not be undertaken without a banking licence:.

Acceptance of deposits or instalment savings. Loans of funds or discounting of bills. As an exception, this can be carried out by a non-bank registered as a money lender. Remittance of funds.

As an exception, this can be carried out by a non-bank registered as a fund transfer businesses operator who can remit funds not exceeding JPY1 million. Paragraph 1, Article 10, Banking Act. A bank can engage in certain additional business activities, such as the guaranteeing of obligations, the sale and purchase of certain debt instruments, securities lending and so on paragraph 2, Articles 10 and 11, Banking Act. A bank cannot engage in any business other than the core business and additional business activities Article 12, Banking Act.

What is the application process for bank licences? Application Anyone seeking a licence must apply and submit supporting materials such as articles of incorporation and a certificate of registered matters of the company to the Prime Minister through the Commissioner of the Financial Services Agency FSA Articles 1 to 8, Banking Act Enforcement Regulations.

An applicant can request a preliminary review before submitting an application Article 2, Banking Act Enforcement Regulations.

An applicant must pay JPY, as a registration and licence tax for each application. This website provides information on the documents necessary for an application available only in Japanese.

Requirements The Banking Act provides the licensing criteria. The Prime Minister also has a discretion to grant licences and to impose such conditions as is considered appropriate on any licence paragraph 4, Article 4, Banking Act. If the majority of voting rights of the stock corporation are owned by a foreign bank or its affiliates, the Prime Minister will determine if reciprocal treatment is given to Japanese banks in the foreign bank's home jurisdiction paragraph 3, Article 4, Banking Act and Article 4, Banking Act Enforcement Regulations.

There is no limit on the number of bank licences that can be issued under the Banking Act. Foreign Applicants A foreign bank can obtain a licence from the Prime Minister by establishing a branch office in Japan paragraph 1, Article 47, Banking Act.

The Prime Minister will determine if reciprocal treatment is given to Japanese banks in the foreign bank's home jurisdiction paragraph 2, Article 47, Banking Act and Article 9, Banking Act Enforcement Order. Timing and Basis of Decision To obtain a licence, the applicant must prove both of the following:.

The applicant has the financial basis to conduct banking business soundly and efficiently, and has good prospects for income and expenditure pertaining to the business. After consideration of such matters as its personnel structure, the applicant has the knowledge and experience to be able to conduct banking business appropriately, fairly and efficiently, and has sufficient business credibility.

Paragraph 2, Article 4, Banking Act. The Prime Minister has a broad discretion to grant licences and to impose such conditions as is considered appropriate on any licence paragraph 4, Article 4, Banking Act see above, Requirements.

The Prime Minister must try to provide a decision on an application within one month after receiving the official application Article 40, Banking Act Enforcement Regulations. However, in practice, a preliminary review is conducted before the official application. During the preliminary review process the government closely examines the applicant from the perspective of whether they meet the above requirements.

There is no statutory period for a preliminary review before submitting the application. Cost and Duration There is no duration period for a bank licence.

A bank can continue to conduct banking business unless the enforcement authority orders the suspension or revocation of the licence. There is no ongoing or renewal fee for the licence.

Can banks headquartered in other jurisdictions operate in your jurisdiction on the basis of their home state banking licence? A foreign bank cannot conduct banking business in Japan on the basis of its home state banking licence.

However, a foreign bank can obtain a licence from the Prime Minister by establishing a branch office in Japan paragraph 1, Article 47, Banking Act see Question 4, Foreign Applicants. A licensed foreign bank branch is subject to substantially the same regulations as those which banks based in Japan are subject to.

Forms of Banks 6. What forms of bank operate in your jurisdiction, and how are they generally regulated? Does the regulatory regime distinguish between different forms of banks? Are there any specific requirements for banks or banking groups in your jurisdiction in relation to the scope of business or organisation?

State-Owned Banks A number of governmental financial institutions have been organised to supplement the activities of the private sector banking institutions. Their funds are provided mainly from government sources. These corporations:. Are wholly owned by the government. Are regulated by the individual statutes applicable to each of them. Operate under government supervision through senior officials appointed by the government.

In Japan's retail banking sector, Japan Post Bank Co Ltd incorporated as a result of the privatisation of Japan Post on 1 October remains the largest single deposit-taking institution.

Legislation has been passed to fully privatise certain governmental financial institutions, including Japan Post Bank Co Ltd, after a transitional period.

Universal Banks, Commercial and Retail Banks These banks can engage in commercial banking activities, such as the following:. Acceptance of deposits. Ancillary business activities specified in the Banking Act, such as guaranteeing of obligations, the sale and purchase of certain debt instruments, securities lending, and so on. By contrast, a bank can only engage in limited investment banking activities such as the underwriting of Japanese Government bonds and sales of unit trusts or non-discretionary investment advisory services if it is registered under the Financial Instruments and Exchange Act.

For historical reasons, banks are generally prohibited from engaging in certain categories of securities business including brokerage and underwriting of corporate shares and corporate bonds, and discretional investment management services. To conduct such activities, a bank must establish a subsidiary or affiliate which is a separate legal entity from the bank and register it under the Financial Instruments and Exchange Act. In addition to the above, in general, a bank cannot engage in non-banking or general commercial activities.

A bank cannot engage in any business other than the core business acceptance of deposits, loans of funds and fund remittance , ancillary business activities and other business activities permitted under the Banking Act or other acts Article 12, Banking Act. With respect to other entities in banking groups, the Banking Act prohibits banks and bank holding companies from having any subsidiaries other than those that engage in certain specified categories of business, including securities, insurance, other financial services, and other businesses dependent on the bank's business paragraph 1, Article and paragraph 1, Article , Banking Act.

Following amendments to the Banking Act in , banks and bank holding companies can acquire and hold subsidiaries engaging in business activities that are expected to complement the banking business or improve convenience for the bank's customers such as companies engaging in the FinTech business , subject to approval of the Commissioner of the FSA.

Investment Banks The following investment banking activities are considered to constitute "financial instruments trading business", which require registration with or a licence from the Prime Minister:.

Sale and purchase of securities. Intermediary, brokerage and agency of the sale and purchase of securities. Underwriting and offering of securities. Non-discretionary investment advisory services. Discretionary investment management services. These investment banking activities are carried out primarily by securities companies or other financial service providers.

Banks can engage in a limited scope of financial instruments trading business see above, Universal banks, commercial and retail banks. Private Banks The Banking Act requires a bank to be incorporated and does not allow a partnership form. It scrutinises privately owned banks by regulating shareholders see Question 18 to Other Banks In addition to banks, a number of co-operative financial institutions engage in banking activities mainly to support small and medium-sized enterprises.

These institutions include:. The Norinchukin Bank that is, the agricultural and forestry central bank and the agricultural and fisheries co-operative, which are supervised by the FSA and the Ministry of Agriculture, Forestry and Fisheries. The DIC has taken these measures not only for international and nationwide failures, but also for the failure of regional banks. The amendments to the Deposit Insurance Act became effective on 6 March and introduced a regime for the orderly resolution of financial institutions.

The regime is triggered if it is deemed necessary to prevent severe market turmoil. Japan must implement the policy measures in accordance with the recommendations announced by the FSB. Organisation of Banks Legal Entities. What legal entities can operate as banks? What legal forms are generally used to operate as banks? All banks organised in Japan must be stock corporations kabushiki kaisha.

For details of the structure of stock corporations, see Question What requirements apply to the structure of banking groups?

Any person who wishes to become a bank holding company needs to obtain the prior approval of the FSA paragraph 1, Article , Banking Act. Aforementioned approval is granted at the sole discretion of the FSA. In principle, the criteria required to be met to obtain approval as a bank holding company include the following:. Ability to generate income and pay for its operating expenditure.

Sufficiency of knowledge and experience on the part of relevant personnel to engage in banking business. Corporate Governance. What are the legislative and non-legislative corporate governance rules for banks?

Capital Framework also includes a market risk capital charge implementing the Basel II. Unlike the Basel II. The Basel Committee adopted a revised capital requirement for market risk framework in January to ensure standardisation and promote consistent implementation globally. Key features include a revised boundary between the trading and banking book, a revised standardised and internal models approach for market risk, and incorporation of the risk of market illiquidity.

In January , the Basel Committee issued revised standards, which will come into effect in January Capital Framework includes two separate leverage requirements. In addition, the largest U. In October , the U. For example, in order for a U. Capital levels also form the basis for the level of deposit insurance premiums payable to the FDIC by depository institutions, the ability of depository institutions to accept brokered deposits, qualification of banking organisations for streamlined processing of applications to make acquisitions or engage in new businesses, as well as other filings with bank supervisors under various laws and regulations.

Capital levels also form the basis for the prompt corrective action framework applicable to depository institutions which provides for early supervisory intervention in a depository institution as its capital levels decline.

Stress testing is a key supervisory technique used by U. The tailoring rules revised the stress testing and CCAR requirements so as to reduce the compliance burden on firms in lower-risk categories. Under this revised regime, U. BHCs and IHCs are required to run company-run stress tests and supervisory stress tests either annually or biannually, depending on the applicable category of standards under the tailoring rules.

There were 34 firms subject to the CCAR process in , with 19 of them subject to the qualitative assessment. In , the Federal Reserve conducted additional stress tests to assess the resilience of firms under a range of plausible downside scenarios stemming from the economic conditions caused by the COVID pandemic.

The results of that additional stress test were released in December and showed that firms would experience substantial losses and lower revenues under two separate hypothetical recessions, but could continue lending to creditworthy businesses and households.

GSIBs and certain U. IHCs of non-U. These requirements are aimed at improving the prospects for the orderly resolution of such an institution. LTD issued on or prior to December 31, was grandfathered from provisions of the rule that prohibit certain contractual provisions.

Liquidity has become a key focus of U. In , the U. The Federal Reserve has stated that it may develop and propose a quantitative LCR-based liquidity requirement applicable to the U.

Institutions subject to the U. Generally, the NSFR requires covered firms to hold a specified ratio of high-quality liquid assets sufficient to cover the outflows of a one-year stress scenario.

The final rule will be effective on July 1, Holding companies and any covered non-bank companies regulated by the Federal Reserve will be required to publicly disclose their NSFR levels semi-annually beginning in Regulators have also addressed liquidity in the U.

As a general matter under U. Properly licensed non-U. Virtually all U. Except for grandfathered offices, U. Funds on deposit in a non-U. Also, they are not entitled to the benefits of the depositor preference provisions of the FDI Act unless such deposits are by their terms dually payable at an office of the bank inside the United States.

The FDIC requires FDIC-insured institutions with more than 2 million deposit accounts to maintain complete and accurate data on each depositor and to implement information technology systems capable of calculating the amount of insured money for depositors within 24 hours of a failure. In , the FDIC issued a final rule that makes several changes to brokered deposit rules in order to modernise its framework and adapt to the introduction of fintech companies into the industry.

Consumer deposit accounts are subject to CFPB regulations that require banking organisations to make disclosures regarding interest rates and fees and certain other terms and conditions associated with such accounts. Deposit accounts are also subject to Federal Reserve regulations regarding funds availability and the collection of cheques. In recent years, fees associated with various types of overdraft protection products have generated significant litigation and regulatory attention.

In addition, banks are generally subject to reserve requirements with respect to their transaction accounts. Accounts that are not transaction accounts, such as money market deposit accounts, have limitations on the number of certain types of withdrawals or payments that can be made from such an account in any one month.

The lending activities of banks are subject to prudential and consumer protection requirements. Lending limits also now generally include credit exposure arising from derivative transactions and, in the case of national banks and U.

The lending limits applicable to the U. BHCs and non-U. FBOs can meet limits applicable to their combined U. The exact requirements applicable to IHCs are based on their size. Bank loans to insiders are subject to limitations and other requirements under Regulation O of the Federal Reserve.

Banks are also required to hold reserves against potential loan losses, and the United States is generally transitioning from an incurred loss method to a current expected credit loss method.

Lending to consumers is generally subject to a number of U. A significant issue in recent years has been whether a loan that is valid when made remains valid in the hands of an assignee, which may be subject to different rules, including usury limits, than the original lender. This was an issue in a case, Madden v. Midland Funding. In addition, if, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan.

These rulemakings are the subject of ongoing litigation. The Home Mortgage Disclosure Act requires banks and certain non-bank lenders located in metropolitan areas to collect and report data about their residential mortgage lending activities e. The Federal Reserve did not join that proposal. Anti-tying statutes generally prohibit a bank from extending credit or providing other services to any person on the condition that the person also obtain some other product or service other than certain traditional bank products from the bank or an affiliate.

Leveraged lending and commercial real estate lending are additional areas of particular supervisory focus, and interagency guidance has been released with respect to both activities. In December , the U. The ban on proprietary trading essentially prohibits a banking entity from trading as principal in most financial instruments for short-term gain. Exemptions are permitted for among other activities underwriting, market-making, hedging and, for FBOs, activities conducted solely outside of the United States.

Covered funds are generally issuers that would be considered investment companies under the Investment Company Act of but for the exemptions under Section 3 c 1 or 3 c 7 of such Act.

Exceptions are available for among other activities traditional asset management activities and, for FBOs, activities conducted solely outside the United States. One apparently unintended consequence of the Volcker Rule is that foreign funds that have no U. EGRRCPA also relaxed certain naming restrictions that applied to covered funds sponsored or advised by a banking entity. In , U. Furthermore, the revisions create a presumption of compliance for trading desks engaged in market-making and underwriting activity that establish, implement, and enforce internal limits that are designed not to exceed the reasonable expected near-term demand of customer, clients, or counterparties.

The National Bank Act limits the activities of national banks to those specifically authorised by statute, which includes activities incidental to the business of banking. State banks are subject to state laws, and their activities conducted in a principal capacity are also limited to those permissible for national banks under federal law, unless the FDIC specifically approves the activity.

The activities of a U. In , the OCC revised its licensing and activities regulations that govern numerous activities of national banks, including chartering of banks, establishment of subsidiaries, corporate governance, mergers, dividends, derivatives activities, and other matters.

These revisions take effect in Bank transactions with affiliates are subject to qualitative and quantitative limits under Sections 23A and 23B of the Federal Reserve Act. BHCs that successfully elect to be treated as FHCs may engage in a broader range of activities than BHCs that do not make such an election, such as securities underwriting, merchant banking, and insurance underwriting.

In addition, an FBO that meets the requirements of a qualifying FBO may engage in a broad range of banking and non-banking activities outside the United States. Banks are generally required to respond to complaints and are expected to resolve most complaints within 60 days. The CFPB publishes a database of non-personal complaint information. So, regulators have more basic expectations for smaller, less complex banks.

For example, although capital requirements for institutions of all sizes have strengthened since the — financial crisis, some requirements do not apply to smaller banks. It also called for a more systemic approach to supervision in order to safeguard the financial system. For example, the legislation created a new interagency Financial Stability Oversight Council to monitor risks to the financial system as a whole. To this end, the Fed and other federal financial regulatory agencies expanded research and data collection in order to enhance financial system monitoring and analysis.

In addition, the Fed makes its most consequential supervisory decisions on a System-wide level through the Large Institution Supervision Coordinating Committee, consisting of representatives from various professional disciplines and several Reserve Banks, as well as the Board of Governors.

The Dodd-Frank Act also directed the Fed to apply stronger supervisory standards to nonbank financial institutions that have the potential to affect the whole financial system. The legislation also gave the Fed authority to assign individual smaller holding companies and financial market intermediaries to this group. These stronger supervisory standards helped to make the entire financial system healthier, more stable, and more resilient to financial shocks and stresses.

Federal Reserve Press Release: Federal Reserve provides additional information to financial institutions on how its supervisory approach is adjusting in light of the coronavirus , March 24, Senate, Washington, D. No, Dodd-Frank was neither repealed nor gutted. Financial Stability. Crisis and Response. Skip to content Readability Tools. Reader View. Dark Mode.