※As of May 18, 2024

Comprehensive Guidelines forSupervision of Major Banks, etc(Provisional Translation）
Main Document

July 2024
Financial Services Agency

Comprehensive Guidelines for Supervision of Major Banks, etc(Provisional Translation)I.

II.

How Major Banks are Supervised and Regulated
I-1

Key Principles in Financial Supervision

I-2

History of Financial Supervisory Guidelines

I-3

Roles of the Guidelines for Supervision of Major Banks

Points to Note in Administrative Services for Supervising Major Banks
II-1

II-2

Key Principles in Supervisory Activities
II-1-1

How to Supervise Major Banks

II-1-2

Supervisory Approaches and Methods

II-1-3

Quality Control

II-1-4

Cooperation with Local Financial Bureaus

II-1-5

Coordination with Inspection by the Deposit Insurance Corporation of Japan

II-1-6

Administrative Reports on Individual Banks

II-1-7

Points to Note in Preparation of Application Documents

II-1-8

Points to note regarding written and face-to-face proceduresII-1-9Points to note when submitting application forms

Grievance against Banks and Provision of Information about Banks
II-2-1

Responding to Inquiries or Complaints

II-2-2

Cooperation with the Counseling Office for Financial Services Users

II-2-3II-2-4
II-3

II-5

Information from the Counseling Office for Financial Services Users
Responding to Fictitious Billing with Use of Deposit Accounts or Other Fraudulent Use of Deposit
Accounts

Responding to Inquiries about Interpretation and Application of Laws and Regulations
II-3-1

Scope of the FSA’s Inquiry Services

II-3-2

Methods for Responding to Inquiries

II-3-3

II-4

Responding to Curbs on New Loans or Forcible Collection of Outstanding Loans Recognized Based on

Prior Confirmation Procedures on the Application of Laws and Regulations by Administrative Agencies(No-Action Letter System)

II-3-4

System to Remove Gray Zone Areas

II-3-5

Responding to Inquiries about Deposits and Savings

Points to Note in Providing Administrative Guidance or Implementing Equivalent Actions
II-4-1

Points to Note in Providing Administrative Guidance or Implementing Equivalent Actions

II-4-2

Points to Note in Interviews or Other Direct Communication

Points to Note in Enforcing Administrative Actions or Other Measures
II-5-1

Basic Workflow for Administrative Action (Adverse Action)

II-5-1-1
II-5-1-2

III.

Administrative action
Cancellation of the Obligation to Make Progress Reports Basedon a Business Improvement Order Issued under Article 26 of the Banking Act

II-5-2

Relations with the Administrative Procedure Act and Other Relevant Acts

II-5-3

System for Exchange of Opinions

II-5-4

Communication with Relevant Authorities in Japan and Overseas Regulators

II-5-5

Basic Stance for Public Disclosure of Adverse Administrative Actions

II-5-6Preliminary Examination

Evaluation Points for Supervising Major Banks
III-1

III-2

GovernanceIII-1-1

BackgroundIII-1-2

Major Supervisory Viewpoints
III-1-2-1

If Banks are a Company with a Board of Company Auditors

III-1-2-2

If Banks are a Company with a Nominating Committee, etc.

III-1-2-3

If Banks are a Company with Audit and Supervisory Committee

III-1-3

Supervisory Approaches

III-1-4

Supervisory Actions

Financial Soundness
III-2-1

Capital Adequacy
III-2-1-1

Appropriateness and Sufficiency of Capital
III-2-1-1-1

BackgroundIII-2-1-1-2

Major Supervisory Viewpoints

III-2-1-1-3
III-2-1-2

III-2-1-3

III-2-1-1-2-1

Directors and the Board of Directors

III-2-1-1-2-2

Capital Adequacy Assessment

III-2-1-1-2-3

Measures to Maintain Sufficient CapitalSupervisory Approaches and Actions

Accuracy of Capital Adequacy Ratios and Leverage Ratios
III-2-1-2-1

BackgroundIII-2-1-2-2

Points to Note

III-2-1-2-3

Internal Control over Transactions Subject to Market Risk Regulations

III-2-1-2-4

Supervisory Approaches and Actions

Order for Prompt Corrective Action
III-2-1-3-1

BackgroundIII-2-1-3-2

Supervisory Approaches and Actions

III-2-1-3-3

Criteria for Judging the Reasonableness Prescribed in Article 2(1) of theCategorization OrderIII-2-1-3-4
III-2-1-3-5
III-2-1-3-6
III-2-1-3-7
III-2-1-4

III-2-2Categories
Progress Reporting
Criteria for Revaluation of Assets Listed in Article 2(2) of theCategorization Order
Miscellaneous Notes for Prompt Corrective Action

Capital Distribution Constraints
III-2-1-4-1

BackgroundIII-2-1-4-2

Supervisory Approaches and Actions

III-2-1-4-3

Submission of Plans and Progress Reporting

III-2-1-4-4

Miscellaneous Notes for Prompt Corrective Action

Improvement in Profitability
III-2-2-1

BackgroundIII-2-2-2

Major Supervisory Viewpoints in Profitability Improvement

III-2-2-3

Supervisory Approaches and Actions (including Early Warning System)

III-2-2-4
III-2-3

Levels of Capital Adequacy Ratios or Leverage Ratios Underlying Order

Points to Note for Financial Institutions in the Context of the Industrial Competitiveness
Enhancement Act

Risk Management
III-2-3-1

III-2-3-2

Risk Management (General) and Integrated Risk Management
III-2-3-1-1

Background (Risk Management)

III-2-3-1-2

Background (Integrated Risk Management)

III-2-3-1-3

Major Supervisory Viewpoints Common in All Types of Risk Management

III-2-3-1-4

Major Supervisory Viewpoints in Integrated Risk Management

III-2-3-1-5

Supervisory Approaches and Actions

Credit Risk Management
III-2-3-2-1

III-2-3-2-2

III-2-3-2-3

III-2-3-2-4

Outline of Credit Risk Management
III-2-3-2-1-1

BackgroundIII-2-3-2-1-2

Major Supervisory Viewpoints

Credit Risk Management for Large Borrowers
III-2-3-2-2-1

BackgroundIII-2-3-2-2-2

Major Supervisory Viewpoints

Disposal of Non-performing Loans and Business Rehabilitation(Integrated Revitalization of Industry and Finance)
III-2-3-2-3-1

BackgroundIII-2-3-2-3-2

Major Supervisory Viewpoints

Country Risk Management
III-2-3-2-4-1

BackgroundIII-2-3-2-4-2
III-2-3-2-5

III-2-3-2-6
III-2-3-3

III-2-3-4

Credit Risk Reduction Method
III-2-3-2-5-1

BackgroundIII-2-3-2-5-2

Major Supervisory Viewpoints

Supervisory Approaches and Actions Related to Credit Risk Management

Market Risk Management
III-2-3-3-1

BackgroundIII-2-3-3-2

Major Supervisory Viewpoints

III-2-3-3-3

Supervisory Method and Actions

Liquidity Risk Management
III-2-3-4-1

BackgroundIII-2-3-4-2

Major Supervisory Viewpoints

III-2-3-4-3

Supervisory Method and Actions

III-2-3-4-4

Liquidity Ratio Regulation (for Internationally Active Banks)III-2-3-4-4-1
III-2-3-4-4-2

III-2-3-4-4-3

III-2-3-5

III-2-3-6

III-2-3-7

III-3

Major Supervisory Viewpoints

Background
Accuracy of Calculation of Liquidity Coverage Ratio
and Net Stable Funding Ratio
III-2-3-4-4-2-1

BackgroundIII-2-3-4-4-2-2

Points of Attention

III-2-3-4-4-2-3

Supervisory Method and Actions

Supervisory Measures Regarding the Regulation on
Liquidity Ratios
III-2-3-4-4-3-1

Supervisory Method

III-2-3-4-4-3-2

Supervisory Actions

Points to Note Regarding Compensation Structure, etc.
III-2-3-5-1

BackgroundIII-2-3-5-2

Supervisory Viewpoints

III-2-3-5-3

Supervisory Method and Actions

Supervisory Viewpoints for the Capability to Aggregate Data Relating to Risk
Management and Reporting to the Board of Directors, etc.
III-2-3-6-1

BackgroundIII-2-3-6-2

Viewpoints and Supervisory Method and Actions

Operational Risk Management
III-2-3-7-1

BackgroundIII-2-3-7-2

Major Supervisory Viewpoints

III-2-3-7-3

Supervisory Method and Actions

Appropriateness of Business Operations, etc.

III-3-1

Legal Compliance (for Especially Important Matters)
III-3-1-1

Supervisory Actions in Response to Misconduct and Other Inappropriate Behavior

III-3-1-2

Handling of Violation of Laws and Regulations by Officers

III-3-1-3

III-3-1-2-1

BackgroundIII-3-1-2-2

Supervisory Method and Actions

Measures against Organized Crime
III-3-1-3-1

III-3-1-3-2
III-3-1-4

III-3-1-5

III-3-1-6

III-3-1-3-1-1

BackgroundIII-3-1-3-1-2

Major supervisory viewpoints

III-3-1-3-1-3

Supervisory Method and Actions

Counterfeit Bank Notes and Coins, etc.

Prevention of Damage that May be Inflicted by Anti-Social Forces
III-3-1-4-1

BackgroundIII-3-1-4-2

Major Supervisory Viewpoints

III-3-1-4-3

Supervisory Method and Actions

Compliance with Third-Party Allotment
III-3-1-5-1

BackgroundIII-3-1-5-2

Viewpoints and Supervisory Method and Actions

Inappropriate Transactions, etc.
III-3-1-6-1
III-3-1-6-2

III-3-2

Verification at the Time of Transaction

Performance Guarantee
Prevention of the Occurrence of Inappropriate Transactions Contrary toNormal Transaction Practices

Appropriateness and Sufficiency of DisclosureIII-3-2-1

BackgroundIII-3-2-2

Internal Control for Financial Reporting

III-3-2-3

Type of Disclosure Required for Banks

III-3-2-4

Points to Consider for DisclosureIII-3-2-4-1
III-3-2-4-2

III-3-2-4-3

Application of Principle of Materiality
Information to be Described in Disclosure Report (concerning Articles
19.2 and 19.3 of the Enforcement Regulation)
Disclosure of Risk Management Loans based on the Banking Act and the
Financial Reconstruction Act
Disclosure of Condition of Capital Adequacy (concerning Article 19-

III-3-2-4-42(1)(v)(d), Article 19-3(1)(iii)(c), Article 19-5, Article 34-26(1)(iv)(c),and Article 34-27-2 of the Banking Act Enforcement Regulation)

Disclosure on compensation system (concerning Article 19-2(1)(vi),
III-3-2-4-5

Article 19-3(iv) and Article 34-26(1)(v) of the Banking Act Enforcement
Regulation)
Disclosure of Condition, etc. of Sound Business Operations concerning

III-3-2-4-6

Liquidity (concerning Article 19-2(1)(v)(e), Article 19-3(1)(iii)(d),Article 19-5, Article 34-26(1)(iv)(d) and Article 34-27-2 of the Banking
Act Enforcement Regulation)(Internationally Active Banks)
Disclosure of Condition, etc. of Sound Business Operations concerning

III-3-2-4-7

TLAC (concerning Article 19-3(iii)(d), Article 19-5, Article 3426(1)(iv)(d) and Article 34-27-2 of the Banking Act Enforcement
Regulation)(Banks subject to TLAC)

III-3-3

III-3-2-5

Major Supervisory Viewpoints

III-3-2-6

Supervisory Methods and Measures

Provision of Information and Consultation Function, etc. for Protection of Users
III-3-3-1

III-3-3-2

III-3-3-3

III-3-3-4

III-3-4

Customer Explanation Concerning Credit Transactions, etc. (loan contracts, and related
collateral and guarantee contracts and derivative transactions)III-3-3-1-1

Purpose and SignificanceIII-3-3-1-2

Major Supervisory Viewpoints

III-3-3-1-3

Supervisory Methods and Measures

Sales and Customer Explanation for Deposit and Risk-Associated Products, etc.
III-3-3-2-1

Purpose and SignificanceIII-3-3-2-2

Major Supervisory Viewpoints

III-3-3-2-3

Supervisory Methods and Measures

Control Environments for Management of Information Related to Customers, etc.
III-3-3-3-1

Purpose and SignificanceIII-3-3-3-2

Major Supervisory Viewpoints

III-3-3-3-3

Supervisory Methods and Measures

Outsourcing
III-3-3-4-1

Purpose and SignificanceIII-3-3-4-2

Major Supervisory Viewpoints

III-3-3-4-3

Supervisory Methods and Measures

Rules, etc. for User Protection
III-3-4-1

III-3-4-2

Measures to Prevent Customers’ Misidentification
III-3-4-1-1

Purpose and SignificanceIII-3-4-1-2

Major Supervisory Viewpoints

III-3-4-1-3

Supervisory Methods and Measures

Points of Attention regarding Private Banking, etc.

III-3-5

III-3-4-2-1

Purpose and SignificanceIII-3-4-2-2

Major Supervisory Viewpoints

III-3-4-2-3

Supervisory Methods and Measures

Dealing with Complaints (including Financial ADR System)
III-3-5-1

Purpose and SignificanceIII-3-5-2

Establishment of Internal Control Environment for Handling Complaints, etc.

III-3-5-3

III-3-5-2-1

Purpose and SignificanceIII-3-5-2-2

Major Supervisory Viewpoints

Response to the Financial ADR System
III-3-5-3-1

III-3-5-3-2

III-3-6

III-3-7

III-3-5-3-1-1

Purpose and SignificanceIII-3-5-3-1-2

Major Supervisory Viewpoints

In Cases Where There is No Designated ADR Body
III-3-5-3-2-1

Purpose and SignificanceIII-3-5-3-2-2

Major Supervisory Viewpoints

III-3-5-4Statements in Various Documents

III-3-5-5Administrative Response

Development of Environments for Operational Resilience
III-3-6-1

Purpose and SignificanceIII-3-6-2

Major Supervisory Viewpoints

III-3-6-3

Supervisory Methods and Measures

Information Technology (IT) System Risk
III-3-7-1

III-3-7-2

III-3-7-3

III-3-8

In Cases Where There is a Designated ADR Body

Information Technology (IT) System Risk
III-3-7-1-1

Purpose and SignificanceIII-3-7-1-2

Major Supervisory Viewpoints

III-3-7-1-3

Supervisory Methods and Measures

Security for ATM System
III-3-7-2-1

Purpose and SignificanceIII-3-7-2-2

Major Supervisory Viewpoints

III-3-7-2-3

Supervisory Method and Actions

Use of Interbank System/Network
III-3-7-3-1

Purpose and SignificanceIII-3-7-3-2

Major Supervisory Viewpoints

III-3-7-3-3

Supervisory Methods and Measures

Internet Banking
III-3-8-1

Purpose and SignificanceIII-3-8-2

Major Supervisory Viewpoints

III-3-8-3
III-3-9

III-3-10

Supervisory Methods and Measures

Cooperation with External Payment Service Providers
III-3-9-1

SignificanceIII-3-9-2

Main Supervisory Viewpoints

III-3-9-3

Supervisory Method and Actions

System Integration Risk and Project Management
III-3-10-1

Purpose and SignificanceIII-3-10-1-1
III-3-10-1-2
III-3-10-1-3

III-3-11

III-4

III-5

III-6

System Integration Risk
Risk Characteristics of System Integration Risk and Risk Mitigation
MeasuresImportance of Project Management

III-3-10-2

Major Supervisory Viewpoints

III-3-10-3

Supervisory Methods and Measures

Management of Overseas Operations
III-3-11-1

BackgroundIII-3-11-2

Major Supervisory Viewpoints

III-3-11-3

Supervisory Methods and Measures

Exercise of Finance Facilitation Function
III-4-1

Basic Roles

III-4-2

Major Supervisory Viewpoints

III-4-3

Supervisory Methods and Measures

Exercise of Consulting Function to Customer Enterprises
III-5-1

Key Principles

III-5-2

Major Supervisory Focus

III-5-3

Supervisory Approaches and Actions

Provision of Various and High-Quality Financial Instruments and Services Suitable to User Needs
III-6-1

OutlineIII-6-2

Efforts towards Financing, etc. Focusing on Growth Potential

III-6-3

III-6-4

III-6-2-1

BackgroundIII-6-2-2

Key Principles on Efforts towards Financing Focusing on Growth Potential

III-6-2-3

Supervisory Approaches and Actions

Points to Note in Granting Consumer Loans
III-6-3-1

BackgroundIII-6-3-2

Major Supervisory Viewpoints

III-6-3-3

Supervisory Approaches and Actions

Provision of Finance Service with Consideration for Persons with Disabilities
III-6-4-1

BackgroundIII-7

III-8

III-6-4-2

Major Supervisory Viewpoints

III-6-4-3

Supervisory Approaches and Actions

Information Disclosure Regarding Corporate Social Responsibility (CSR)
III-7-1

BackgroundIII-7-2

Major Supervisory Viewpoints

III-7-3

Supervisory Approaches and Actions

Business Continuity Management (BCM)
III-8-1

BackgroundIII-8-2

Actions in Normal Times

III-8-3

Actions to Emergencies
III-8-3-1
III-8-3-2

III-9

III-10

III-11

OutlineMeasures Regarding Financial Services Support in Event of Disasters (relating to theDisaster Countermeasures Basic Act, etc.)

III-8-4

Post-Crisis Actions

III-8-5

Crisis Management System against Reputation Risk

Dissemination and Establishment of the “Guidelines for Personal Guarantee Provided by Business Owners” as Loan
Practice
III-9-1

Purpose and SignificanceIII-9-2

Major Supervisory Viewpoints

III-9-3

Supervisory Methods and Measures

Establishment of loan practice that does not, in principle, demand a personal joint and several guarantee of a third
party other than the business owner
III-10-1

Purpose and SignificanceIII-10-2

Major Supervisory Viewpoints

III-10-3

Supervisory Methods and Measures

Ensuring Smooth Implementation of Orderly Resolution, etc.
III-11-1

Purpose and SignificanceIII-11-2

Development of Recovery and Resolution Plans

III-11-3

III-11-4

III-11-2-1

Purpose and SignificanceIII-11-2-2

Viewpoints and Supervisory Method and Actions

Measures to Ensure the Effect of a Stay Decision in Contracts Governed by Foreign Laws
III-11-3-1

Purpose and SignificanceIII-11-3-2

Major Supervisory Viewpoints

III-11-3-3

Supervisory Methods and Measures

Measures to Ensure the Continuity of Systemically Important Functions in Orderly Resolutions
III-11-4-1

Purpose and SignificanceIII-11-4-2

Major Viewpoints and Supervisory Method and Actions

III-11-5

III-11-6

Liquidity Monitoring and Reporting System for Ensuring Smooth Implementation of Orderly
Resolutions
III-11-5-1

Purpose and SignificanceIII-11-5-2

Major Viewpoints and Supervisory Method and Actions

Enhancement of Loss Absorbing Capacity
III-11-6-1

III-11-6-2

III-11-7

III-11-8

IV.

V.

Adequacy, Sufficiency, and Correctness of Loss Absorbing Capacity
III-11-6-1-1

Purpose and SignificanceIII-11-6-1-2

Major Viewpoints and Supervisory Method and Actions

Orderly Resolution Using TLAC
III-11-6-2-1

Purpose and SignificanceIII-11-6-2-2

Specific Examples of Procedures

Valuation for Ensuring Smooth Implementation for Orderly Resolution, etc.
III-11-7-1

Purpose and SignificanceIII-11-7-2

Major Viewpoints and Supervisory Method and Actions

Testing of System for Ensuring Smooth Implementation of Orderly Resolutions, etc.
III-11-8-1

Purpose and SignificanceIII-11-8-2

Major Viewpoints and Supervisory Method and Actions

Bank Holding Company
IV-1

Purpose and SignificanceIV-2

Main Points to Note

IV-3

General Supervisory Methods and Measures

IV-4

System Integration

IV-5

Certified Bank Holding Company

IV-6

Administrative Processes to Note

Consolidated-base Supervision over Bank Groups
V-1

Key Principles

V-2

Arm’s Length Principle

V-3

Scope of Business of Banks and Their Group Companies
V-3-1

Key Principles

V-3-2

Handling of Article 10(2)(xxi) of the Banking Act

V-3-3

V-3-2-1

Points to Note regarding Services for Regional Development, etc.

V-3-2-2

Handling of “Other Auxiliary Business”

Scope of Business of Subsidiary Companies, etc.
V-3-3-1
V-3-3-2

Scope of Business of Subsidiary Companies, etc.
Handling of Agency/Brokerage Firms for the Purchase and Sale of Collateral Assets(excluding Real Property) Related to Other Firms’ Loans

V-3-3-3

Non-banking Advanced Banking Service Companies

V-3-3-5

Scope of Business of Any Japanese Bank’s Overseas Subsidiary Companies, etc.

V-3-3-6

Relations between Banks and Their Securities Subsidiary Companies, etc.

V-3-3-8

V-4

V-5

V-6

VI.

VII.

to Financial Institutions’ Loans

V-3-3-4

V-3-3-7

V-3-4

Handling of Collateral Asset Holding/Management Companies with the Collateral Related

Relationship between Financial Institutions, etc. and Their Affiliated Insurance
Companies
Other Matters to Note Regarding Subsidiary Companies, etc.

Restrictions on the Acquisition of Voting Rights

Major Shareholders of Banks
V-4-1

Purpose, Significance, and Supervisory Viewpoints

V-4-2

Supervisory Methods and Measures

Development of Systems to Protect Customers’ Interests
V-5-1

Purpose and SignificanceV-5-2

Major Supervisory Viewpoints

V-5-3

Supervisory Methods and Measures

Points of attention on crypto-assets
V-6-1

Purpose and SignificanceV-6-2

Major Supervisory Viewpoints

Supervision of Foreign Bank Branches
VI-1

Purpose and SignificanceVI-2

Major Supervisory Viewpoints

VI-3

Supervisory Methods and Measures

Handling of New Entry into Banking Business
VII-1

License Examination for New Entry into Banking Business and Supervisory Actions after Granting the License
VII-1-1

Purpose and SignificanceVII-1-2

License Application Filed by a Bank whose Finance and Management Are Influenced by a Shareholder

VII-1-3

Handling of License Application for Limited Banking Operations

VII-1-4

Risk Management and Profitability in Cases Where the Asset Structure is Biased towards Securities
including Government Bonds
Customer Protection and Other Viewpoints in Cases Where New Types of Banks are Exclusively

VII-1-5Focusedon Non-face-to-face Transactions Using Online Banking or ATMs without any Manned Offices

VII-1-6

License Application Filed by a Bank of Which Parent Company is a Non-Financial Company
VII-1-6-1
VII-1-6-2

Perspective of Ensuring the Independence of Any Subsidiary Bank from Its Parent NonFinancial Company
Perspective of Blocking the Parent Non-Financial Company’s Business Risk

VII-2

Approval Examination for Major Shareholders of Banks and Supervisory Actions after the ApprovalVII-2-1

Purpose and SignificanceVII-2-2

Matters to be Checked in the Bank’s Major Shareholder Approval Examination

VII-2-3
VII-3

VII-4
VIII.

VII-2-2-1

Bank’s Major Shareholder Approval Application Filed by a Non-Financial Company

VII-2-2-2

Bank’s Major Shareholder Approval Application Filed by an Investment Fund

Points of attention in the Post-Approval Supervision

Application to Capital Participation in Existing Banks
VII-3-1

Matters to be Noted in Capital Participation in Existing Banks

VII-3-2

Approval for Major Shareholders of Banks

Application Mutatis Mutandis of the Supervisory Guidelines to New Forms of Banks

Bank Agency Service
VIII-1

Purpose and Significance

VIII-2

Key principles

VIII-3

VIII-2-1

History and Purport of Introduction of the Bank Agency Service System

VIII-2-2

Supervision through Principal Banks

Administrative Processes Related to Supervision over Bank Agents
VIII-3-1

General Administrative Processes
VIII-3-1-1

Flow of General Administrative Processes Related to Supervision over Bank Agents

VIII-3-1-2

Supervisory Actions through Principal Banks

VIII-3-1-3

Cooperation between Supervisory Departments

VIII-3-1-4

VIII-3-2

Internal Delegation of Part of the Authority of the Director-General of Local Finance
Bureau to the Director, etc. of the Competent Finance Office

VIII-3-1-5

Administrative Report

VIII-3-1-6

Application Mutatis Mutandis of the Supervisory Guidelines

Administrative Processes Related to License Application
VIII-3-2-1

VIII-3-2-2

VIII-3-2-3

Points to Note in Applying for License
VIII-3-2-1-1

Necessary or Unnecessary of License

VIII-3-2-1-2

Points of Attention in Acceptance of License Application Forms
VIII-3-2-1-2-1

Acceptance Procedures for License Applications Forms

VIII-3-2-1-2-2

Entries in the License Application Form

VIII-3-2-1-2-3

Attached Documents

Points to Note in Examining Permission
VIII-3-2-2-1

Examination Related to Financial Basis

VIII-3-2-2-2

Examination Related to Business Execution Ability

VIII-3-2-2-3

Examination on Social Credibility

VIII-3-2-2-4

Examination on Concurrent Engagement in Other Businesses

OthersVIII-3-2-3-1

VIII-3-2-3-2

Permission Number

VIII-3-2-3-1-2

Notification to Permission Applicants

Handling of Denial of Permission Application

Points to Note Regarding Receipt of Notification

VIII-3-4

Administrative Processes Related to Application for Approval of Concurrent Business
Points to Note in Approval of Concurrent Business
VIII-3-4-1-1
VIII-3-4-1-2

Necessity of Approval of Concurrent Business
Points to Note in Acceptance of Written Application for Approval ofConcurrent Business

VIII-3-4-2

Points of Attention in Examination of Approval of Concurrent Business

VIII-3-4-3

Others
VIII-3-4-3-1

Handling of Approval

VIII-3-4-3-2

Handling of Disapproval

Bank Agent
VIII-4-1

Purpose and Significance

VIII-4-2

Major Supervisory Viewpoints
VIII-4-2-1

Prohibited Acts, and Inappropriate Transactions Pertaining to a Bank Agent

VIII-4-2-2

Legal Compliance (for Especially Important Matters)

VIII-4-2-3

Provision of Information and Consultation Function for Protection of Users

VIII-4-2-4

Rules, etc. for User Protection

VIII-4-2-5

Measures to be Taken by a Bank Agent When Undertaking Bank Agency Services for Twoor More Principal Banks
VIII-4-2-5-1
VIII-4-2-5-2

VIII-4-2-6
VIII-4-2-7

Explanation to Customers (Articles 34-43 and 34-46 of the Banking Act
Enforcement Regulation)
Management of Customer Information

Measures Taken by a Principal Bank Agent to Ensure the Sound and Appropriate Conduct
of Business Operations of a Secondary Bank Agent
Others
VIII-4-2-7-1
VIII-4-2-7-2
VIII-4-2-7-3

VIII-5

VIII-3-2-3-1-1

VIII-3-3

VIII-3-4-1

VIII-4

Handling of Approval of Permission Application

Prohibition of Name-Lending
Points to Note Regarding Public Inspection of Written Reports of Bank
Agency Services
Public Inspection of Written Explanation of Principal Bank

Principal Bank
VIII-5-1

Background

VIII-5-2

Major Supervisory Viewpoints
VIII-5-2-1

Points of Attention Regarding Selection of Bank Agent

Measures to Ensure Appropriateness of the Business of a Bank Agent by a Principal Bank
VIII-5-2-2(Article 52-58 of the Banking Act, Article 34-63 of the Banking Act Enforcement
Regulation)

VIII-5-2-3
VIII-5-2-4
IX.

Points of Attention Considered Regarding a Case Where the Bank Agent is the Parent
Company or a Major Shareholder of the Principal Bank

Electronic Payment Handling Services
IX-1

BackgroundIX-2

Key Principles

IX-3

IX-2-1

Key Principles concerning Supervision of Electronic Payment Handling Service Providers

IX-2-2

Key Principles concerning Administrative Processes related to Supervision

Information Technology (IT) System Risk
IX-3-1Main Supervisory Viewpoints

IX-4

Legal Compliance (for Especially Important Matters)

IX-5

Provision of Information and Consultation Function for Protection of Users

IX-6

Rules, etc. for User Protection

IX-7

Others

IX-8
X.

Points of Attention Regarding Inspection of the Registry of Bank Agents

IX-7-1

Measures to Ensure Precise Execution of Entrusted Business (Article 34-63-20)

IX-7-2

Prohibition of Name-Lending

IX-7-3Special Provisions concerning Electronic Payment Services Involving Entrusting Banks, etc.

Application Mutatis Mutandis of the Supervisory Guidelines

Electronic Payment Services
X-1

Purpose and SignificanceX-2

Key Principles

X-3

X-4

X-5

X-2-1

Key Principles in Supervising Electronic Payment Service Providers

X-2-2

Key Principles in the Administration of Supervision

Information Technology (IT) System Risk
X-3-1

BackgroundX-3-2

Major Supervisory Viewpoints

X-3-3

Supervisory Methods and Measures after Registration

Rules for Protection of Users
X-4-1

Significance

X-4-2

Main Focus

X-4-3

Supervisory MeasuresCompensation for Fraudulent Transactions
X-5 -1

Major Supervisory Viewpoints

X-5 -2

Supervisory Methods and Responses

I

How Major Banks are Supervised and Regulated

I-1

Key Principles in Financial Supervision(1) The goal of financial supervision is to preserve the credibility of bank services, to achieve the soundand appropriate management of bank services in order to ensure the protection of depositors andfacilitate financial services, and to thereby contribute to the sound development of Japan’s economy,
as described in Article 1 of the Banking Act of Japan (the “Act”).
(2) Since its inception, the Financial Services Agency of Japan (“FSA”) has had a mission to ensuretransparent and fair financial policy based on explicit rules.
To this end, the FSA is constantly working to improve administrative efficiency and effectiveness,
to make rules even more explicit, and to refine administrative procedures in various areas of financial
policy, including supervision, inspection, and surveillance.
Another important role that the FSA performs in this context is to promote enhanced disclosure byfinancial institutions on an ongoing basis, with a view to further enhancing their business
transparency, encouraging their self-regulatory and self-corrective behavior under market discipline,
and establishing the principle of reasonable sharing of risks between banks and depositors.
(3) Administrative transparency and fairness continue to constitute the backbone of the administrative
operations now and in the future. At the same time, however, excessive prescription must be avoided.
If enthusiasm to make rules clearer evolved into the preparation of extremely meticulous checklists, theregulator’s effort would end up with mechanical repetition and continuation of backward-looking andone-size-fits-all review based on a common comprehensive checklist. In this situation, no attempt
would be made to explore root causes of problems and substantive verification of potential secondary
problems or consequences. Moreover, such a supervisory approach might bring about further
unwanted effects. For example, financial institutions might be discouraged from finding out what istruly important in light of their overall business management and root causes of various problems, andseeking fundamental solutions to prevent recurrences. Or financial institutions might become
unwilling to take forward-looking measures at an early stage and to stay innovative in pursuit of bestpractices.
The FSA is therefore committed to continuous and seamless monitoring through accurate profilingand close communication with individual financial institutions, in light of their business size andcharacteristics and the likelihood of facing serious problems that could affect their financial stability
or compliance. Then, the FSA will implement supervisory measures, where appropriate, to preventthe occurrence of serious problems. In addition, the FSA is continuing various efforts, including
dialog with financial institutions and other stakeholders, to encourage financial institutions’initiatives to pursue best practices.

1<Reference> “FSA’s Supervisory Approaches (Replacing Checklists with Engagement),” June 29, 2018
(4) With the key principles described in (1) to (3) in mind, the FSA requires that its staff members
engaged in supervision of financial institutions execute their duties in accordance with the following
code of conduct and continue efforts to maintain confidence in financial policy.
(i)Entrustment from Japanese citizens and observance of professional ethics
FSA staff members are assigned to their duties because the corresponding responsibility isdelegated from Japanese citizens to the FSA. Therefore, FSA staff members on duty must stay
conscious of the goal of financial supervision described in I-1(1) as the highest-priority mission.
They must also maintain ethics pertaining to their duties and endeavor to aim at ensuring publicconfidence in financial policy.

(ii) Official discipline, integrity, and confidentiality
In the conduct of financial policy, FSA staff members should never compromise on discipline,
integrity, and confidentiality and should maintain an even-minded and immovable attitude.
(iii) Big-picture and medium- to long-term perspectives
The standpoints of citizens and companies using financial services should always be remembered.
Rather than ending in detecting and clearing away short-term problems from a narrow point ofview, FSA staff members’ time and effort must be spent to find out root causes of problems andto seek early solution from big-picture and medium- to long-term perspectives.
(iv) Integrity and fairness
Duties must be executed in an integrated and fair manner, through proper administrative
procedures conforming to applicable laws, and with due consideration to circumstances ofrespective financial institutions. Domestic financial institutions and financial business operatorsand foreign entities operating in Japan (i.e., foreign financial institutions’ branches or foreign
corporations’ subsidiaries operating in Japan as financial institutions or financial business
operators) should be treated equally, except when different treatment is reasonably accountablebased on applicable laws.
(v)

Respect for financial institutions’ initiatives
To achieve the goal of financial supervision, financial institutions’ initiatives for innovation are
indispensable. With this in mind, and recognizing that they are private enterprises, FSA staff
members must pay due regard to their self-initiated efforts in their business management.

(vi) Self-improvement
FSA staff members are expected to continuously brush up and improve their fundamental
understanding of financial laws and regulations and recent conditions of financial institutions,
including those of foreign countries, and a broad range of social and economic topics that could
affect financial services serving as economic infrastructure. To effectively execute duties, which
include dialog with financial institutions, FSA staff members should gain deep insights on
individual financial institutions and FSA staff members will need to conduct issue-specific2analyses requiring a high level of expertise in business performance, governance, risk
management, asset management, or other themes. To acquire such expertise and skills, FSA staff
members need to continue self-development efforts on a regular basis.
(vii) Appropriate and close communication with co-workers and external stakeholders
For effective supervision, FSA staff members need to have a broad perspective through a crossfunctional approach. For this reason, they should appropriately and closely communicate andcooperate with a wide variety of parties concerned, both inside and outside the FSA.
I-2

History of Financial Supervisory Guidelines(1) Renewing the handling of ministerial notifications and establishing the Guideline for Administrative
Processes
Just before the launch of the Financial Supervisory Agency (a predecessor of the current FSA) in
June 1998, Japan’s former Ministry of Finance exhaustively redesigned the ways of handlingministerial notifications related to financial affairs, as part of its efforts for a shift to rule-based,transparent, and fair financial policy. Then, the Guideline for Administrative Processes was published
as a guidebook for staff members working in supervision teams. This guidebook was intended toensure integrated financial policy and describes how to interpret and apply laws and regulations, inhouse procedures, and supervisory viewpoints to verify the soundness of financial businesses.
(2) Formulation of comprehensive supervisory guidelines targeted at Major Banks and small- andmedium-sized or regional financial institutions
For supervision over small- and medium-sized financial institutions and regional financial
institutions (*1), the Comprehensive Guidelines for Supervision of Regional Financial Institutions
were formulated in May 2004, and are based on the Action Program Concerning Enhancement ofRelationship Banking Functions published in March 2003.
With regard to major banks, however, it was decided that the formulation of comprehensive
supervisory guidelines would be postponed until the complete resolution of the non-performing loans(NPL) problems. In those days, national efforts were underway toward a goal of reducing major banks’
NPL ratio to about half by the end of March 2005, based on the Program for Financial Revival(October 2002) and other government policies.
When this goal was achieved, Japan’s financial policy outgrew the stage of emergency response to
the NPL problems and reached a turning point to move into a forward-looking phase aiming at adesired financial system for the future. In October 2005, the initial version of the Supervisory
Guidelines for Major Banks (*2) was released with the aim of realizing a financial system highly
satisfactory to users and deserving of international acclaim.
All the foregoing guidelines serve as a guide for staff members of the FSA’s headquarters and the
Local Financial Bureaus who are assigned to the duties of supervising small- and medium-size or3

regional financial institutions or Major Banks. These guidelines show the key principles in financial
supervision, supervisory evaluation points, and the points to note during administrative processes,
which have been compiled by reviewing the former administrative guidelines and systematicallyreorganizing new supervisory approaches.
Note 1: Small- and medium-size or regional financial institutions refer collectively to regional banks,
second-tier regional banks, credit associations called “shinkin banks”, and credit cooperatives
called “shinkumi banks”. However, the Comprehensive Guidelines for Supervision of Regional
Financial Institutions contain some regulations applicable to labour banks and Credit Guarantee
Corporations, in addition to the entities mentioned above.
Note 2: The term “Major Banks” refers collectively to Japan's three megabanks, SBI Shinsei Bank,
Aozora Bank, and Japan Post Bank.
(3) Revisions of the supervisory guidelines based on the redefined supervisory approaches
In 2008, the collapse of a US major investment bank in the subprime mortgage crisis triggered theglobal financial crisis and other ensuing turmoil. Nevertheless, Japan’s financial market remained
stable in general. Subsequently, however, the business environment for Japan’s financial institutions
has been becoming increasingly challenging due to Japan’s declining birth rate and ageing population
followed by shrinking domestic market, persistent global low interest rates, and competition
intensified by the rise of new technologies. In addition, a transformation appearing in the form andlocus of risks for financial institutions is accelerating. Under these circumstances, Japan’s financial
institutions are facing the increasing necessity of undertaking their initiatives to build sustainablebusiness models, to secure their soundness into the future, and to develop adequate compliance risk
management mechanisms from a long-term perspective.
Meanwhile, the FSA is required to respond, in a timely and precautionary manner, to changes inenvironments and new issues that may arise. When a FSA’s forward-looking analysis shows thelikelihood that financial institutions may face serious problems that could affect their financial
stability or compliance, the FSA will need to take quick actions. For this purpose, the FSA iscontinuing various reforms to redefine its supervisory approaches.
In June 2018, a report entitled “FSA’s Supervisory Approaches (Replacing Checklists withEngagement)” was issued to present the key principles in financial policy, new supervisory
approaches, and the FSA’s internal organization and staff assignment policy. This report states that
the Inspection Manuals are to be repealed with a view to urging the FSA to break away from checklistbased and formality-focused inspection of financial institutions and enhancing the FSA’s role toencourage financial institutions’ initiatives for innovation.
In July 2018, the FSA enforced its internal reorganization to allow for effective and efficientmonitoring of financial institutions on an ongoing basis. While under the previous organizational
structure on-site inspection had been conducted by the Inspection Bureau and interviews and otherdialog with firms had been undertaken by the Supervision Bureau, this conventional scheme was4abolished and the new scheme to integrate both on-site and off-site activities for supervision andmonitoring is being developed.
In this context, these Supervisory Guidelines were updated accordingly in December 2019,
simultaneously with the repeal of the Inspection Manuals. More specifically, the ways of continuousand seamless monitoring through fact-based profiling or engagement in dialog and the roles of therenewed Supervisory Guidelines were redefined. In addition, some clauses with excessive
prescription were modified so as not to hinder financial institutions’ initiatives for innovation. The
FSA will continue review and improvement of these Supervisory Guidelines from such viewpoints.
I-3

Roles of the Guidelines for Supervision of Major Banks(1) These Supervisory Guidelines systematically show the key principles in financial supervision, thepoints to note during administrative processes, and supervisory evaluation points, serving as a guidefor staff members assigned to the duties of supervising Major Banks.
(2) In addition to these Supervisory Guidelines, the FSA releases various documents showing its
supervisory policies, which include theme-specific supervisory approaches and principles, annual
policies, and recommendations or requests to industry associations. During supervisory processes, thedifferences in the purposes and objectives of respective policy documents must be taken into fullconsideration, and thorough explanations should be provided to the financial institutions.
(3) For the convenience of administration, these Supervisory Guidelines are applicable not only to Major
Banks, but also to other similar entities including long-term credit banks, foreign bank branches, trustbanks, and entities newly entering into banking business (in terms of licensing and approval of major
shareholders).
Note: Regarding operations using trust accounts conducted by trust banks, see the Comprehensive
Guidelines for Supervision of Trust Companies separately established.
(4) The FSA’s relevant bureaus and divisions are required to carry out the processes of supervision over
Major Banks in conformity with these Supervisory Guidelines. During those processes, theseSupervisory Guidelines must be operated in a way suitable for each firm’s circumstances, rather thanmechanically and uniformly applying the same rules. This is because these Guidelines have been
designed to respect financial institutions’ initiatives and to assist them in ensuring sound and proper
business operations.
(5) Follow-up on the banks and bank holding companies which have received capital injections frompublic funds under the Banking Act on Emergency Measures for Early Strengthening of Financial
Functions or the Deposit Insurance Act

5

(i)

While the FSA needs to follow up on the banks and bank holding companies which have received
capital injections from public funds under the Banking Act on Emergency Measures for Early
Strengthening of Financial Functions (the “Early Strengthening of Banks Act”), such follow-up
activities will be performed based on a set of relevant decisions issued by the Financial
Reconstruction Commission and the guidelines established by the FSA specifically for thispurpose (*), to be operated separately from these Supervisory Guidelines. The same applies tofollow-up activities for deposit-taking institutions and bank holding companies that have received
capital injections from public funds under Article 102(1)(i) of the Deposit Insurance Act.

Note: List of major rules applied to firms subject to capital injections from public funds(A)

Decisions of the Financial Reconstruction Commission

a. Follow-Up on Financial Institutions Subject to Capital Injections under the Early
Strengthening of Banks Act (abstract) (June 29, 1999)
b. Conversion of Convertible Preferred Shares (June 29, 1999)
c. Basic Approach for Review of Business Revitalization Plans (September 30, 1999)
d. Administrative Measures Pertaining to Follow-Up on Banks Subject to Capital Injections(September 30, 1999)(B)

Guidelines established by the FSA

a. Guidance to Clarify Ways of Implementing Administrative Measures Pertaining to FollowUp on Banks Subject to Capital Injections (June 11, 2001)
b. To Improve Corporate Governance of Major Banks Capital Injected with Public Funds(April 4, 2003, followed by partial revision on August 7, 2003)
c. To Improve Corporate Governance of Regional Banks Capital Injected with Public Funds(June 30, 2003)
d. Guidance II to Clarify Ways of Implementing Administrative Measures Pertaining to FollowUp on Banks Subject to Capital Injections (July 30, 2004)(ii) The banks which have received capital injections from public funds under the Early
Strengthening of Banks Act or the Deposit Insurance Act are required to formulate and publish
their business improvement plans and publicly disclose reports on the progress of implementationof such plans. Since such banks are subject to follow-up and administrative actions implemented
under the rules listed in the preceding paragraph, the FSA intends to make maximum use of theinformation from such preceding documents when supervising Major Banks under theseSupervisory Guidelines in accordance with the Banking Act and other laws. Such a crossfunctional approach will contribute to more efficient and effective supervisory services (cf. II1(3)).

6

II

Points to Note in Administrative Services for Supervising Major Banks

II-1

Key Principles in Supervisory Activities
To achieve the goal of financial supervision described in I-1(1), the FSA needs to make continuous

responses commensurate with the size and characteristics of each bank.
The first thing to do in such supervisory processes is to learn respective banks’ policies for developing
business models, promoting financial intermediation, securing financial stability, building compliancemanagement and risk management systems, and addressing various other issues. What is essential next
is to accurately understand how those policies are implemented, what governance systems are operated
for such implementation, what potential risks or problems lurk, and how banks recognize and respondto their respective risks and problems.
In order to turn banks’ efforts towards addressing their critical issues from a holistic viewpoint into
the sound development of Japan’s economy, banks should promote self-initiated improvements topursue best practices and renovate their management systems, even without being instructed by theregulator. What the FSA should do in this context is to encourage individual banks’ pursuit of bestpractices by means of continuous monitoring; i.e., through dialog with banks and checking theirconditions.
If, in the course of such monitoring activities, the FSA finds any issue that is considered serious interms of the soundness and appropriateness of the bank’s business or determines that the bank is unable
to improve its business by its self-initiated efforts only, the FSA will consider whether to issue a business
improvement order or to impose other administrative action pursuant to Article 26 of the Banking Act(as explained in II-5).
Some other points that need to be adequately considered in the course of supervising banks are
summarized as follows.
(1) Close communication with banks
During the supervisory processes, it is important to adequately gather and analyze information aboutbanks’ business operations and to make timely and proper responses. For this purpose, the FSA not
just needs to obtain reports from banks from time to time, but also should endeavor to closely
communicate with banks and gather information on a day-to-day basis, with a sense of moderate andconstructive tension between the regulator and regulated firms. More specifically, day-to-day
communication with banks should be secured through periodic and occasional interviews, dialog, anddiscussions with banks’ management, outside directors, internal auditors and various other officers or
employees, together with the effort to understand both financial information and business informationof those banks.
(2) Respect for banks’ initiatives

7

Since each bank, as a private company, makes management decisions at its own risk andresponsibility, the role of the FSA as a regulator is to review such decisions based on relevant laws andregulations and to encourage banks to resolve problems by their own efforts and resources. With thisrole firmly in mind, the FSA must pay due regard to banks’ initiatives in their business operations
throughout supervisory processes.
(3) Efficient and effective supervisory activities
To make maximum use of limited resources of the FSA and banks, supervisory activities need to becustomized based on each bank’s size and characteristics, and implemented efficiently and effectively.
When the FSA asks a bank to submit reports or other documents, the scope of such documents mustbe limited to the extent truly necessary for the relevant supervisory processes. More importantly, the
FSA must continue efforts to enhance efficiency and effectiveness of supervisory activities; thenecessity of the supervisory processes currently adopted and their methodologies should be constantly
reviewed and supervisory processes should be redesigned whenever necessary.
The content of the reports previously obtained from banks and the procedures for requesting
submission of reports or documents are reviewed every year to streamline such procedures and reducebanks’ paperwork burdens. On such occasions, the FSA should seek banks’ opinions about submission
requirements.
When the FSA asks banks to submit reports or other documents on their small-scale offices, theirproducts and services and other peculiar circumstances must be taken into full consideration and due
regard must be given so as not to disturb their efficient operation.
(4) Risk management at financial conglomerates
Japan has unleashed a spectrum of financial sector reforms, including: the financial system reforms
in 1993 to deregulate cross-entry among different financial business categories through establishmentof subsidiaries, the lifting of the ban on the establishment of financial holding companies in 1998, andmodifications of the provisions concerning subsidiary companies in the Banking Act and other laws by
virtue of the 1998 Financial System Reform Act. Through these developments, financial groups
containing businesses in different categories have been formed in Japan.
While the formation of these financial conglomerates may help strengthen the business structure offinancial institutions and improve the quality of their services, such grouping of firms is likely to giverise to new risks. For one thing, a complex organizational structure may lead to inefficient business
operations, or the grouping may trigger conflicts of interest among group companies and tend to
induce tie-in sales or superior position-abusing transactions. For another thing, risks are apt to spillover and affect the entire group or, conversely, may concentrate in specific firms only.
In light of these characteristics, it is not enough just to ensure the soundness of an individual bankin a banking group, but it is crucial to understand and analyze the entire group’s governance, financial
stability, and appropriateness of business operations. From the viewpoint of ensuring appropriateness8

of business operations, the FSA needs to urge banking groups to engage in integrated management.
This is also the case when a regulated bank is a subsidiary or affiliate of another firm which is a nonbanking financial institution, a foreign financial group, or a non-financial company. The FSA needs tocheck the likelihood that each such bank may have the potential risks mentioned above (e.g., risk
contagion or risk concentration), through extending the FSA’s regulatory power to major shareholdersof such banks, and also, through in-depth interviews.
Since there are various forms of financial groups, the characteristics of risks vary among different
types of groups, and the impacts of such risks spread within the group differently. As a consequence,
the governance systems adopted by those financial groups vary accordingly. The regulator’s review andenforcement activities therefore need to be tailored to each financial group’s profile. Moreover, evenin cases where business categories or applicable laws and regulations differ, when regulations are basedon a similar effect, the FSA needs to implement supervisory activities from a similar standpoint or
viewpoint. Especially for financial services provided by financial institutions with different businesscategories in an integrated manner within any financial group, it is effective for all relevant divisions
in the FSA to cooperatively engage in supervisory activities. From these points of view, it is crucial tostrengthen the collaboration among all relevant divisions, such as the Securities Business Division ofSupervision Bureau and other supervisory divisions, as well as the Securities and Exchange SurveillanceCommission.
(5) Conformity with international regulatory standards
Given that most Major Banks covered by these Supervisory Guidelines are financial institutions
operating internationally, the regulator should, to the extent possible, attempt to make its supervisory
approaches and standards compliant with the principles and guidelines for international banksupervision established by the Basel Committee on Banking Supervision or other internationalorganizations (*).
Regarding Major Banks’ activities outside Japan, the FSA needs to closely cooperate with financial
regulators in the countries in which the Major Banks are based (host countries).
Note:II-1-1

See the Guidance on Review Processes in Supervisory Services, as shown in Exhibit 1.
How to Supervise Major Banks

The regulator’s supervision over banks is basically intended to encourage their necessary
improvements. Such supervisory activities are implemented by combining various approaches andmethods, including monitoring through risk profiling or dialog, imposition of supervisory measures,
giving feedback, and dissemination of information. Such approaches and methods should beappropriately chosen based on individual banks’ circumstances and the characteristics and severity of
their problems.
In addition, day-to-day monitoring is essential for adequately understanding changes in the global

9economy and in market environments that could affect banks, for the purpose of ensuring stability ofJapan's entire financial systems and promoting financial intermediation in Japan. Data from monitoring
and findings from occasional interviews may facilitate the regulator’s dialog with banks. Through suchdialog, the regulator must understand individual banks’ circumstances and encourage their efforts topursue best risk management practices, to develop management and governance systems capable offlexibly responding to changes, and to resolve various challenges.
II-1-2

Supervisory Approaches and Methods(1) Continuous and seamless monitoring focused on priority issues
The FSA’s continuous monitoring starts with accurate profiling of individual banks andidentification of their issues to be addressed. Then, depending on the nature and priority of thoseissues, the FSA chooses among and flexibly uses various monitoring methods (including on-site
inspection) and follows up on the progress of banks’ improvement activities.
Which monitoring method is effective will depend on the target bank’s actual circumstances. In
addition, which to use should be determined after fully considering the effectiveness of eachmonitoring method in the given situation, workload burdens of both the regulator and the bank, andthe urgency of the issues. In general, what comes first is to conduct monitoring through analyses ofthe bank’s business performance, financial performance, risk data, and other information or throughinterviews with the bank’s personnel and its stakeholders within and outside the bank. On thisoccasion, whether or not the bank’s business is sound and appropriate for the time being is judged
based on the analysis findings. After this step, whether or not to conduct on-site inspection under
Article 25 of the Banking Act will be determined.
(2) Methods used for supervisory activities(i)Actions necessary for understanding the bank’s circumstances and having dialog(A) Information gathering and profiling
The FSA conducts monitoring with the intention of gaining insights into the bank’s
characteristics, challenges, self-initiated efforts for improvement, and specific conditions of
the time. Such monitoring activities include the step of understanding impacts of changing
business environments on the bank’s business management and its response measures.
Since changes in economic conditions and financial and capital markets at home and abroad
and individual banks’ behavior may affect each other, the interplay between these two factors
should also be analyzed and assessed.
These information gathering and profiling activities are accumulated through day-to-day
monitoring. While no particular forms or methods are designated for these activities, theperspectives illustrated below may be informative.
a.

Macro-level perspectives

10

It is necessary to identify and analyze impacts on individual banks and financial systems
that may potentially result from changes in economy, financial markets, politics, societies, orother domestic or international environments. One useful way is, for example, to seek
cooperation from relevant bureaus and divisions in the FSA, Local Financial Bureaus, or otherrelevant ministries or governmental agencies to gather various information about changes indomestic and international environments. Such information may cover cases of misconduct
committed by domestic and international companies, including enterprises in non-financial
sectors, legislative changes and system reforms at home and abroad, judicial precedents invarious nations, developments in discussions by foreign regulators or internationalorganizations, and economic or social changes (e.g., increasing attention to sustainable
development goals). Analyses of such various information may reveal common challenges
which are faced by industry peers or firms in other industries, which can be observed in similar
products or services, or which may exist in different countries’ legislative systems.
Since the information gathering and analysis activities described above enable horizontal
analyses of relevant risk events observed or spreading in the industries, the FSA will continue
efforts to identify and highlight problems inherent in Japan’s entire financial sector.
b. Micro-level perspectives
For effective dialog and other communication with banks, the regulator absolutely needs toaccumulate extensive knowledge about individual banks’ conditions. Among other measures,the first thing to do is to check each bank’s management philosophy; i.e., what the bank aims
to be in its business environment (e.g., customer characteristics, competitive environment)
and what the bank wants to do toward this end. It may be advisable to gather the information
described below from each bank and its stakeholders (e.g., employees, customers, regional
communities, shareholders).
・ The scope of information to be analyzed should not be limited to ﬁnancial data, risk data, orother typical information disclosed, but should be extended to minutes of executive meetingsor other organs and documents pertaining to management decisions (including theinformation about strategies to enhance financial intermediation and related progress
reports).
・ In addition to periodic interviews in connection with the bank’s period-end settlement orrisk management, FSA staff should have discussions with the heads of the bank’s respective
business units and other officers or managers in different positions from time to time inorder to learn about the bank’s business conditions, efforts to promote financial
intermediation, or other activities.
・ To understand how the bank perceives its risks and what its business operations ought to be,
FSA staff need to exchange views with the bank’s internal auditors, audit committee
members, company auditors, or outside directors.
・ To deepen the regulator’s understanding of the characteristics of banks’ customers and the11characteristics of the banking sector, FSA staff are strongly recommended to interact withbusiness operators in non-financial sectors and other stakeholders in regional communities.
・ Feedback from users of ﬁnancial services can be obtained through various channels, andsuch feedback includes, for example, inquiries or complaints received at FSA’s Counseling
Office for Financial Services Users, and findings from interviews with corporate borrowers.
In addition, media reports, inquiries from third parties, and other external information
should be analyzed.
Through these information gathering and analysis activities, as well as through themonitoring activities performed so far, the FSA will figure out banks' business models,management strategies, business operation systems and organizational structures and gain
insights into their problems, risk profiles, and potential impacts from changes in businessenvironments.
(B) Identification of priority issues and formulation of monitoring policies and plans
After horizontal challenges common among individual banks and business categories are
identified through the information gathering and profiling activities described above, all thoseissues will be prioritized, taking into full consideration the degree of importance and urgencyof the occasion such as social demands. This prioritization is necessary to facilitate
subsequent discussions between the regulator and each bank’s executives on substantive
issues critical to their business and to make maximum use of limited administrative resources.
The horizontal challenges identified as priority issues in this process are published in the
FSA’s annual supervisory policies at the beginning of each program year.
Subsequently, monitoring policies and plans are formulated based on firm-specificconditions, which describe practical policies and plans to address priority issues, and FSA
staff need to be reassigned or rearranged appropriately. To enable banks to concentrate their
management resources on efforts to address critical and substantive problems, the FSA will
choose between on-site inspection and off-site monitoring, and between firm-specificmonitoring and horizontal monitoring, depending on the nature of priority issues.
Unlike periodic on-site inspections as was previously done, the on-site inspection practicecurrently adopted is incorporated in continuous and seamless monitoring processes, for the
purpose of understanding individual banks’ conditions. However, a long interval between
occasional on-site inspections may make it relatively difficult for the regulator to foresee somerisk events, which is a negative aspect of the new practice.
In the event that new issues arise or are uncovered, the FSA will flexibly adjust monitoringplans and endeavor to adapt monitoring activities for changing circumstances.
(ii) Accurate profiling of individual banks
To figure out individual banks’ conditions, the FSA will chose the most efficient and effective
methods among: interviews with various stakeholders, requesting submission of documents on a12

non-compulsory basis, questionnaires, demanding submission of statutory reports, on-site
inspection, and other methods. Which to choose depends on the nature of issues to be addressed,
the progress of countermeasures being implemented, and other firm-specific circumstances.
If the FSA has received reports from banks through any previous monitoring or has alreadyobtained some information about banks from other sources, the FSA must review them in advanceand effectively use the information on hand in order to mitigate the banks’ paperwork burdens.
If new or previously unpredicted issues come to the attention of the FSA in the course of gathering
information, profiling, or dialog after the monitoring based on the previous analyses, the FSA will
make appropriate responses in light of the nature of the new issues.
When applying any monitoring method, the points illustrated below should be considered, among
others. Regardless of which method is chosen, the FSA must clearly explain the problems recognizedby the FSA and the purpose of discussions with the bank.
(A) Interviews
In order for the regulator and each bank to share an understanding of its priority issues, the
FSA will conduct multilevel interviews with the bank’s personnel, including top executives, theheads of business units, departments, or branches, and working-level managers, depending on
the nature of the issues.
The pursuit of best business practices is a matter that each bank should spontaneously
promote to find its own way appropriate for its own conditions and circumstances. With thisview in mind, the regulator should not impose a particular solution on the bank.
As part of these interviews, the FSA may conduct interviews or discussions on specificthemes on banks’ premises intensively for a certain period of time.
(B) Requesting submission of documents on a non-compulsory basis
When requesting banks to submit documents, the FSA will pay due regard to their burdensand closely communicate with the banks in advance, in order to convince the banks of what
documents are desired and why they are necessary, through clear and accurate explanations.
The FSA should try to reduce banks’ burdens by carefully asking for submission with adequate
intervals, avoiding duplicated submission requests, or allowing sufficient time before
submission deadlines. When asking multiple banks for submission of documents at the sametime (e.g., questionnaires), due regard should be given to respective banks’ characteristics andcircumstances.
(C) Demanding submission of reports pursuant to Article 24 of the Banking Act
When it is found necessary, the FSA will ask a bank to make a report pursuant to Article 24of the Banking Act. In this event, the bank must be fully informed and convinced as to how theregulator perceives the bank’s issues and why the regulator asks for such reporting.
(D) On-site inspection pursuant to Article 25 of the Banking Act
The FSA will conduct on-site inspection pursuant to Article 25 of the Banking Act when the
FSA determines that detailed examination is required to verify the soundness and13

appropriateness of the bank’s business for the time being, or when it is found necessary onother grounds. In this event, the FSA needs to stay focused on the bank’s critical issues andtheir root causes, to reaffirm the accuracy of the selection and definition of priority issues
together with the bank’s executives, and to form hypotheses. To demonstrate the hypotheses,
the FSA will gather and analyze more detailed information about the facts and circumstancesand continue discussions with the bank’s executives based on additional analyses. Suchdiscussions should not end up in seeking a facile solution, but should aim at a fundamental
solution of the problems critical in terms of both the bank's management and the regulator’s
financial policy.
In this regard, see the Basic Procedures for On-Site Inspection, as shown in Exhibit 2. If the
FSA issues a notice of inspection results to an inspected bank, within one week after the noticein principle, the FSA will ask the bank to report the bank’s fact-checking of the problems
pointed out in the notice, its own analyses of the causes of those problems, planned measures
for improvement or remediation, and other comments within one month pursuant to Article
24 of the Banking Act. The matters required to be reported will be designated by reference toForm II-1-3-3(2) in the Forms and Reference Information. Since this form is a mere template,adequate and sufficient reportable matters should be specified on an individual basis in a way
tailored to the problems detected in the inspection.
(iii) Dialog
The regulator’s dialog with a bank is intended to clarify whether any problem that could affectthe bank’s financial soundness or compliance has occurred or is likely to occur, to review the bank's
initiatives for enhancing business management or financial intermediation, or to discuss otherissues that are important under the present circumstances or in light of the nature of ongoingproblems.
In the course of dialog, FSA staff must avoid imposing their beliefs or hypotheses and endeavor
to make the bank’s executives or managers feel free to express their views. After hearing their story
and understanding the bank’s mindset and policies, facts-based discussions will follow.
On the occasion of each such dialog session, the past communications between the FSA and thebank should be fully considered, and consistent and continuous discussions should be pursued.
(A) If the FSA determines, based on the facts ascertained, that the bank is highly likely to face aserious problem that could affect its financial soundness or compliance, the bank will verify its
challenges, their root causes, and the adequacy of remediation measures first of all. Then, indepth discussions between the FSA and the bank to implement remediation measures will
follow. If, however, a serious problem has already arisen or high urgency in any other form isobserved, the FSA may go further and pinpoint the issues required to be rectified in the FSA’sopinion and then check the bank’s policies for rectification.
(B) If banks are determined to be unlikely to cause serious problems as described in (A), they are
expected to exercise diverse initiatives to innovate themselves in ways fitting their

14

circumstances and to continue efforts to refine business models and risk management
practices. The FSA will try to deepen its understanding of those banks’ business conditions
and challenges and their policies and strategies through day-to-day monitoring and profiling
activities. Then, the FSA will conduct in-depth dialog with the banks to discuss their businessmodels, risk management practices, human resources development, and other issues, without
a presumption on the right answers, for the purpose of promoting their improved awarenessand understanding (and share other banks’ model cases for best practices where appropriate).
(iv) Flexible and appropriate use of various methods in combination
As explained before, the FSA may use various methods to make administrative responses to banks.
However, each method has some advantages and disadvantages in terms of effectiveness, workload
burdens of the regulator and banks, and expenses. The FSA will therefore flexibly choose amongsuch methods, maximize their advantages, and seek their optimized combinations, aiming at evenmore effective and efficient supervisory activities. Which to choose and combine will depend on
individual banks’ challenges, the existence of serious problems affecting their financial soundness
or compliance, the likelihood of occurrence of serious problems, or other firm-specific ongoing
circumstances. For example, the following methods may be available, in addition to the methods
already explained.
・ Feedback about industry-wide situations and challenges or theme-speciﬁc case examples will
help encourage the banks’ initiatives for innovation. In particular, feedback pertinent to a bank’s
issues will help the regulator and the bank build a shared value and facilitate their in-depth dialog.
Even when giving such feedback, the FSA should respect individual banks’ business decisions
and avoid unduly interfering with their judgments concerning specific transactions.
・ The information voluntarily disclosed by banks may cover their management policies,
management reforms, and efforts for better financial intermediation. Such information may not
only facilitate dialog between the bank and the regulator, but also promote communication
between the bank and its customers or other stakeholders, which will back up the bank’s efforts
for management reforms.
・ If a bank’s problems pertain to ﬁnancial intermediation or convenience for customers, the FSA
will contact the bank’s business partners, users, or other third parties for questionnaire surveys
or interviews, rather than focusing on communication with the bank only. Feedback from
communication with such third parties will surely contribute to more effective dialog between
the regulator and the bank.
・ If the FSA can build a shared value or goal with the stakeholders other than the bank, as necessary,or if the FSA publicly discloses the findings from its analyses or the FSA’s philosophy in financial
policy, such activities may be helpful for convincing or appealing to stakeholders who areassociated with banks’ business environments.
(v) Responses based on monitoring findings
The findings from the financial monitoring activities described above may be made known to the15inspected bank in the form of a notice of inspection results, as is conventionally done, or in any
other appropriate way. Examiners may choose to confirm where the two sides disagreed andcontinue discussions. The FSA will explore the best ways suitable for productive discussions focusedon priority issues.
Feedback may be given to a bank, for example, in any of the following ways when the FSA intends
to continue dialog with the bank, to ask for remedial necessary measures, or to carry out otheradequate follow-up activities.
(A) If the FSA conducts on-site inspection and off-site monitoring for a bank over a full business
year, the FSA may compile the monitoring findings, as necessary, in the form of an annual
monitoring report called a “Feedback Letter” and issue it to the bank.
(B) Findings from on-site inspection will be made known to the bank, in principle, in each instance.
Forms of providing feedback may vary depending on the types or severity of problems detectedor the content of the on-site inspection. For example, when pointing out inconsequential
problems or communicating with a bank with low likelihood of causing serious problems as
described in II-1-2(2)-(iii)(B), the form of “Feedback,” “FSA Comments” or the like may be
used. Meanwhile, the form of “Notice of Inspection Results” or the like will be used when
warning about serious issues.
(C) In addition to the forms of communication described in (A) and (B) above, the FSA will
distribute information about industry-wide challenges to banks from time to time.
Issues recognized and information gathered through monitoring activities will be classified into
the four categories as follows: firm-specific issues, industry-wide issues, cross-industry issues, andissues affecting administrative activities of FSA’s other bureaus or divisions or other ministries’ orgovernmental agencies or activities of industry associations or other organizations. After the processof information gathering and profiling in II-1-2(2)-(i)(A), the issues classified above will beincorporated in FSA’s annual policies and monitoring plans for the subsequent program year. Whensome issues need to be addressed as an industry-wide challenge, when horizontal monitoring mayneed to be conducted, or when a certain issue is likely to spill over into areas beyond the scope of
the FSA’s monitoring activities, the FSA’s monitoring team will seek cooperation from otherdivisions or from other competent authorities or relevant external organizations.
II-1-3

Quality Control

In order to ensure that monitoring activities conducted through profiling and dialog are carried out withconstant quality and in appropriate depth and that proper judgments are made throughout all supervisory
processes, the FSA performs organization-wide quality control. The FSA’s efforts to ensure the quality ofits supervisory activites should be promoted from broad perspectives based on the overall national welfare,and such efforts should be intended to assist in making financial functions work most effectively. To be16

more specific, the quality of the FSA’s supervisory activities will be checked in the following respects: forexample, whether FSA staff understand individual bank’s business conditions, management philosophy,
and other particular features; whether banks’ initiatives for innovation are respected; and whether banks
are not forced to bear undue burdens.
For this quality check, senior officials of both the Strategy Development and Management Bureau andthe Supervision Bureau will verify the FSA’s supervisory activities from multi-directional perspectives atmultiple levels and try to improve supervisory activities on an ongoing basis. The points described below
may be checked based on voices from banks.
・ When gathering information from banks or having dialog with banks, eﬀective coordination andinformation sharing among sector- or area-wise monitoring teams is indispensable in order to eliminate
duplication of requests to the banks and to avoid imposing undue burdens on the banks. Is such internal
communication and coordination conducted sufficiently? When requesting banks to submit reports or
documents, is the purpose of the request clear and is the content of such documents clearly specified?
And is due consideration paid to different characteristics of different banks? Is the submission deadline
appropriate to secure sufficient time?
・ For accurate proﬁling, are respective banks’ business conditions, management philosophy, and otherfirm-wise features understood well? Are facts and objective evidential documents used to eliminate
individual staff’s preoccupations?
・ When identifying priority issues, are individual banks’ circumstances fully considered and are substantive
issues critical to their business management selected? If there are issues common to multiple banks orindustry-wide issues, are those issues detected unfailingly?
・ When drawing up a monitoring policy or plan, are appropriate monitoring subjects and methods chosen?
Is a system for monitoring established?
・ When requesting a bank to submit reports, is the bank fully informed and convinced as to how theregulator recognizes the bank’s problems?
・ Is dialog with each bank appropriate in terms of the points mentioned in II-1-2(2)(iii)? In view that it iscalled dialog, did the FSA avoid having it end up with unilateral administrative guidance?
・ Regarding the issues or problems identiﬁed through monitoring, are their root causes analyzed?
・ When informing a bank of the ﬁndings from monitoring, is the best method chosen? This will aﬀect
whether the two sides can have effective discussions focused on the bank’s priority issues. Does the
feedback letter clearly state the points to be discussed or the matters to be improved? Are they truly
critical issues or matters? Is the feedback free of trivial issues? Is there any content that might unduly
interfere with the bank’s management?
For effective verification of supervisory activities, the FSA will endeavor to expand opportunities toreceive candid comments and criticisms from banks. For one thing, the FSA already has a process forinspected firms to file comments on monitoring activities, called the “Inspection Challenge Process.” Foranother thing, FSA’s senior officials may visit an inspected bank and conduct interviews to seek comments

17

on the FSA’s monitoring activities directly from the bank’s executives and managers.
In addition to the foregoing, the FSA will commission consultants to have them interview banks and FSA
staff to seek third-party evaluation of financial policy, and the FSA will also invite insights from external
experts by such means as holding a panel of experts.
II-1-4

Cooperation with Local Financial Bureaus(1) The FSA will try to closely cooperate with the Local Financial Bureaus having jurisdiction over thebusiness territories of Major Banks. In particular, when a Major Bank intends to choose a management
strategy likely to significantly affect the regional economy or community, the FSA will offer relevant
information to the Local Financial Bureau concerned. Conversely, the FSA will actively gather
information from the Local Financial Bureaus, which may include information about Major Banks andthe Local Financial Bureaus’ views on the FSA’s processes of supervising Major Banks.
(2) If the authority to supervise a subsidiary bank of a bank holding company is delegated to the DirectorGeneral of a Local Finance Bureau, the FSA will closely cooperate with the Local Financial Bureau tohelp ensure the subsidiary bank's proper business operations.
(3) In addition to the above, when there is know-how or other relevant information obtained from theaccumulated cases, the FSA and Local Finance Bureaus will strive to closely cooperate, such as byproperly sharing such information with each other, from the viewpoint of strengthening theeffectiveness of monitoring.
II-1-5

Coordination with Inspection by the Deposit Insurance Corporation of Japan(1) If a bank has undergone inspection conducted by the Deposit Insurance Corporation of Japan (the“DICJ”) pursuant to the Deposit Insurance Act, the FSA will follow up on the progress of the bank’smeasures to address the problems pointed out in the DICJ's notice of inspection results in accordancewith the following procedures.
(i)

If the DICJ informs the FSA that the DICJ has issued a notice of inspection results to a bank after
inspecting the bank’s scheme for ensuring smooth refund of insured deposits or after conducting
insurance premiums inspection, the FSA will promptly ask the inspected bank, as necessary, tosubmit a report within one month (or within two weeks, in the event that the DICJ has determinedthat the state of noncompliance remains unrectified) pursuant to Article 24 of the Banking Act or
Article 136 of the Deposit Insurance Act. Since the DICJ's notice describes the problems identified
by the DICJ, a report requested by the FSA needs to cover the bank’s explanations about the facts
concerning those problems (excluding simple calculation mistakes identified through insurance18

premiums inspection), analyses of the causes of those problems, planned measures for improvement
or remediation, and other important details (cf. Form II-1-3-4(1) in the Forms and Reference
Information).
(ii) After receiving a report from the bank, the FSA will conduct meticulous interviews with the bank’s
personnel. On the occasion of such interviews, the FSA will closely cooperate with the DICJ and take
into consideration the items on the checklist used in the on-site inspection conducted under Article
137 of the Deposit Insurance Act (i.e., the items related to Article 50(1) of the same Act and thoserelated to Article 55-2(5) and Article 58-3(1) of the same Act). In principle, the FSA will cause DICJ
staff to attend the interviews with the bank arranged by the FSA (cf. Reference Document 1 in theForms and Reference Information).
Note:

The FSA must obtain the bank’s prior consent to the DICJ’s attendance at interview sessions
and to information sharing between the FSA and the DICJ.

(iii) In the case where the DICJ’s insurance premiums inspection has ascertained that the bank’s
noncompliance remains unrectified, if the FSA determines that such situation constitutes a problem
that the bank needs to address, as a result of reviewing the DICJ’s inspection findings and asubsequent report submitted by the bank under Article 24 of the Banking Act or Article 136 of the
Deposit Insurance Act, the FSA will issue a business improvement order to the bank pursuant to
Article 26 of the Banking Act.
(iv) In the case where the DICJ’s insurance premiums inspection has ascertained that the bank’s
compliance management scheme needs to be improved or where the DICJ’s inspection of the scheme
for ensuring smooth refund of insured deposits has detected some problems in the progress of
information systems development, data management and database maintenance, and developmentof internal manuals and procedures (collectively, the “Progress of Development” ), if the FSA
determines that it will take a certain period of time for the bank to resolve the noncompliance inquestion or overcome problems in the Progress of Development, as a result of reviewing the DICJ’s
inspection findings and a subsequent report submitted by the bank under Article 24 of the Banking
Act or Article 136 of the Deposit Insurance Act, the FSA will ask the bank to submit a follow-onreport by a specified deadline pursuant to Article 24 of the Banking Act or Article 136 of the Deposit
Insurance Act. If the FSA determines, as a result of reviewing such follow-on report, that the bank isunable to overcome problems in the Progress of Development solely by its self-initiated efforts, the
FSA will issue to the bank a business improvement order pursuant to Article 26 of the Banking Act(or a business improvement order pursuant to Article 26 of the Banking Act or a rectification orderpursuant to Article 58-3(3) of the Deposit Insurance Act to urge the bank to develop a scheme for
ensuring smooth refund of insured deposits).
Note:

In addition to the implementation of various measures described above, the FSA’s supervisorydivisions will seek appropriate cooperation with the DICJ in any other situation. As and whennecessary, for example, some information about financial institutions’ development of a scheme

19

for ensuring smooth refund of insured deposits may be provided by the FSA to the DICJ.
(2) If a bank has undergone inspection conducted by the DICJ pursuant to the Banking Act on Paymentof Damage Recovery Benefits from Funds in Deposit Accounts Used for Crimes, the FSA will follow
up on the progress of the bank’s measures to address the problems pointed out in the DICJ's notice ofinspection results in accordance with the following procedures.
(i) If the DICJ informs the FSA that the DICJ has issued a notice of inspection results to a bank after
inspecting the bank’s procedures for processing cancellation of claims on deposits used for crimes
or for paying damage recovery benefits to victims of such crimes, the FSA will promptly ask theinspected bank, as necessary, to submit a report within one month (or within two weeks, in the eventthat the DICJ has determined that the state of noncompliance remains unrectified) pursuant to
Article 24 of the Banking Act or Article 35 of the Banking Act on Payment of Damage Recovery
Benefits from Funds in Deposit Accounts Used for Crimes. Since the DICJ's notice describes the
problems identified by the DICJ, a report requested by the FSA needs to cover the bank’s
explanations about the facts concerning those problems, analyses of the causes of those problems,planned measures for improvement or remediation, and other important details (cf. Form II-1-34(1) in the Forms and Reference Information).
(ii) After receiving a report from the bank, the FSA will conduct meticulous interviews with the bank’s
personnel. In principle, the FSA as well as DICJ staff will attend the interviews with the bankarranged by the FSA.
Note:

The FSA must obtain the bank’s prior consent to the DICJ’s attendance at interview sessions
and to information sharing between the FSA and the DICJ. In addition to the implementationof various measures described above, the FSA’s supervisory divisions will seek appropriate
cooperation with the DICJ in any other situation. As and when necessary, for example, some
information about banks’ development of a scheme for paying damage recovery benefits may
be provided by the FSA to the DICJ.

(3) If a bank has undergone inspection conducted by the DICJ pursuant to the Banking Act on the
Utilization of Funds Related to Dormant Deposits, etc., the FSA will follow up on the progress of thebank’s measures to address the problems pointed out in the DICJ's notice of inspection results inaccordance with the following procedures.
(i) If the DICJ informs the FSA that the DICJ has issued a notice of inspection results to a bank after
inspecting the bank’s procedures for the transfer and management of funds related to dormant
deposits, etc. and the results of the inspection on the entrustment or re-entrustment of payment
services, the FSA will promptly ask the inspected bank, as necessary, to submit a report within one
month (or within two weeks, in the event that the DICJ has determined that the state ofnoncompliance remains unrectified) pursuant to Article 24 of the Banking Act and Article 43 of the
Banking Act on the Utilization of Dormant Deposits, etc. Since the DICJ's notice describes the20

problems identified by the DICJ, a report requested by the FSA needs to cover the bank’s
explanations about the facts concerning those problems, analyses of the causes of those problems,planned measures for improvement or remediation, and other important details (cf. Form II-1-34(1) in the Forms and Reference Information).
(ii) After receiving a report from the bank, the FSA will conduct meticulous interviews with the bank’s
personnel. In principle, the FSA as well as DICJ staff will attend the interviews with the bankarranged by the FSA.
Note: The FSA must obtain the bank’s prior consent for the DICJ’s attendance at interview sessions
and for information sharing between the FSA and the DICJ. In addition to the implementationof various measures described above, the FSA’s supervisory divisions will seek appropriate
cooperation with the DICJ in any other situation. As and when necessary, for example, some
information about banks’ development of a scheme for the transfer and management of funds
related to dormant deposits, etc. and the entrustment or re-entrustment of payment services
may be provided by the FSA to the DICJ.
II-1-6

Administrative Reports on Individual Banks(1) Documents concerning period-end settlement, etc.
Since the FSA asks each bank to submit an annual closing report, a daily accounts sheet and otherdocuments, the deadline and other instructions for submission must conform to the rules specified in
Exhibit 3.
(2) Administrative report
If the Director-General of a Local Financial Bureau has implemented any of the administrative
measures listed below, its consequences must be reported to the Director-General of the FSA’s
Supervision Bureau without delay.
If a bank, a bank controlled by its major shareholder(s), or a subsidiary bank of a bank holding
company is subject to any administrative measure implemented by a Local Financial Bureau otherthan the Local Financial Bureau having jurisdiction over the district where such bank's head office islocated, the report on the administrative measure prepared by the first-mentioned Local Financial
Bureau must be given to the latter-mentioned Local Financial Bureau.
(i) Ask for submission of reports or materials pursuant to paragraph (1) or (2) of Article 24 or Article
48 of the Banking Act(ii) Ask for actions pursuant to Article 26(1), Article 52-14(2), or Article 52-33(3) of the Banking
Act (excluding the case of issuing an order for suspension of the whole or part of business, andincluding the case of asking for submission of an improvement plan)(iii) Ask for submission of reports or materials pursuant to Article 52-7 of the Banking Act(iv) Ask for submission of reports or materials pursuant to Article 52-11 of the Banking Act

21

(v) Ask for submission of reports or materials pursuant to Article 52-31 of the Banking Act
II-1-7

Points to Note in Preparation of Application Documents

When entering the names of directors or officers in an application form or any other document to besubmitted to the FSA, the current name of a person who has changed his/her surname by marriage may be
accompanied by his/her name before marriage in parentheses.
If a bank has already submitted a document using any form in the Forms and Reference Information
which contains the current name of a director or officer together with his/her name before marriage in thespecified entry column, the bank is allowed to use his/her name before marriage without the current namein all subsequent documents to be submitted to the FSA.
II-1-8

Points to note regarding written and face-to-face procedures

According to the provisions of Article 6, Paragraph 1 and Article 7, Paragraph 1 of the Banking Act on
the Promotion of Public Administration Utilizing Information and Communications Technology(hereinafter referred to as the "Digital Procedure Act"), applications, notifications, etc. by banks, etc. tothe authorities and notices of dispositions, etc. issued by the authorities to banks, etc. may be made bymeans of an electronic data processing system, notwithstanding the provisions of the relevant laws andregulations, even if such methods are stipulated in such laws and regulations, such as in writing.
In light of the purpose of the Digital Procedure Act, the provisions of these Supervisory Guidelines
relating to procedures covered by the Banking Act may be implemented by means of an electronic dataprocessing system, regardless of the written or face-to-face descriptions in the provisions.
In addition, in the midst of dramatic progress in digitalization in all economic and social activities, thegovernment as a whole is reviewing Japan's systems and practices based on documents, seals, and face-toface procedures, and is making efforts to realize a remote society in which procedures can be carried out
without actually visiting.
In order to steadily advance these efforts, the FSA has been promoting the computerization ofadministrative procedures by renewing the FSA Electronic Application and Notification System, whichenables all applications and notifications received from banks to be submitted online, and by revisingCabinet Office Ordinances and Supervisory Guidelines, etc., which abolish the use of seals.
Furthermore, with regard to procedures among private business operators, the FSA has held a "Study
Group for the Review of Documents, Seals, and Face-to-Face Procedures in the Financial Industry," andhas been working to eliminate the need for electronic documents and seals and review face-to-faceregulations by encouraging the industry as a whole to review its practices.
In light of such efforts by the public and private sectors, among the statements concerning documents
and face-to-face meetings in these Supervisory Guidelines, matters other than those concerning procedures
subject to the Digital Procedure Act may be conducted by means of an electronic data processing system22

or by means of other information and communications technology, except for the cases listed in (Note)below where documents and face-to-face meetings are desirable from the viewpoint of customer protection.
In light of the above, supervisors shall be encouraged to take procedures pursuant to the provisions ofthese Supervisory Guidelines in a manner that does not require written or face-to-face consultation as
much as possible, taking into consideration the intention of the other party to the procedures.
Note: It should be noted that the response to people with writing difficulties as described in III-6-4 is
not subject to the above treatment.
II-1-9Points to note when submitting application forms

Based on II-1-8, applications and notifications by banks, etc. (including attached documents issued bypublic institutions (such as a copy of the residence certificate, an identification card, and a certified copy ofthe family register)) to the authorities shall be required to be submitted by the methods listed in (1) and(2) below in principle.
With regard to attached documents issued by public institutions, original copies shall be requested when
there is any problem in the course of confirmation due to the blurredness of entries recorded by means ofa digital camera or an image scanner or any other reason. As for procedures that require the payment of tax
or a fee, original copies shall be separately requested as evidence of the payment of tax or a fee when suchpayment is received in forms other than electronic payment.
(1) FSA Electronic Application and Notification System
In principle, banks are required to submit applications and notifications to the authorities by thedeadline specified by laws and regulations using the FSA Electronic Application and Notification
System, except for procedures requiring submission using the FSA Business Support Integration
System (hereinafter referred to as the "Integration System") set forth in (2).
(2) FSA Business Support Integration System
In principle, business reports (interim business reports in the interim period) shall be required tobe submitted using the Integration System.
Exhibit 2:

Basic Procedures for On-Site Inspection

Exhibit 2-2: List of Important Matters Explained to Inspected Banks
II-2
II-2-1

Grievance against Banks and Provision of Information about Banks
Responding to Inquiries or Complaints

If the FSA receives an inquiry or complaint relating to a bank, the FSA will explain to the consulter thatthe regulator is in no position to mediate or otherwise become involved in any specific transaction.

23

Where appropriate, the FSA may introduce a contact desk of the relevant bank, consultation desks ofindustry associations or other related organizations, or a designated ADR body (meaning a designateddispute resolution organization defined in Article 2(24) of the Banking Act; the same applies hereinafter).
If the consulter has given consent to disclosure of the information about the inquiry or complaint to thebank, the FSA will, in principle, provide relevant information to the bank.
II-2-2

Cooperation with the Counseling Office for Financial Services Users(1) To properly incorporate feedback from inquiries or complaints received at the Counseling Office forFinancial Services Users in the FSA’s supervisory activities, the FSA’s supervisory divisions will carryout the following steps.
(i)Analyze details of the inquires and complaints circulated from the Counseling Office(ii) Share information with the Counseling Office(2) If the consulter has given consent to disclosure of the information about the inquiry or complaint tothe bank, the FSA will, in principle, provide relevant information to the bank.
II-2-3

Responding to Curbs on New Loans or Forcible Collection of Outstanding Loans Recognized
Based on Information from the Counseling Office for Financial Services Users(1) Interview
If the information received by the FSA from the Counseling Office for Financial Services Users
pertains to curbs on new loans or forcible collection of outstanding loans, the FSA will summarize allsuch information on a quarterly basis and conduct interviews with banks to check their lending policies,
systems, and operations. If the informant has given consent to disclosure of the information about theborrower’s name and other details to the bank concerned, the FSA will flexibly act according tocircumstances, including an attempt to ascertain facts through interviews.
(2) Request for reporting(i)

If the FSA determines, as a result of conducting interviews described in (1), that the bank’s
internal control systems and their effectiveness need to be checked in greater detail, the FSA will
ask the bank to submit a report summarizing current situations and planned measures to improve
internal control systems pursuant to Article 24 of the Banking Act.

(ii) If the FSA determines, as a result of its examination based on the information from theCounseling Office for Financial Services Users, that the bank has problems in connection withcurbs on new loans or forcible collection of outstanding loans as alleged by the informant, the
FSA will ask the bank to submit a report on improvement measures pursuant to Article 24 of the
Banking Act.

24

(3) Business improvement order(i)

If the FSA determines, as a result of reviewing a report received from the bank under Article 24of the Banking Act or on any other grounds, that the bank’s situations need to be checked ingreater detail, the FSA may conduct on-site inspection of the bank. If such inspection finds out
any serious problem, the FSA will issue a business improvement order pursuant to Article 26 of
the Banking Act where appropriate.

(ii) If the FSA determines, as a result of reviewing a report received from the bank under Article 24of the Banking Act or on any other grounds, that the bank is unable to properly develop
compliance management systems solely by its self-initiated efforts, the FSA will issue a business
improvement order pursuant to Article 26 of the Banking Act.
II-2-4

Responding to Fictitious Billing with Use of Deposit Accounts or Other Fraudulent Use of
Deposit Accounts

If the FSA receives information about suspected fraudulent use of a deposit account (e.g., the case offictitious billing accompanied by a request for money transfer to a designated bank account), the FSA willpromptly provide relevant information to the bank concerned and the police authority, subject to theinformant’s consent, except where the information is found to be obviously doubtful or unfounded.
Those who intend to report such information to the FSA need to identify themselves, in principle, andare requested to submit the billing statement in question or other supporting documents by personaldelivery, facsimile, or e-mail.
II-3

Responding to Inquiries about Interpretation and Application of Laws and Regulations

II-3-1

Scope of the FSA’s Inquiry Services

The FSA responds to inquiries about interpretation and application of the laws and regulations fallingwithin the jurisdiction of the FSA, including the Banking Act. If receiving an inquiry about any law outside
its jurisdiction, the FSA will strictly refrain from making any comments on the inquiry.
II-3-2

Methods for Responding to Inquiries(1) When it is possible to answer to an inquiry based on these Supervisory Guidelines, opinions or reports
issued by the FSA’s relevant councils or panels, or any other existing documents, the FSA will give ananswer appropriately.
(2) If a business operator directly governed by any law falling within the jurisdiction of the FSA or an25

industry association consisting of such business operators (*) makes an inquiry in connection with thelaws and regulations falling within the jurisdiction of the FSA, the director of the FSA’s relevant
division will provide a written answer to the inquiry and publicly disclose its content, insofar as suchinquiry is a common question satisfying all of the criteria listed below and it is determined appropriate
to give an answer in writing and publicly disclose it with a view to enhancing predictability inapplication of the law.
Note: An industry association in this context means an organization formed by a substantial numberof business operators of the same type of business directly governed by a certain law falling within
the FSA’s jurisdiction with the intention of promoting their common interests, or a group of suchorganizations (limited to the highest-tier organization if the industry has multi-tier associations
or federations).
(i)

Scope of inquiries covered by the FSA’s inquiry services
The FSA’s services to respond to inquiries under the procedures explained here are provided
when the inquiry satisfies all of the following criteria.

(A) The inquirer does not ask about a specific business operator’s specific transaction and theapplicability of any law to such transaction, but wants to know the interpretation of any laws
or regulations generally applicable to common cases. (In other words, the inquiry is not a casethat can be processed under the so-called no-action letter system).
(B) The inquirer does not ask the FSA to ascertain or check facts.
(C) The inquiry pertains to transactions commonly conducted by many business operators directly
governed by the law falling within the FSA’s jurisdiction (or commonly conducted by thebusiness operators belonging to an industry association, if the inquirer is such industry
association), and similar inquiries are expected to be made by many other business operators.
(D) A clear answer to the inquiry cannot be found in relevant administrative guidelines releasedin the past.
(ii) Inquiry forms (including electronic forms)
If an inquirer desires to make an inquiry under the procedures explained here, an inquiry
must be submitted to the FSA in a prescribed form stating the following matters. After
submitting an inquiry in a prescribed form, the inquirer may be asked to rewrite descriptionsin the inquiry form or to provide additional information if the FSA finds it necessary to confirm
the content of the inquiry or to judge whether or not the inquiry meets the criteria describedabove.
(A) The clauses of the laws and regulations relevant to the inquiry, and the points at issue
explained in concrete terms(B) The inquirer’s opinions and their reasoning(C) The inquirer’s consent to disclosure of the inquiry and the corresponding answer to the public(iii) Point of contact
Inquiries in a prescribed form will be received by respective divisions of the FSA having the26authority and responsibility for affairs concerning the laws and regulations pertaining to eachinquiry.
(iv) Answer(A) The director of the FSA’s relevant division will endeavor to give an answer to the inquirer, inprinciple, within two months after the arrival of the inquiry at the specified point of contact.
If it is difficult to answer within two months, the inquirer will be informed of the reason forsuch delay and an estimated answer date.
(B) Each answer to any inquiry must contain a disclaimer of the following substance:“This document offers a general view of the Financial Services Agency, as the competentadministrative agency having jurisdiction over the laws and regulations related to the referenced
inquiry, as of the date hereof. The views expressed in this document are premised exclusively on
the information contained in the inquiry. This document is not intended to make any judgment
regarding the application of said laws and regulations to any specific case and is not binding on
any judgment of competent investigative or judicial authorities. ”(C) If the FSA’s relevant division decides not to answer the inquiry in accordance with theforegoing procedures, the division director will inform the inquirer and explain the reason forsuch decision.
(v)

Public disclosure
After giving an answer to an inquirer in accordance with the procedures described above,
the FSA will promptly disclose the inquiry and the answer on the FSA website to make themavailable for public access.

(3) Inquiries which are frequently received but deviate from the criteria described in (2) may, whereappropriate, be shared among all relevant divisions in the FSA by means of circulation in a prescribed
form (Form II-3-2(3) in the Forms and Reference Information). Then, the legal manager of thedivision primarily responsible will archive such circulated information.
(4) If an inquirer desires to obtain a written answer from the FSA in a situation where the no-action lettersystem can be used under the rules specified in II-3-3(2), the inquirer will be asked to use the noaction letter system.
II-3-3

Prior Confirmation Procedures on the Application of Laws and Regulations by Administrative
Agencies (No-Action Letter System)

Under the Prior Confirmation Procedures on the Application of Laws and Regulations by
Administrative Agencies (the “No-Action Letter System”), private companies can contact the competentadministrative agency and seek its confirmation in advance as to whether specific provisions of certain laws
and regulations are applicable to a particular action for planned business activities. Administrative agencies

27

will give answers to the inquiries made under this system and publicly disclose those answers. The FSA has
established detailed rules concerning its No-Action Letter System. Below are the administrative proceduresto operate the FSA’s No-Action Letter System. In this regard, FSA staff are required to read the Details of
the Prior Confirmation Procedures on the Application of Laws and Regulations by the Financial Services
Agency (Reference Document 2 in the Forms and Reference Information) before using the No-Action
Letter System.
(1) Point of contact
Inquiries made through use of the No-Action Letter System are received by the PlanningManagement Division, the Supervisory Bureau of the FSA.
If the Planning Management Division receives an inquiry in a prescribed form conforming to all of
the requirements specified in (2)-(iii) below, the inquiry will be promptly acknowledged and passed
on to the division having the authority and responsibility for affairs concerning the laws andregulations pertaining to the inquiry.
(2) Steps following the receipt of an inquiry
The division receiving the inquiry passed on as above will determine whether or not it should beprocessed under the No-Action Letter System, by checking the points listed in (i) through (iii) below,
among others. If the inquiry is not eligible for the No-Action Letter System, the inquirer will be
informed to that effect. If it is found necessary to correct any description in the inquiry or to obtain
additional information, the division will ask the inquirer for necessary arrangement. However, thescope of documents to be additionally submitted should be minimized, in order to avoid imposing
excessive burdens on the part of the inquirer.
(i)Points for which confirmation can be sought
Whether the inquiry is made by a private enterprise having a concrete plan of a new
business or transaction in the context of any laws and regulations and related government
orders listed on the FSA website as those covered by the FSA’s inquiry services (collectively,“Laws and Regulations”), as to the adequacy of such business or transaction from theperspectives listed below.

(A) Whether or not the business or transaction would constitute unlicensed or unauthorized
operation if it were commenced without corresponding formalities(B) Whether or not the business or transaction would constitute operation lacking required
notification if it were commenced without corresponding formalities(C) Whether or not the business or transaction will constitute grounds for imposing suspension ofbusiness, revocation of license, or any other adverse disposition(D) Whether or not the business or transaction could directly lead to a situation where the firm
will face some obligations or restrictions on rights in the context of financial policy(ii) Eligibility for inquirers
Those who are allowed to make an inquiry under the No-Action Letter System are limited28

to persons who intend to perform a particular action referred to in the inquiry in the context
of their own business activities and desire to know about the applicability of the Laws andRegulations for such action, or attorneys at law or other agents acting for and on behalf of
those persons. To make an inquiry, it must be submitted in a prescribed form conforming to
the requirements specified in the next paragraph, and the inquirer is requested to give consent
to public disclosure of the inquiry and the corresponding answer.
(iii) Requirements for filling out an inquiry form
Inquiries either in writing or in electronic form must conform to the following requirements.
(A) The facts specific to the action to be performed by the inquirer must be concretely described.
(B) The provisions in the Laws and Regulations for which the regulator’s confirmation is sought
must be identified.
(C) The inquirer’s consent to public disclosure of the content of the inquiry and the corresponding
answer must be clearly stated.
(D) The inquirer’s opinions as to the application of the provisions in the Laws and Regulations
identified in (B) and their reasoning must be clearly described.
(iv) Answer
The director of the FSA’s division receiving an inquiry passed on will give an answer to theinquirer, in principle, within 30 days after the arrival of the inquiry at the specified point ofcontact. In any of the cases listed below, however, the deadline respectively specified will apply.
In all such cases, relevant directors should endeavor to answer within the shortest possible time,
including periods for the inquirer’s correction or additional documentation, if applicable.
(A) If the inquiry pertains to any advanced financial technique or technology and requires careful
judgment: within 60 days, in principle(B) When an effort to answer to a specific inquiry within the standard period is likely to besignificantly detrimental to the division’s overall operations because of a large number ofinquiries exceeding the division’s workload capacity: within a reasonable period exceeding 30
days(C) If the inquiry pertains to the Laws and Regulations concurrently subject to the FSA andanother ministry or agency: within 60 days, in principle
If the inquirer is asked to correct any description in the inquiry, the number of days taken
for such correction will not be included for the purpose of recognizing the answer deadline. If
an answer is not given within 30 days, the inquirer will be informed of the reason for such delay
and an estimated answer date.
(v)

Public disclosure of inquiries and answers
The content of an inquiry and its corresponding answer will be disclosed on the FSA website
for public access, in principle, within 30 days after the answer date.
However, such public disclosure may be postponed for a reasonable period if the inquiry
states why the inquirer requests for public disclosure after a certain period of time following

29the answer date and when the inquiry can be disclosed, on condition that such reason isdetermined justifiable. In this event, the actual postponement period will not necessarily be
the same as the period desired by the inquirer. When the reason for the postponement ceases
to exist, the FSA may start public disclosure upon notice to the inquirer. If an inquiry or its
corresponding answer contains any portion constituting or likely to constitute non-disclosure
information defined in the Banking Act on Access to Information Held by Administrative
Organs, the FSA may publicly disclose the content of the inquiry and answer after eliminatingsuch portions, where appropriate.
II-3-4

System to Remove Gray Zone Areas

Under Article 7(1) of the Industrial Competitiveness Enhancement Act, a person intending to start new
business activities may seek confirmation regarding the interpretation of provisions of relevant acts andsubordinate orders (including public notices) which may regulate such new business activities and otherrelated business activities (collectively, “Laws” in II-3-4) and the applicability of such provisions to thosebusiness activities. This system for requesting confirmation is called the “Gray Zone Elimination System.”
Below are the administrative procedures for operating the Gray Zone Elimination System at the FSA.
Before applying the Gray Zone Elimination System, FSA staff members are required to read the “Guide to
the Use of the ‘Gray Zone Elimination System,’ ‘Regulatory Sandbox,’ and ‘Special Measures on
Regulations for New Businesses’” (Ministry of Economy, Trade and Industry (METI), July 15, 2022)(hereinafter referred to as the “Usage Guide,” including those after revisions by the METI in thisparagraph).
(1) Point of contact
Inquiries made under the Gray Zone Elimination System are received by the Strategy Development
Division, the Strategy Development and Management Bureau of the FSA.
When the Strategy Development Division receives an inquiry in a prescribed form conforming to
all of the requirements specified in (2)(iii) below, the inquiry will be promptly acknowledged. If theinquiry is to be submitted to two or more ministers, the Strategy Development Division will seek
confirmation from the other minister(s).
Inquiries from banks regulated under the jurisdiction of Local Finance Bureaus are received byrespective Local Finance Bureaus. When a Local Finance Bureau receives an inquiry, it must be
promptly sent to the FSA’s Strategy Development Division.
Note:

When a Local Finance Bureau dispatches the original of an inquiry to the Strategy
Development Division, a document showing the Local Finance Bureau’s review comments
must be attached, in principle. Such comments are required solely for the issues involving
the Laws falling within the jurisdiction of the FSA for which confirmation is sought.

30

(2) Steps following the receipt of an inquiry
After receiving and acknowledging an inquiry, the Strategy Development Division will promptly
pass it on to the division having the authority and responsibility for affairs concerning the Laws forwhich confirmation is sought. Then, both divisions will discuss and determine whether or not it
should be processed under the Gray Zone Elimination System, by checking the points listed below,
among others. If the inquiry is not eligible for the Gray Zone Elimination System, the person who has
submitted the inquiry (a “submitter” in II-3-4) will be informed to that effect. If it is necessary tocorrect the inquiry or obtain additional information in order to apply the Gray Zone Elimination
System to the inquiry, the Strategy Development Division will ask the submitter for necessary
arrangement. In this event, the scope of documents to be additionally submitted should be minimized,
in order to avoid imposing excessive burdens on the part of the submitter.
(i)

Eligibility for requesting confirmation
Those who submit a request for confirmation under the Gray Zone Elimination System mustmeet both of the following criteria.
(A)

The submitter is a person intending to start new business activities.

Note: “New business activities” means the development or production of new products, thedevelopment or provision of new services, the introduction of new approaches for
producing or selling products, the introduction of new approaches for providing services,or other new business activities which are expected to enhance productivity (as detailed
below) or to create new demand and which are unlikely to disrupt public order or morality
The term “productivity” encompasses resource productivity, meaning the degree ofcontribution to economic activities of a person intending to launch new business activities
which is expected to be achieved through use of energy or mineral resources (excluding thecase of using mineral resources as energy sources). (Article 2(4) of the Industrial
Competitiveness Enhancement Act; as well as Article 2 of the Order Concerning theDevelopment of Special Treatments for Regulations Regarding New Technology
Verification and New Business Activities and the Promotion of Regulatory Reforms underthe Industrial Competitiveness Enhancement Act (hereinafter referred to as the “Orderunder the Enhancement Act”)).
(B)

The new business activities that the submitter intends to start must fall within the scope ofbusinesses subject to the FSA’s jurisdiction. Or the submitter intends to seek confirmation
with the FSA regarding the interpretation of provisions of relevant Laws falling within thejurisdiction of the FSA which may regulate the submitter’s new business activities and otherrelated business activities and the applicability of such provisions to those businessactivities.

(ii) Points for which confirmation can be sought

31

A submitter intending to start new business activities may seek confirmation regarding theinterpretation of provisions of relevant Laws which may regulate the new business activities andother related business activities and the applicability of such provisions to those business activities.
Such confirmation may be requested from the perspectives listed below.
(A)

Whether or not the business or transaction would constitute unlicensed or unauthorized
operation if it were commenced without corresponding formalities(B)

Whether or not the business or transaction would constitute operation lacking required
notification if it were commenced without corresponding formalities(C)

Whether or not the business or transaction will constitute grounds for imposing suspensionof business, revocation of license, or any other adverse disposition(D)

Whether or not the business or transaction could directly lead to a situation where the firm
will face some obligations or restrictions on rights in the context of financial policy(iii) Requirements for filling out an inquiry form
Inquiries must be submitted in Form 9 attached to the Order under the Enhancement Act inaccordance with the METI Guide. Each inquiry must state the following matters.
(A)

Goals of the new business activities and related business activities(B)

Descriptions of the new business activities and related business activities(C)

Time schedule for the new business activities and related business activities(D)

Clauses of the Laws for which interpretation and applicability need to be confirmed(E)

Particular issues that need to be confirmed(3) Answer(i)

If the Strategy Development Division judges that an inquiry should be answered, the FSA’s division
receiving the inquiry from the Strategy Development Division will, in principle, issue an answer
within one month after the arrival of the original of the submitter’s inquiry at the specified pointof contact. This answer will be issued in Form 11 attached to the Order under the Enhancement
Act.
However, it may be difficult to issue an answer within such time frame, depending on the
progress of examinations for the interpretation and applicability of the provisions in the Laws
mentioned in the inquiry for which confirmation is sought. If the division receiving the inquiry
determines that such situation is unavoidable on reasonable grounds, the submitter will be
informed of the situation and its reason and kept updated at intervals of not more than one month
until the answer is issued.

II-3-5

Responding to Inquiries about Deposits and Savings(1) Handling of Deposits and Savings

32

If the FSA receives an inquiry about the definition of any of the deposits or installment savings listed
below, other than specified deposits, etc. defined in Article 13-4 of the Banking Act (collectively,“Deposits and Savings” in II-3-5) or any feature of such Deposits and Savings, the FSA will respond,taking into account general laws or the laws prescribing the handling of other financial products, andkeeping in mind the points listed below.
When responding to any such inquiries, FSA staff, as the regulator, must remain aware that banks are,in general, free to design and create any Deposits and Savings plan as a product for their customers,
insofar as the principal is guaranteed, and that banks can carry out such product development activities
based on their management decisions.
(i)

Negotiable certificate of deposit (excluding those issued outside Japan)
A negotiable certificate of deposit, or NCD, is a deposit with a predetermined date for repayment
and without a non-assignability clause. In light of these characteristics, the handling of NCDs needs
to be checked in the following respects.

(A) Termination before maturity; purchase and amortization
Are NCDs terminated before the date of maturity as designated on the date of deposit or not?
Does the issuing bank purchase and amortize any NCDs or not?
(B) Trading
Does the bank sell or buy back NCDs issued by it or not? Does the bank broker or mediate theissuance of NCDs or not?
(C) Are NCDs issued over the counter on an individual basis? Does the bank issue NCDs in the formof public offering or any other form of issuing a large volume to an unspecified and large numberof persons under the same conditions?
(ii) Fixed-term deposits
The handling of fixed-term deposits needs to be checked in the following respects.
(A) Regarding fixed-term deposits, are their periods of depositing consistent with the categories
specified in the Banking Act on Reserve Requirement System (Act No. 135 of 1957); i.e., thecategories of deposits with a predetermined date for paying out which falls after one monthfollowing the date of executing the deposit contract?
(B) Regarding floating-rate term deposits (meaning term deposits for which the interest rate until
maturity is not fixed at the time of depositing), are their interest rates set based on specified
benchmark indexes by a specified method of setting money rates? Do such benchmark indexes andmethod of setting money rates remain unchanged until maturity?
(iii) Open-end deposits
The handling of open-end deposits needs to be checked in the following respects.
(A) Deposits with a lock-up period
If a lock-up period is one month or longer, or if the interest rate is to be changed after expirationof a lock-up period, do the conditions similar to those described in II-3-5(1)(ii)(B) apply during
the lock-up period?

33

(B) Savings deposits
Savings deposits are offered to individual customers only and have some other limitations fordepositing or paying out. If a bank account is used for automatic transfer services to processcontinuous payments of wage and salaries, public or private pension (including pension fromproperty accumulation savings), dividends on shares or trusts, cash dividends from investment
trusts, or principal and interest payments for Japanese Government Bonds or corporate bonds incustody, used for account transfers based on a packaged transfer request for simultaneously
processing transfers to 100 or more accounts, used for automatic transfer and automatic bill
payment services under a contract for processing payments of public utility charges, or used for
multipurpose account services, such bank account cannot be classified as a savings deposit account.
The FSA uses savings deposit balances as a benchmark for securing total deposit balance of bothpublic- and private-sector entities.
(2) Scope of deposit-taking institutions and other issues prescribed in the Long Term Credit Bank Act
If an inquiry received pertains to the issues prescribed in the Long Term Credit Bank Act (e.g.,
the scope of deposit-taking institutions, the definitions of money equivalent to deposits, the scope ofreserve funds), the following points must be considered before responding to the inquiry.
(i)

Deposit-taking institutions referred to in Article 6(1)(iii) of the Long Term Credit Bank Act(A) The term “national or local government” includes administrative organs specified in Article 3of the National Government Organization Act and various types of local public entities
specified in Article 1-3 of the Local Autonomy Act (including prefectures, municipalities,
special cities, special wards, associations of local public entities, property controlling districts,
and regional development corporations).
(B) The term “borrower” or “customer” equivalent to a borrower means a borrower of loans or acustomer of a bank falling under any of the following categories.
a.

A borrower of loaned securities, an account holder concluding an overdraft agreement with abank, or a borrower of loans provided by a bank acting as an agent for the Development Bankof Japan or other specified financial institution

b. A prospective borrower to whom a bank has issued a loan commitment letter, etc.
c.

A customer for whom the bank discounted or accepted bills (or a customer for whom thebank negotiated an export bill or foreign currency bill, etc.)

d. An obligor of any obligations guaranteed by a banke.

A joint and several obligor, guarantor, or collateral provider(C) The term “company entrusting administration of corporate bonds” or “customer equivalent
thereto” means a company issuing corporate bonds and entrusting the work for solicitation ofsubscription for such bonds (including other related claims; the same applies hereinafter) or
the work for administration of such bonds, or a customer of a bank falling under any of thefollowing categories.

34

a.

A company issuing or distributing bonds for which the total amount is fully underwritten

b. A company issuing or distributing bonds which are securedc.

A collateral provider or surety company to secure bonds to be issued or distributedd. A financial instruments business operator acting as an underwriter for bonds to be issued or
distributede.

A financial instruments business operator underwriting bonds and offering those bonds forsecondary distributionf.

Any other firm which is to undertake certain services equivalent to the foregoing for bonds tobe issued or distributed(D) “Customers” or other equivalent terms, other than those classified into the preceding items,
include the following persons.
a.

Bond subscribers (meaning those who apply for subscription for bonds); in this regard,
deposits withdrawn solely for the purpose of payments for financial bonds issued by a longterm credit bank (which may be called a “deposit with a special clause for bond subscription”
or the like) are included in the scope of deposits purchased by bond subscribers.

b. Financial institutions which subscribe for financial bonds issued by a long-term credit bankon a repeated and ongoing basis, e.g., correspondent banks for international money transfers,
users of safe-deposit box services, customers of safe custody servicesc.

Firms which undertake services for receiving amounts paid in for shares (including investment
securities; the same applies hereinafter), services for paying dividends on shares, or services
for principal and interest payments for corporate bonds, or firms which undertake services forreceiving amounts paid in for corporate bondsd. Target companies in which a long-term credit bank invests by means of holding their shares,
bonds, or other securitiese.

Firms which undertake depository services for registered public or corporate bondsf.

Firms which undertake services for examination, evaluation, clearance, or other operations ofbills

g. Persons who are directed to make deposits with a long-term credit bank under special laws or
regulations
h. Other persons equivalent to any of the foregoing(ii)

Regarding “deposits or equivalent” referred to in Article 6(2) of the Long Term Credit Bank
Act, money equivalent to a deposit includes the following.

(A) Subscription money for bonds: amounts paid in for subscribing for financial bonds(B) Subscription money for securities: deposits for subscribing for public or corporate bonds orshares, or amounts paid in for such subscription(C) Funds for payments for securities: funds for making principal and interest payments for public
or corporate bonds, funds for purchasing public or corporate bonds, or funds for distributing
dividends on shares

35

(D) Domestic exchange unsettled, credit: amounts received through domestic exchangetransactions that remain unsettled(E) Loan amounts temporarily retained: amounts received or money paid on account or reserved
for loan principal and interest that are temporarily retained because loan disbursements aredelayed in the context of formation of a foundation(F) Bond principal and interest payable: principal and interests of financial bonds issued by a longterm credit bank that are due and payable on a specified redemption date or such principal
amounts that remain unpaid(G)

Dividends payable: dividends to shareholders (including preferred shareholders) that remain
unpaid(H) Taxes and charges received: tax amounts withheld at the source upon payment of interest
payable, interest receivable, salary, or the like(I)

Suspense receipts: reserves, allowances, or other amounts reserved which have been received
and recorded under a suspense account with a character similar to deposits(J)

Adjustment accounts payable: gross profits in adjustment accounts(K) Borrowings from the Bank of Japan (BOJ), bills or notes re-discounted by the BOJ, borrowings
from the BOJ for settlement of import bills, or call money(L) Other money equivalent to any of the foregoing
II-4

Points to Note in Providing Administrative Guidance or Implementing Equivalent Actions

II-4-1

Points to Note in Providing Administrative Guidance or Implementing Equivalent Actions

When providing administrative guidance or equivalent (meaning administrative guidance defined in
Article 2(vi) of the Administrative Procedure Act or any other administrative action that cannot be clearly
distinguished from administrative guidance, e.g., providing information, consultation, advice or the like)to banks, FSA staff must act properly in accordance with the Administrative Procedure Act and otherrelevant laws and regulations. In particular, the following points must be noted when intending to provide
administrative guidance.
(1) General principles (Article 32 of the Administrative Procedure Act)(i)

Is the administrative guidance fulfilled solely by the bank’s voluntary cooperation?
More specific points to note are as illustrated below.
(A) Do FSA staff convince the bank of the content of the administrative guidance, its operation,and the staff’s responses?
(B) Isn’t the administrative guidance forcibly continued even though the bank clearly expresses its
unwillingness to cooperate?

(ii) Doesn’t the bank receive any disadvantageous treatment by reason of its refusal to follow the36

administrative guidance?
(A) If the fact about a certain bank’s failure to follow administrative guidance was publicly
disclosed without due legal grounds, or if such public disclosure was likely to inflict economic
losses on the bank or impose social sanction on the bank in any other way, the regulator’s
action might eventually be regarded as disadvantageous treatment.
(B) If there is a possibility that, whether or not exercising the authority to render administrative
action remain uncertain at the time when the regulator intends to provide administrative
guidance to a bank, it may subsequently turn out that the bank’s situation deserves certain
administrative action depending on circumstances after provision of the administrative
guidance, the FSA will not be precluded from giving administrative guidance by suggesting
the possibility of exercising administrative action at a later time.
(2) Administrative guidance for applications filed by banks (Article 33 of the Administrative ProcedureAct)
If a bank filing a certain application has clearly expressed its unwillingness to follow theadministrative guidance, does the FSA staff’s behavior (such as forcibly continuing theadministrative guidance) preclude the applicant from exercising its rights?
(i) Even when the applicant does not express a clear intention of defying the administrative guidance,
FSA staff should observe the backgrounds underlying the administrative guidance and changes
in objective circumstances surrounding the bank and try to find out whether the bank shows anegative reaction.
(ii) Even when the applicant appears to go along with the administrative guidance, the applicant may
not necessarily accept possible delay in the regulator’s judgment or responses for the applicationin question.
(iii) More specific points to note are as described below.
(A) Does FSA staff avoid behavior that forces the applicant to have no other choice but to follow
the administrative guidance and consequently preclude the applicant’s exercise of its rights?
(B) When the applicant does not express a clear intention of defying the administrative guidance,
do FSA staff take care not to intentionally suspend or withhold their process of examinations
and responses for the application in question by reason of the ongoing administrative
guidance?
(C) When the applicant expresses its unwillingness to follow the administrative guidance, do FSA
staff stop enforcing the administrative guidance and promptly take appropriate steps for theapplication in question?
(3) Administrative guidance in relation to the authority to grant permission, license, or other approval(Article 34 of the Administrative Procedure Act)
Even when the regulator is unable to exercise the authority to give permission, license, or other37

approval or to render disposition based on such permission, license, or other approval or has nointention of exercising such authority, do FSA staff avoid deliberately threatening the bank with theregulator’s power to exercise such authority and eventually coerce the bank to follow theadministrative guidance?
More specific points to note are as illustrated below.
(i)

Although the FSA has no authority to refuse to grant certain permission, license, or otherapproval, do FSA staff avoid pretending to have such authority and coerce the bank into certain
action or inaction?

(ii) Do FSA staff avoid inducing the bank to have no other choice but to follow the administrative
guidance in such a way to imply that failure to follow the administrative guidance will
immediately lead to the exercise of certain authority or some disadvantageous treatment?
(4) Means of administrative guidance (Article 35 of the Administrative Procedure Act)(i)

When providing administrative guidance to a bank, is the bank clearly informed of the purpose
and content of the administrative guidance and the name of the FSA’s official responsible?
More specific points to note are as illustrated below.
(A) Is the required action or inaction defined clearly?
(B) Is the name of the official primarily responsible for enforcing the administrative guidanceindicated clearly?
(C) When the administrative guidance is based on any specific act, are relevant provisions in theact identified?
(D) When the administrative guidance is not based on any specific act, is the purpose of theadministrative guidance clarified and explained to convince the bank of the necessity of theadministrative guidance?

(ii)

When the bank asks for issuance of a document stating the purpose and content of theadministrative guidance and the name of the official responsible, is such document issued except
where it is specifically detrimental to financial policy? (The foregoing does not apply in any of
the cases set forth in Article 35(3) of the Administrative Procedure Act.)(A) Upon request for issuance of a document in writing, it should be issued as promptly as possible.
(B) According to the Administrative Procedure Act, “extraordinary administrative inconvenience”
that justifies the regulator’s refusal to issue a written document means a situation where thedocument is expected to be exploited for any purpose or to be interpreted in any way that isirrelevant to the issuer’s intention, resulting in failure to achieve the intended administrative
purpose, or any other situation where the regulator’s administration might be significantly
disrupted if the purpose and content of the administrative guidance and the name of theofficial responsible are put into writing.
(C) “Extraordinary administrative inconvenience” will not be recognized merely because theregulator needs to process a large number of applications or to expeditiously process the38

application in question.
II-4-2

Points to Note in Interviews or Other Direct Communication

When a FSA staff member conducts an interview or other session of personal communication (meaning
face-to-face interview, telephonic conversation, or communication by e-mail, facsimile, or any other means;the same applies hereinafter) with an officer or manager of a bank, the following points must be noted.
(1) While in an interview or communication session, do FSA staff maintain discipline and integrity as wellas an even-minded and immovable attitude?
(2) At the beginning of an interview or communication session, are its purpose, the names and job
positions of the bank’s participants, and other key information confirmed?
(3) In light of the purpose and content of the interview or communication session, is a suitable meanschosen and are the venue, time of day, and participants of both parties appropriate?
(4) After the interview or communication session, do both parties confirm the summary of discussions
and conclusions to share the same recognition, as necessary? In particular, if such discussions andconclusions need to be kept confidential, do both parties clearly understand this?
(5) If it is necessary to seek a superior’s judgment in relation to a certain issue discussed in the interview
or communication session, does the FSA staff member act appropriately, either by asking thesuperior’s judgment beforehand or making a prompt report to the superior afterwards? If it isnecessary to interview or communicate with multiple banks on an individual basis to discuss the same
issues, are administrative integrity and transparency ensured?
II-5
II-5-1II-5-1-1

Points to Note in Enforcing Administrative Actions or Other Measures
Basic Workflow for Administrative Action (Adverse Action)
Administrative action

Major adverse actions (as defined in Article 2(iv) of the Administrative Procedure Act; the same applies
hereinafter) enforced by FSA’s supervisory divisions include: the issuance of a business improvement orderunder Article 26 of the Banking Act, the issuance of a business suspension order under Article 26 of thesame act, the issuance of a business suspension order under Article 27 of the same act, and the revocationof a license under Article 27 of the same act. The basic workflow for rendering such administrative action39

is described as follows.
(1) Request for reporting under Article 24 of the Banking Act(i)

If the FSA’s on-site inspection or off-site monitoring (such as interviews or demanding
submission of a misconduct notification) finds out any problem in a bank’s risk management
practices, compliance management systems, governance systems, or other business practices, the
FSA will ask the bank to report its fact-checking of the problems, its own analyses of the causesof those problems, planned measures for improvement or remediation, and other comments onimportant issues pursuant to Article 24(1) of the Banking Act.

(ii) If the FSA determines, as a result of verifying the report submitted by the bank, that further
scrutiny is needed, the FSA will ask the bank to submit an additional report pursuant to Article
24(1) of the Banking Act.
(2) Follow-up on measures for improvement or remediation reported under Article 24(1) of the Banking
Act(i)

If the FSA determines, as a result of verifying the reports submitted by a bank, that no serious
issue is found in terms of the soundness and appropriateness of the bank’s business and that thebank is capable of promoting its self-initiated improvement efforts, the FSA will follow up on the
progress of the bank’s measures for improvement reported in (1) above through non-compulsory
interviews or other communication.

(ii) Where necessary, the FSA may ask the bank to make periodic follow-up reports pursuant to
Article 24(1) of the Banking Act.
(3) Issuance of a business improvement order under Article 26(1) of the Banking Act
If the verification of the reports received under (1) above (including additional reports ) finds out
any serious problems, for example, in terms of the soundness and appropriateness of the bank’sbusiness, or concludes that the bank is unable to improve its business only by its self-initiated efforts,
the FSA will consider whether to issue an order for submission of a business improvement plan andfor implementation of the established plan pursuant to Article 26(1) of the Banking Act.
According to circumstances, the FSA may consider issuing an order to refrain from starting a new
business for a specified period of time, which business banks are now allowed to operate in the wakeof the recent financial reforms in Japan. Such order may be issued either in the form of a single action
or in parallel with another administrative action described in (4) or (5) below.
(4) Issuance of a business suspension order under Article 26(1) of the Banking Act
If the FSA determines, on the occasion of intending to issue a business improvement order
described in (3) above, that it is expected to take a certain period of time for the bank to improve its
business, for which period the bank will need to focus all its efforts on improvement activities, the40

FSA will consider whether to issue an order to suspend the relevant business for a specified period
pursuant to Article 26(1) of the Banking Act. The period of suspension will be determined based on
the length of time that is expected to be required for the improvement.
(5) Issuance of a business suspension order under Article 27 of the Banking Act
If the verification of the reports received under (1) above (including additional reports) finds out
any serious violation of laws or regulations or any conduct detrimental to public interests, which isdetermined serious because of its continuity, repetition, intentionality, or maliciousness, the FSA
will consider whether to issue an order to suspend the relevant business pursuant to Article 27 of the
Banking Act. At the same time, whether to issue an order to establish internal control systems for
ensuring compliance pursuant to Article 26(1) of the Banking Act will be considered.
(6) Revocation of a license under Article 27 of the Banking Act
If the verification of the reports received under (1) above (including additional reports) finds out
a large number of cases involving serious violations of laws or regulations or conduct detrimental to
public interests and the FSA determines that the bank is incompetent to continue its business, the
FSA will consider whether to revoke its license pursuant to Article 27 of the Banking Act.
When the FSA considers invoking any administrative action described in (3) to (6), not just the factors
listed in the three categories below must be examined, but also whether there are any other points toconsiderer must be scrutinized.
(i)Severity and maliciousness of the improper conduct(A)

Degree of detriment to public interests
Does the bank avoid acting in a way to undermine confidence in financial markets or to cause
any other detriment to public interests? One example of such conduct is to design and offer
products that are extremely inadequate in terms of proper disclosure of customers’ financial
reporting.

(B)

Degree of damage to users
Do a large number of users in extensive areas suffer damage? How serious is each user’s
damage?

(C)

Maliciousness of the improper conduct
Is the bank’s conduct malicious? One example of malicious conduct is to ignore a lot ofcomplaints from users of certain products and continue selling the same or similar products.

(D)

Duration of the improper conduct and its repetitions
Has the conduct in question been continued over a long time or for a short period? Was it
committed repeatedly or continuously? Or only once? Had the bank committed any similar
act in the past?

41

(E)

Intentionality
Did the bank intentionally act with an awareness of illegality or inappropriateness? Or was itmere negligence?

(F)

Institutional involvement
Was the conduct in question at the sole discretion of a sales manager or based on directions
from a high-level officer? Were the bank’s top executives involved in the conduct?

(G)

Attempt to cover up the improper conduct
After the bank or the persons in charge had recognized the problem, did they attempt toconceal its evidence? If so, was it an institutional attempt?

(H)

Involvement of antisocial forces
Were any antisocial forces involved in the conduct in question? If so, to what extent were they
involved?

(ii) Appropriateness of governance systems and business operation systems leading to the causes of
the improper conduct(A)

Are the representative directors and the board of directors fully aware of the significance ofcompliance and eager to promote compliance-conscious management?

(B)

Is the bank’s internal audit department well prepared? Does it exert its functions properly?

(C)

Are the bank’s compliance department and risk management department well prepared? Do
they exert their functions properly?

(D)

Are the bank’s relevant staff fully aware of the significance of compliance? Are theyadequately trained or educated in the bank?

(iii) Mitigating factors
In addition to the examination of the bank’s conduct in the respects described above, is there
any factor that can allow the regulator to mitigate administrative enforcement? For example, isthe bank promoting self-initiated efforts for protecting users before receiving any administrative
measure?
In particular, if the bank’s self-initiated efforts are properly implemented in line with theprinciples shared with the regulator, this may be considered as a mitigating factor.
(7) Standard period for processing a case subject to administrative action
When the FSA is going to invoke any administrative action described in (3) to (6) above, suchaction should be rendered roughly within about one month, in principle, after receiving a report or a
misconduct notification described in (1) above (or a report submitted based on a request made by
the FSA under Article 24 of the Banking Act, if applicable), or roughly within two months if the action
is based on any law subject to concurrent jurisdiction of the FSA and another ministry or agency.
Note 1: To recognize the time for receiving a report, the following points need to be noted.
(i)

If asking for submission of a report multiple times pursuant to Article 24 of the Banking
Act (limited to the case where each request for submission is made within the time frame

42specified above after receiving the immediately preceding report), the time for receiving thelast report is regarded as the starting point of the time frame for administrative action.
(ii)

If asking for correction of a report submitted or for submission of additional documents(excluding inconsequential correction or provision of trivial information), the time forreceiving corrected or additional documents is regarded as the starting point of the timeframe for administrative action.

Note 2: The time spent for formal explanations or hearings are not included in the standard period forprocessing a case subject to administrative action.
Note 3: The standard period for processing a case subject to administrative action will apply to each
set of information to be examined as the basis for invoking administrative action.
II-5-1-2

Cancellation of the Obligation to Make Progress Reports Based on a Business Improvement
Order Issued under Article 26 of the Banking Act

After issuance of a business improvement order to a bank under Article 26 of the Banking Act, the FSA
will follow up on the bank’s business improvement based on such order and try to encourage theirimprovement efforts. For this purpose, the FSA is, in principle, supposed to ask the bank to report the
progress of its business improvement plan submitted to the FSA, with the following points in mind.
(1) If the FSA issues a business improvement order to a bank under Article 26 of the Banking Act andasks the bank to report the progress of its business improvement plan for a certain period, the bankwill be relieved of the obligation to report after expiration of the specified period.
(2) If the FSA issues a business improvement order to a bank under Article 26 of the Banking Act andasks the bank to report the progress of its business improvement plan on an ongoing basis, without
specifying a definite period, the FSA will cancel the bank’s obligation to report when the FSA
determines that adequate improvement measures have been completed in line with the business
improvement plan to address the problem triggering the business improvement order. In this regard,whether or not to cancel the bank’s obligation to report will be determined by evaluating the bank’s
improvement efforts reported by the bank or confirmed through the FSA’s inspections.
II-5-2

Relations with the Administrative Procedure Act and Other Relevant Acts

(1) Relations with the Administrative Procedure Act
When the FSA intends to render any adverse administrative action falling under any of the cases
set forth in item (i) of Article 13(1) of the Administrative Procedure Act to a bank, the FSA must
conduct hearings with the bank. In case of any adverse administrative action falling under the caseset forth in item (ii) of the same article, the FSA must offer the opportunity for explanation to the43bank.
In either case, the FSA must show the grounds for the adverse administrative action pursuant to
Article 14 of the same act. (When such adverse administrative action is rendered in writing, its
grounds must also be indicated in writing.)
If intending to refuse to grant the permission, license, or other approval requested under anapplication filed by a bank, the FSA must show the grounds for the action of refusal pursuant to
Article 8 of the same act. (When such action is rendered in writing, its grounds must also be indicatedin writing.)
On this occasion, merely enumerating the provisions of relevant acts is not sufficient; instead, fullaccountability is required to clarify what facts underlie the decision to render the action and whichacts and standards are relied on to justify the action.
(2) Relations with the Administrative Complaint Review Act
If the FSA intends to render any administrative action for which an administrative complaint canbe filed, the FSA must explain in writing that the bank is entitled to file a complaint pursuant to
Article 82 of the Administrative Complaint Review Act.
(3) Relations with the Administrative Case Litigation Act
If the FSA intends to render any administrative action for which an action for revocation can be
instituted, the FSA must explain the information about the procedures for filing such action inwriting pursuant to Article 46 of the Administrative Case Litigation Act.
II-5-3

System for Exchange of Opinions(1) Purpose of the system
Before rendering any adverse administrative action to a bank, the FSA is supposed to conducthearings with the bank or give an opportunity for explanations to the bank in accordance with the
Administrative Procedure Act. In addition to and separately from such hearings or explanations,
there is a system to allow the bank to ask for multi-level exchange of opinions between the regulator
and the bank. This system is meaningful to help the parties share the same recognition as to the facts
underlying the administrative action and their severity.
(2) How to operate this system
During the course of hearings in relation to the regulator’s request for reporting under Article 24of the Banking Act, the bank in question may feel that an adverse administrative action is likely to berendered. If the bank asks for an opportunity of exchange of opinions between the regulator’s senior
officials (*1) and the bank’s executives (*2) in a situation where the regulator intends to render anadverse administrative action which requires prior hearings or the grant of an opportunity for44

explanations, the regulator must arrange an opportunity for exchanging opinions as to the facts
underlying the intended adverse administrative action and their severity. Such opinion exchange
session must be held before a notice of hearings or an opportunity for explanations preceding the
invocation of adverse administrative action is issued by the regulator, except where suchadministrative action needs to be urgently rendered.
Note 1: Example of the FSA’s senior officials: director of its relevant division.
Note 2: If the bank requests that an opportunity for exchange of opinions be arranged, such request
must be made during the period after the FSA’s receipt of the bank’s report explaining thefacts underlying the intended adverse administrative action submitted under Article 24 of the
Banking Act and before the FSA’s issuance of a notice of hearings or an opportunity for
explanations preceding the invocation of the disposition.
II-5-4

Communication with Relevant Authorities in Japan and Overseas Regulators

When intending to render any adverse administrative action described in II-5-1-1(3) to (6), the FSA will
give notice to other relevant authorities in Japan or overseas regulators, as necessary.
II-5-5

Basic Stance for Public Disclosure of Adverse Administrative Actions(1) If any adverse administrative action described in II-5-1-1(4) to (6) is rendered in the form of abusiness suspension order or an order for revocation of a license, such administrative action must be
published in the official gazette pursuant to item (i) or (ii) of Article 56(1) of the Banking Act.
(2) If the FSA intends to publicly disclose the cases of adverse administrative actions other than thosedescribed in (1) above, such disclosure should be intended to clarify the FSA’s supervisory viewpoints.
At the same time, efforts to ensure more transparent supervision and administration must be sought
through properly operating the No-Action Letter System, the system for exchange of opinions, andother mechanisms available.
(3) With regard to the adverse administrative actions described in II-5-1-1(3) to (6), the facts underlying
the invocation of those administrative actions, the content of administrative actions, and otherinformation are supposed to be publicized, except when adverse administrative actions are related to
the financial soundness of the banks concerned or when the disclosure of relevant facts andinformation is likely to impede the business improvement efforts of the banks concerned. The FSA
expects such disclosure and information sharing will increase the predictability for other financial
Institutions and prevent recurrence of similar incidents or problems.
II-5-6Preliminary Examination

45

(1)

If a bank files an application for preliminary examination under Article 39 of the Regulation for
Enforcement of the Banking Act (the “Banking Act Enforcement Regulation”), the preliminary
examination and other processes will be carried out in the following manner.
(i)Addressee of applications: Commissioner of the Financial Services Agency(ii) Examination process:The preliminary examination process is carried out in the same way

as applicable to the definitive examination process. However, a standard time frame is not
specified, in light of the characteristics of preliminary examination.
(iii) Answer:To be issued in the name of the Commissioner of the FSA after completion of thepreliminary examination(2) What to examine and what to answer(i)Applicants may ask for preliminary examination at their option under their individual
circumstances. Therefore, the progress of respective applicant’s preparations before filing anapplication for permission or license may vary greatly among different cases of applications. With
this in mind, the FSA will basically try to conduct precise examination in a way tailored to eachapplicant’s circumstances.

(ii) For example, the FSA’s preliminary examination may ascertain that the applicant has completed
almost all preparations necessary for applying for permission or license. In this case, the FSA may
answer to the applicant as follows: “We have decided to give permission for XXX, subject to our
final examination to be separately conducted when a formal application for permission is filed. You
can therefore commence the application procedure whenever you are ready.”(iii) For another example, the FSA’s preliminary examination may find that the applicant is not well
prepared for applying for permission. In this case, continuing such preliminary examination may
not necessarily be beneficial for the applicant. If it is confirmed that there are only a limited
number of pending issues and that they are clearly identified, the FSA may choose to finish thepreliminary examination after informing the applicant of the points to note in filing anapplication.
The FSA’s answer in this event may be as follows: “We notify you that we are ready to give
permission for XXX, subject to our final examination to be separately conducted when a formal
application for permission is filed, and further subject to your completion of the preparations
indicated in the attached document before filing a formal application.”

46

III

Evaluation Points for Supervising Major Banks

III-1

GovernanceIII-1-1

Background

Since risks for Major Banks acting in global financial markets are becoming more intricate andsophisticated, effective discipline and good governance are essential in their business management in orderto ensure financial stability, to achieve Major Banks’ sustainability, and to maintain and even enhance theirbusiness soundness.
III-1-2

Major Supervisory Viewpoints

To ensure effective governance in a firm, the organs constituting the firm are required to fulfill theirrespective expected roles, first of all. More specifically, the board of directors and the board of company
auditors (or the board of directors, the audit committee, and other organs if the bank is a company with anominating committee, etc., or the board of directors and the audit and supervisory committee if the bankis a company with an audit and supervisory committee) must check the company’s management,
mechanisms of checks and balances among divisions and departments in the firm must function properly,
and the firm’s internal audit department must perform soundly. In addition, representative directors,
directors, executive officers, company auditors and all other personnel in any job grade must understandtheir respective roles and engage responsibly in relevant business processes.
In light of the public nature of banking services, the Banking Act requires that the credibility of bankservices be preserved and that the sound and appropriate management of bank services be achieved in orderto ensure the protection of depositors and to facilitate financial services. In this context, directors serving
in the bank basically on a full-time basis (or directors and executive officers serving in the bank basically ona full-time basis if the bank is a company with a nominating committee, etc.) and the bank’s company
auditors (or the bank’s audit committee members if the bank is a company with a nominating committee,etc., or audit and supervisory committee members if the bank is a company with an audit and supervisorycommittee) are required to have superior qualities to serve in their position.
Under the Companies Act as amended in 2014 and various rules and regulations established by financial
instruments exchanges, listed companies are supposed to have outside directors. In addition, financial
instruments exchanges’ rules and regulations encourage listed companies to strive for improving theircorporate governance with full respect for Japan’s Corporate Governance Code. In this way, listedcompanies are required to maintain a higher level of governance than unlisted companies. With this in mind,
the FSA monitors the governance of banks and bank holding companies to verify whether the functions forgovernance work properly, based on the viewpoints as described below.

47

(1) To develop governance systems at a level required under the principles indicated in the Corporate
Governance Code, does the bank or bank holding company take appropriate steps, including thefollowing, in line with the Corporate Governance Code?
Note:

The Corporate Governance Code adopts principles-based approaches (rather than rulesbased approaches) and the “comply or explain” approach. Under the comply or explain
approach, regulated firms may either comply with the principles specified by the regulator
or explain why they do not if they choose not to comply.

(i)

Independent outside directors of a listed bank or bank holding company are expected to fulfill
their roles and responsibilities to contribute to the firm’s sustainable growth and promotion of
medium- and long-term corporate value. Does the listed bank or bank holding company have atleast two independent outside directors with the competencies sufficient to make suchcontribution?
Depending on the circumstances of the listed bank or bank holding company such as its
industrial category, size, business characteristics, and governance systems designed anddeveloped, it may be recommended that at least one-third of the firm’s directors (rather than atleast two) should be independent outside directors. Taking all such factors into comprehensive
consideration, does the listed bank or bank holding company adopt such “one-third” policy at its
independent judgment and disclose this policy?

(ii)

If the listed bank or bank holding company holds other companies’ listed shares in the form ofreciprocal capital holdings, is such capital holding strategy disclosed? Does the firm’s board of
directors annually review major shareholdings under such strategy, check their returns and risks
and verify their medium- and long-term economic rationality and future prospects? Based on this,does the firm adequately explain the objectives and rationality of such shareholdings? Has the firm
formulated and disclosed the criteria to ensure proper exercise of its voting rights related to suchshareholdings?

(2) In Japan, a global systemically important bank, or G-SIB*, is a bank designated in accordance with
Article 2-2(5)(i) of the FSA’s public notice entitled “Standards for Banks to Judge their Capital
Adequacy in Light of their Assets and Other Circumstances under Article 14-2 of the Banking Act”
(the “Public Notice on Standards for Banks' Capital Adequacy”) or a bank holding company
designated in accordance with Article 2-2(5)(i) of the FSA’s public notice entitled “Standards for Bank
Holding Companies to Judge Their Own and Subsidiaries’ Capital Adequacy in Light of Their Assets
and Other Circumstances under Article 52-25 of the Banking Act” (the “Public Notice on Standards
for Bank Holding Companies' Capital Adequacy”). Such G-SIBs are hereinafter referred to as “G-SIBs
Designated under the Public Notices.” Do those G-SIBs Designated under the Public Notices operatestrong governance systems taking into consideration the size, complexity, internationality, and48

systemic interconnectedness (for example, by adopting the corporate structure of company with anominating committee, etc.; or by nominating independent outside directors when reviewing andapproving a proposal for appointment of directors if the company is a major subsidiary bank of a bankholding company, regardless of whether it is listed or unlisted)?
Note:

The assessment of systemic importance for identifying G-SIBs is conducted by the Financial
Stability Board. Such assessment process is required to be carried out for global banks orbank holding companies whose total leverage exposures converted at the exchange rate asof the end of the most recent business year on a consolidated basis exceed EUR 200 billion.
G-SIBs are identified based on the following five factors: size, interconnectedness,
substitutability/financial institution infrastructure, complexity, and global activity. In
Article 2(5) of the FSA’s notification entitled “Disclosure Requirements for Capital
Adequacy Specified by the Commissioner of the FSA under Article 19-2(1)(v)(d) and Other
Provisions of the Regulation for Enforcement of the Banking Act,” some quantitative
information that banks are required to disclose are enumerated, which includes total
leverage exposures calculated in accordance with the Basel III rules; i.e., the amountindicated in item 3 on sheet 32 of Form 2 attached to said public notice. Based on theforegoing, the Public Notice on Standards for Banks' Capital Adequacy or the Public Noticeon Standards for Bank Holding Companies' Capital Adequacy are operated to designate GSIBs in Japan.

III-1-2-1

If Banks are a Company with a Board of Company Auditors(1) Representative directors(i)

Do the firm’s representative directors list compliance as one of the top-priority issues in thefirm’s business management? Do they take the initiative in developing compliance management
systems?

(ii) Are the representative directors fully aware that downplaying the risk management department
could have grave effects on the firm’s earnings? Do they stress the importance of the risk
management department?
(iii) Do the representative directors develop internal control systems to ensure appropriate and timely
disclosure of financial information and other corporate information?
(iv) Are the representative directors aware of the importance of internal auditing? Do they properly
set the goals of internal auditing? Do they develop systems to enable the internal audit
department to adequately perform its functions (and secure the independence of the internal
audit department)? Do they periodically verify the effectiveness of such systems? If company
auditors’ audits or the regulator’s inspections find out any problems in the firm’s internal audit
systems, do they actively promote efforts to address those problems to develop more effective
internal audit systems?

49

Do they promptly take appropriate steps based on feedback from internal audits?
(v) Are the representative directors fully aware of the importance and benefit of company auditors’audits? To ensure such benefit, do they recognize that a proper environment needs to be
developed?
In particular, do they respond to changes in circumstances surrounding company auditors’audits in order to facilitate company auditors’ activities? For example, do the representative
directors understand the Code of Audit and Supervisory Board Member Auditing Standards(revised on March 10, 2011, Japan Audit and Supervisory Board Members Association)?
(vi) Are the representative directors fully aware that emphatically eliminating and rejecting relations
with antisocial forces is absolutely essential to maintain public confidence in financial institutions
and to ensure the appropriateness and soundness of financial institutions’ services? Inaccordance with the Guidelines for Enterprises to Prevent Damage Caused by Antisocial Forces(Agreement at a Meeting of Cabinet Ministers Responsible for Anti-Crime Measures) issued onJune 19, 2007 (hereinafter referred to as the “Government Guidelines” in III-1-2), do therepresentative directors declare the firm’s basic policy against antisocial forces approved by theboard of directors, both in and outside the bank?
(2) Directors and the board of directors(i)

Do directors warn against and deter dogmatic actions by the representative directors or othertop executives? Are directors actively involved in the board of directors’ processes to makedecisions for business execution and to oversee directors’ business execution?

(ii) If the firm has outside directors, are they fully aware of their own significance and mission toensure the objectivity of business decisions? And are they actively involved in the board of
directors’ activities? When the board of directors reviews and approves a proposal for
appointment of outside directors, in light of the roles that outside directors are expected toperform, does the board closely check the candidates’ personal, capital, and business
relationships and other interests with the bank or its personnel and carefully examine thecandidates’ independence and qualifications?
Does the firm continuously provide information to outside directors or offer othermechanisms to help them make proper judgments at board meetings ?
(iii) The board of directors may from time to time need to make some important business decisions
or management judgments in relation to compliance, credit risk management, or other criticalissues. On such occasions, does the board seek advice from outside experts, submit to a panel
consisting of outside experts, or take other appropriate steps, where needed, in order to ensure
the adequacy and fairness of those decisions or judgments in an objective manner?
(iv) Does the board of directors clearly define business policies based on the overall picture that
financial institutions should aim at? Then, does the board draw up clear-cut business plans inline with the established business policies and familiarize all personnel in the firm with those50

plans? Is the progress of each business plan reviewed periodically and revised whenevernecessary?
(v) Do directors and the board of directors sincerely promote compliance ahead of other personnel
in the firm and properly exert the functions to develop firm-wide internal control systems?
(vi) Is the board of directors fully aware that downplaying the risk management department could
have grave effects on the firm’s earnings? Does the board stress the importance of the risk
management department? Among others, do the directors responsible for specified business
operations understand the form and locus of risks and possess in-depth recognition andunderstanding about various approaches for measuring, monitoring, and controlling diversified
risks?
(vii) Does the board of directors clearly define risk management policies based on the firm’s strategic
goals and familiarize the firm’s personnel with the established policies? Are those policies
reviewed periodically or whenever necessary? Does the board effectively use risk information in
the firm’s business operations and development of risk management systems? For example, arethey briefed on the status of risk management on a regular basis? And do they make necessary
decisions based on the reported risk information?
(viii) Does the board of directors endeavor to enforce a culture in the firm where the importance ofgovernance is emphasized and demonstrated to all personnel in any job grade? And does theboard verify the adequacy and effectiveness of governance and aim at better governance systems?
(ix) Is the board of directors aware of the importance of internal auditing? Does the board properly
set the goals of internal auditing? Does the board develop systems to enable the internal audit
department to adequately perform its functions (and secure the independence of the internal
audit department)? Do they periodically verify the effectiveness of such systems? If company
auditors’ audits or the regulator’s inspections find out any problems in the firm’s internal audit
systems, does the board actively promote efforts to address those problems to develop more
effective internal audit systems?
When the board approves basic matters described in internal audit plans, including audit
policies and priority issues, does the board consider the status of risk management in thedivisions or departments to be audited?
In addition, does the board promptly take appropriate steps based on feedback from internal
audits?
(x) Is directors fully aware of the importance and benefit of company auditors’ audits? To ensure
such benefit, do they recognize that a proper environment needs to be developed? When theboard of directors reviews and approves a proposal for appointment of company auditors, does
the board carefully examine each candidate’s independence and qualifications as a company
auditor? In particular, does the board recognize that the appointment of outside auditors is
statutorily required with a view to enhancing the impartiality and independence of the firm’s
audit systems more definitely?

51

Does the board continuously provide information to outside company auditors or offer othermechanisms to help them make proper judgments?
(xi) Developing internal control systems (including compliance management systems, risk
management systems, and financial reporting systems) in the firm constitutes a part of directors’
duty of due care and duty of loyalty. Do the directors understand this and seek to perform suchduties properly?
(xii) Does the board of directors identify the prevention of damage from antisocial forces as one of
the issues in the firm’s compliance and risk management and incorporate clearly definedmechanisms to address this issue in the firm's internal control systems? For example, is the basic
policy against antisocial forces established in line with the Government Guidelines? Are thesystems to implement such policy developed? And is the effectiveness of those systems verified
on a regular basis?
(xiii) During the course of reviewing and approving a proposal for appointment of directors who are
to serve in the bank's business operations on a full time basis, are the candidates’ qualifications
properly checked? According to Article 7-2 of the Banking Act, banks’ executive members are
required to have knowledge and experience to enforce governance appropriately, fairly, andefficiently and to possess sufficient social credibility. Therefore, for example, are the following
aspects properly considered in the candidate screening process?
(A)

Knowledge and experience to enforce governance appropriately, fairly, and efficiently
Do the candidates understand the regulator’s supervisory viewpoints to check firms’
governance as indicated in the Banking Act, other relevant laws and regulations, and theseSupervisory Guidelines? Do they have sufficient knowledge and experience to enforce thedesired governance? Do they have sufficient knowledge and experience of compliancemanagement and risk management required for the sound and appropriate management ofbanking services? Do they have knowledge and experience to properly execute services
other than banking services that banks are allowed to perform under the law?

(B)

Sufficient social credibilitya.

Have they avoided involvement in any antisocial conduct?

b.

Are they compliant with the requirements not to be an organized crime group member(meaning a member of an organized crime group defined in Article 2(vi) of the Banking Act
on Prevention of Unjust Acts by Organized Crime Group Members or a person who used to
be an organized crime group member in the past)? Are they complying with therequirements not to be closely associated with an organized crime group?

c.

Have they violated any provision of the Financial Instruments and Exchange Act or any otherfinance-related laws or regulations of Japan or any equivalent foreign law or committed acriminal offense referred to in the Penal Code or the Banking Act on Punishment of PhysicalViolence and Others, resulting in imposition of a fine (or any equivalent punishment under
the applicable foreign law)?

52

d.

Have they been subjected to imprisonment or any heavier punishment in Japan (or any
equivalent punishment under the applicable foreign law)?

e.

If any firm to which a candidate previously belonged or currently belongs has been subject
to any compliance-related administrative action invoked by the competent financial
regulator in the form of a business improvement order, a business suspension order, or
revocation of a license, registration, or approval, was the candidate involved in the event orincident underlying such administrative action, either as a main player or as a commanderof the main player? If so, was such involvement attributable to the candidate’s grossnegligence or willful misconduct? (In other words, was he/she aware of expectedconsequences or too careless to prevent the avoidable event or incident?)f.

Have they received a dismissal order from the competent financial regulator while in office
as an executive member in any firm?

g.

While in office as an executive member in a failing financial institution or firm, did they
contribute to such failure?

(3) Company auditors and the board of company auditors(i)Is the independence of company auditors and the board of company auditors ensured inaccordance with the purport of the corporate auditor system established in Japan?

(ii) The mission of company auditors and the board of company auditors, as an independent organ,
is to audit directors’ execution of duties to ensure the bank’s soundness and sustainable growth.
With this in mind, do company auditors and the board of company auditors properly exercise
their extensive authority granted under the law? And do they conduct adequate accounting audits
and operational audits and take necessary steps in a timely manner?
(iii) To enhance the effectiveness of audits and efficiently perform audit activities, do company
auditors and the board of company auditors secure mechanisms and tools that assist auditors’
execution of duties and use them effectively?
(iv) Does each company auditor stay conscious of their status as a single-person organ and actively
perform audit activities under their own responsibility? In particular, does each outside company
auditor recognize that the appointment of outside auditors is statutorily required with a view toenhancing the impartiality and independence of the firm’s audit systems more definitely?
Moreover, do they recognize that they are particularly expected to express audit opinions froman objective standpoint when conducting an audit? Do full-time company auditors takeadvantage of their full-time position and oversee and verify the bank’s governance systems andtheir implementation on a routine basis? Do they endeavor to create a better audit environment
and actively gather information?
(v) A proposal for appointment of company auditors is prepared by the incumbent directors to seek
approval by the shareholders meeting. When the board of company auditors deliberates suchproposal and intends to give consent, does the board closely check the independence,53

qualifications, and other aspects of each candidate?
Among others, does the board check the candidates for outside company auditors in terms of
their personal, capital, and business relationships and other interests with the bank or its
personnel?
(vi) Company auditors of a bank are responsible for auditing the bank’s business operations,
including audits to check whether or not directors develop internal control systems. Do thebank’s auditors understand that such responsibility constitutes a part of their duty of due careand seek to perform such duty properly?
(vii) During the course of reviewing and approving a proposal for appointment of company auditorsof the bank, are the candidates’ qualifications properly checked? According to Article 7-2 of the
Banking Act, banks’ auditors are required to have knowledge and experience to audit directors’
execution of duties appropriately, fairly, and efficiently and to possess sufficient social credibility.
Therefore, for example, are the following aspects properly considered in the candidate screening
process?
(A)

Knowledge and experience to audit directors’ execution of duties appropriately, fairly, andefficiently
Do the candidates have sufficient knowledge and experience to actively perform audit
activities as a single-person organ and under each auditor’s own responsibility? And do they
have knowledge and experience necessary for auditing directors’ execution of duties froman independent standpoint in order to ensure sound and appropriate operation of banking
services?

(B)

Sufficient social credibilitya.

Have they avoided involvement in any antisocial conduct?

b.

Are they compliant with the requirement not to be an organized crime group member, andthe requirement not to be closely associated with an organized crime group?

c.

Have they violated any provision of the Financial Instruments and Exchange Act or any otherfinance-related laws or regulations of Japan or any equivalent foreign law or committed acriminal offense referred to in the Penal Code or the Banking Act on Punishment of PhysicalViolence and Others, resulting in imposition of a fine (or any equivalent punishment under
the applicable foreign law)?

d.

Have they been subjected to imprisonment or any heavier punishment in Japan (or any
equivalent punishment under the applicable foreign law)?

e.

If any firm to which a candidate previously belonged or currently belongs has been subject
to any compliance-related administrative action invoked by the competent financial
regulator in the form of a business improvement order, a business suspension order, or
revocation of a license, registration, or approval, was the candidate involved in the event orincident underlying such action, either as a main player or as a commander of the main
player? If so, was such involvement attributable to the candidate’s gross negligence or willful

54

misconduct? (In other words, was he/she aware of expected consequences or too careless toprevent the avoidable event or incident?)f.

Have they received a dismissal order from the competent financial regulator while in office
as an executive member in any firm?

g.

While in office as an executive member in a failing financial institution or firm, did they
contribute to such failure?

(Reference)“Code of Audit and Supervisory Board Member Auditing Standards,” Japan Audit andSupervisory Board Members Association(4) General managers (those who head a sales office or branch or serve in an equivalent or higher position)(i)

Do general managers fully understand the form and locus of risks and various approaches for
managing risks? Then, do they choose among measuring, monitoring, and controlling
approaches suitable for the types of risks and enforce proper risk management in accordancewith the firm’s risk management policies?

(ii) Do general managers implement measures to make checks and balances work in the office orbranch in accordance with the policies established by the board of directors or other equivalentorgan?
(5) Internal audit department(i)

In order to make checks against audited divisions and departments work sufficiently, is theinternal audit department independent in the firm? At the same time, does the internal audit
department have the systems and abilities to timely gather important information about
operations of audited divisions and departments? And does it develop a scheme capable ofadequately responding to circumstances surrounding the bank and its business conditions andconducting effective internal audits?

(ii) Does the internal audit department figure out realities of risk management at audited divisions
and departments and make efficient and effective internal audit plans? Are those plans designed
to fit with the types and severity of risks at appropriate frequencies and depth? Are those plans
reviewed and adjusted flexibly according to circumstances? Then, are internal audits conductedefficiently and effectively in accordance with the plans?
(iii) Does the internal audit department report important audit findings to the representative
directors and the board of directors without delay? Does the internal audit department keep trackof improvements promoted by audited divisions and departments based on feedback frominternal audits?
(6)

Effective use of external audits(i)Does the bank fully recognize that effective external audits are essential to ensure sound andappropriate management of the bank’s services? And are external audits used effectively?

55

(ii) Is the effectiveness of external audits verified periodically? Is the feedback from external audits
utilized to take appropriate measures?
(iii) Regarding reappointment or retention of an external auditing firm, does the bank properly
consider such factors as the total duration of continuous appointment and the number ofconsecutive years for assignment of particular certified public accountants?
(7) Coordination among multiple auditing functions
Do external auditing functions and the firm’s internal audit department, company auditors, orboard of company auditors communicate and coordinate effectively?
III-1-2-2
Note:

If Banks are a Company with a Nominating Committee, etc.
If a bank is a company with a nominating committee, etc., the regulator needs to verify whether
the board of directors, respective committees, executive officers, and other organs in the bankproperly fulfill their roles based on the responsibilities and authorities respectively assigned tothem. Such verification is conducted with a focus on the details of the authorities delegated torespective organs, taking into consideration the viewpoints shown in these Supervisory
Guidelines.

(1) Directors and the board of directors(i)

Does the board of directors clearly define the authorities to make decisions in businessexecution? The matters defined in this context include business management policies, thesegregation of duties assigned to respective executive officers, direction and order schemes, andissues concerning mutual relations among executive officers.
Does the board develop the systems for ensuring that executive officers execute duties incompliance with laws and regulations and the systems for ensuring disciplined business
operations? Is the effectiveness of those systems verified on an ongoing basis? If audit
committee’ audits or the regulator’s inspections find out any problems in the firm’s internal
audit systems, does the board actively promote efforts to address those problems to develop
more effective internal audit systems?

(ii) Does the board of directors actively develop the systems necessary for facilitating the audit
committee to execute duties (e.g., audit assistants, information and reporting controls, internal
control systems)?
(iii) Does the board of directors endeavor to enforce a culture in the firm where the importance ofgovernance is emphasized and demonstrated to all personnel in any job grade? And does theboard verify the adequacy and effectiveness of governance and aim at better governance systems?
(iv) Does the board of directors properly exercise the authority to oversee management and businessexecution by effectively using and cooperating with committees?

56

(v) Does the board of directors develop internal control systems to ensure appropriate and timely
disclosure of financial information and other corporate information?
(vi) Are directors actively involved in the board of directors’ processes to make decisions for businessexecution and to oversee executive officers’ execution of duties? Developing internal control
systems (including compliance management systems, risk management systems, and financial
reporting systems) in the firm constitutes a part of directors’ duty of due care and duty of loyalty.
Do the directors understand this and seek to perform such duties properly?
(vii) Does the board of directors identify the prevention of damage from antisocial forces as one of
the issues in the firm’s compliance and risk management and clearly incorporate the prevention
into defined mechanisms in the firm's internal control systems? For example, is the basic policy
against antisocial forces established in line with the Government Guidelines? Are the systems to
implement such policy developed? And is the effectiveness of those systems verified on a regularbasis?
(viii) During the course of reviewing and approving a proposal for appointment of directors who are
to serve in the bank's business operations on a full time basis, are the candidates’ qualifications
properly checked? According to Article 7-2 of the Banking Act, banks’ executive members are
required to have knowledge and experience to enforce governance appropriately, fairly, andefficiently and to possess sufficient social credibility. Therefore, for example, are the following
aspects properly considered in the candidate screening process?
(A)

Knowledge and experience to enforce governance appropriately, fairly, and efficiently
Do the candidates have sufficient knowledge and experience to actively take part in theboard of directors’ processes to make decisions in relation to business management
policies, internal control systems, and business execution and to oversee directors’ andexecutive officers’ execution of duties? And do they have knowledge and experience
necessary for enforcing governance as specified in the Banking Act, other relevant
regulations, and these Supervisory Guidelines in order to ensure sound and appropriate
operation of banking services?

(B)

Sufficient social credibilitya.

Have they avoided involvement in any antisocial conduct?

b.

Are they compliant with the requirement not to be an organized crime group member, andthe requirement not to be closely associated with an organized crime group?

c.

Have they violated any provision of the Financial Instruments and Exchange Act or any otherfinance-related laws or regulations of Japan or any equivalent foreign law or committed acriminal offense referred to in the Penal Code or the Banking Act on Punishment of PhysicalViolence and Others, resulting in imposition of a fine (or any equivalent punishment under
the applicable foreign law)?

d.

Have they been subjected to imprisonment or any heavier punishment in Japan (or any
equivalent punishment under the applicable foreign law)?

57

e.

If any firm to which a candidate previously belonged or currently belongs has been subject
to any compliance-related administrative action invoked by the competent financial
regulator in the form of a business improvement order, a business suspension order, or
revocation of a license, registration, or approval, was the candidate involved in the event orincident underlying such action, either as a main player or as a commander of the main
player? If so, was such involvement attributable to the candidate’s gross negligence or willful
misconduct? (In other words, was he/she aware of expected consequences or too careless toprevent the avoidable event or incident?)f.

Have they received a dismissal order from the competent financial regulator while in office
as an executive member in any firm?

g.

While in office as an executive member in a failing financial institution or firm, did they
contribute to such failure?

(2) Audit Committee and other committees(i)

Is the independence of each committee ensured in accordance with the purport of Japan’s
corporate committees system?

(ii) Does the audit committee properly exercise its extensive authority granted under the law? And
does the committee conduct adequate accounting audits and operational audits and takenecessary steps in a timely manner?
(iii) To audit the legality and adequacy of directors’ and executive officers’ execution of duties, does
the audit committee effectively use employees serving as the committee’s assistant, the internal
audit department, financial auditors, and other persons?
Unlike a company with board of company auditors where company auditors can readily
conduct on-the-spot inspections, the audit committee’s activities are usually focused onorganizational audits through use of the firm’s internal control systems because most committee
members are outside directors. In light of such nature of the audit committee, does the firm
develop mechanisms to support the audit committee, especially through the internal audit
department?
(iv) During the course of reviewing and approving a proposal for appointment of audit committee
members of the bank, are the candidates’ qualifications properly checked? According to Article
7-2 of the Banking Act, banks’ auditors are required to have knowledge and experience to audit
execution of duties by the bank’s executive officers and directors appropriately, fairly, andefficiently and to possess sufficient social credibility. Therefore, for example, are the following
aspects properly considered in the candidate screening process?
(A)

Knowledge and experience to audit execution of duties by the bank’s executive officers anddirectors appropriately, fairly, and efficiently
Do the candidates have knowledge and experience enough to oversee and verify thedevelopment and operation of the firm’s internal control systems and to perform proactive

58

roles in the board of directors’ deliberations for the development and operation of theinternal control systems? And do they have knowledge and experience necessary forauditing executive officers’ and directors’ execution of duties from an independent
standpoint in order to ensure sound and appropriate operation of banking services?
(B)

Sufficient social credibilitya.

Have they avoided involvement in any antisocial conduct?

b.

Are they compliant with the requirement not to be an organized crime group member, andthe requirement not to be closely associated with an organized crime group?

c.

Have they violated any provision of the Financial Instruments and Exchange Act or any otherfinance-related laws or regulations of Japan or any equivalent foreign law or committed acriminal offense referred to in the Penal Code or the Banking Act on Punishment of PhysicalViolence and Others, resulting in imposition of a fine (or any equivalent punishment under
the applicable foreign law)?

d.

Have they been subjected to imprisonment or any heavier punishment in Japan (or any
equivalent punishment under the applicable foreign law)?

e.

If any firm to which a candidate previously belonged or currently belongs has been subject
to any compliance-related administrative disposition invoked by the competent financial
regulator in the form of a business improvement order, a business suspension order, or
revocation of a license, registration, or approval, was the candidate involved in the event orincident underlying such disposition, either as a main player or as a commander of the main
player? If so, was such involvement attributable to the candidate’s gross negligence or willful
misconduct? (In other words, was he/she aware of expected consequences or too careless toprevent the avoidable event or incident?)f.

Have they received a dismissal order from the competent financial regulator while in office
as an executive member in any firm?

g.

While in office as an executive member in a failing financial institution or firm, did they
contribute to such failure?

(Reference)“Code of Audit and Supervisory Board Member Auditing Standards,” Japan Audit andSupervisory Board Members Association(3) Executive officers (including representative executive officers)(i)

Are executive officers fully aware of the authorities and responsibilities delegated to them basedon the board of directors’ resolutions? Are their business decisions made in line with the business
management policies approved by the board of directors?

(ii) Do executive officers clearly define business plans based on the established business
management policies and familiarize the firm’s personnel with such plans? Is the progress of eachbusiness plan reviewed periodically and revised whenever necessary?
(iii) Do executive officers sincerely promote compliance ahead of other personnel in the bank and59

properly exert the functions to develop and operate firm-wide internal control systems?
(iv) Are executive officers fully aware that downplaying the Risk Management Department could
have grave effects on the bank’s earnings? Do they stress the importance of the risk management
department? Among others, do the executive officers responsible for specified business
operations understand the form and locus of risks and possess in-depth recognition andunderstanding about various approaches for measuring, monitoring, and controlling diversified
risks?
(v) Do executive officers clearly define risk management policies based on the established business
management policies and familiarize the firm’s personnel with such policies? Are those policies
reviewed periodically or whenever necessary? Do executive officers effectively use risk
information in the firm’s business operations and development of risk management systems? For
example, are they briefed on the status of risk management on a regular basis? And do they makenecessary decisions based on the reported risk information?
(vi) Are executive officers aware of the importance of internal auditing? Do they implement measures
to make the internal audit functions work adequately? Is the feedback from internal audits
utilized to take appropriate measures?
(vii) Are executive officers fully aware that emphatically eliminating and rejecting relations with
antisocial forces is absolutely essential to maintain public confidence in financial institutions andto ensure the appropriateness and soundness of financial institutions’ services? In accordancewith the Government Guidelines, do executive officers declare the firm’s basic policy against
antisocial forces approved by the board of directors, both in and outside the bank?
(viii) During the course of reviewing and approving a proposal for appointment of executive officers,
are the candidates’ qualifications properly checked? According to Article 7-2 of the Banking Act,banks’ executive members are required to have knowledge and experience to enforce governanceappropriately, fairly, and efficiently and to possess sufficient social credibility. Therefore, forexample, are the following aspects properly considered in the candidate screening process?
(A)

Knowledge and experience to enforce governance appropriately, fairly, and efficiently
Do the candidates understand the regulator’s supervisory viewpoints to check firms’
governance as indicated in the Banking Act, other relevant laws and regulations, and theseSupervisory Guidelines? Do they have sufficient knowledge and experience to enforce thedesired governance? Do they have sufficient knowledge and experience of compliancemanagement and risk management required for the sound and appropriate management ofbanking services? Do they have knowledge and experience to properly execute services
other than banking services that banks are allowed to perform under the law?

(B)

Sufficient social credibilitya.

Have they avoided involvement in any antisocial conduct?

b.

Are they compliant with the requirement not to be an organized crime group member, andthe requirement not to be closely associated with an organized crime group?

60

c.

Have they violated any provision of the Financial Instruments and Exchange Act or any otherfinance-related laws or regulations of Japan or any equivalent foreign law or committed acriminal offense referred to in the Penal Code or the Banking Act on Punishment of PhysicalViolence and Others, resulting in imposition of a fine (or any equivalent punishment under
the applicable foreign law)?

d.

Have they been subjected to imprisonment or any heavier punishment in Japan (or any
equivalent punishment under the applicable foreign law)?

e.

If any firm to which a candidate previously belonged or currently belongs has been subject
to any compliance-related administrative disposition invoked by the competent financial
regulator in the form of a business improvement order, a business suspension order, or
revocation of a license, registration, or approval, was the candidate involved in the event orincident underlying such disposition, either as a main player or as a commander of the main
player? If so, was such involvement attributable to the candidate’s gross negligence or willful
misconduct? (In other words, was he/she aware of expected consequences or too careless toprevent the avoidable event or incident?)f.

Have they received a dismissal order from the competent financial regulator while in office
as an executive member in any firm?

g.

While in office as an executive member in a failing financial institution or firm, did they
contribute to such failure?

(4) General managers (those who head a sales office or branch or serve in an equivalent or higher position)(i)

Do general managers fully understand the form and locus of risks and various approaches for
managing risks? Then, do they choose among measuring, monitoring, and controlling
approaches based on the types of risks and enforce proper risk management in accordance withthe firm’s risk management policies?

(ii) Do general managers implement measures to make checks and balances work in the office orbranch in accordance with the policies established by the board of directors or other equivalentorgan?
(5) Internal audit department(i)

In order to make checks against audited divisions and departments work sufficiently, is theinternal audit department independent in the firm? At the same time, does the internal audit
department have the systems and abilities to timely gather important information about
operations of audited divisions and departments? And does it develop a scheme capable ofadequately responding to circumstances surrounding the bank and its business conditions andconducting effective internal audits?

(ii) Does the internal audit department figure out realities of risk management at audited divisions
and departments and make efficient and effective internal audit plans? Are those plans designed

61

to fit with the types and severity of risks at appropriate frequencies and depth? Are those plans
reviewed and adjusted flexibly according to circumstances? Then, are internal audits conductedefficiently and effectively in accordance with the plans?
(iii) Does the internal audit department report important audit findings to representative executive
officers and the audit committee without delay? Does the internal audit department keep trackof improvements promoted by audited divisions and departments based on feedback frominternal audits?
(6) Effective use of external audits(i)Does the bank fully recognize that effective external audits are essential to ensure sound andappropriate management of the bank’s services? And are external audits used effectively?

(ii) Is the effectiveness of external audits verified periodically? Is the feedback from external audits
utilized to take appropriate measures?
(iii) Regarding reappointment or retention of an external auditing firm, does the bank properly
consider such factors as the total duration of continuous appointment and the number ofconsecutive years for assignment of particular certified public accountants?
(7) Coordination among multiple auditing functions
Do external auditing functions and the firm’s internal audit department or audit committee
communicate and coordinate effectively?
III-1-2-3

If Banks are a Company with Audit and Supervisory Committee(1) Representative directors(i)

Do the firm’s representative directors list compliance as one of the top-priority issues in thefirm’s business management? Do they take the initiative in developing compliance management
systems?

(ii) Are the representative directors fully aware that downplaying the Risk Management Department
could have grave effects on the firm’s earnings? Do they stress the importance of the risk
management department?
(iii) Do the representative directors develop internal control systems to ensure appropriate and timely
disclosure of financial information and other corporate information?
(iv) Are the representative directors aware of the importance of internal auditing? Do they properly
set the goals of internal auditing? Do they develop systems to enable the internal audit
department to adequately perform its functions (and secure the independence of the internal
audit department)? Do they periodically verify the effectiveness of such systems? If the audit andsupervisory committees’ audits or the regulator’s inspections find out any problems in the firm’s
internal audit systems, do the representative directors actively promote efforts to address those62

problems and to develop more effective systems?
Do they promptly take appropriate steps based on feedback from internal audits?
(v) Are the representative directors fully aware of the importance and benefit of the audit andsupervisory committee’s audits? To ensure such benefit, do they recognize that a proper
environment needs to be developed?
(vi) Are the representative directors fully aware that emphatically eliminating and rejecting relations
with antisocial forces is absolutely essential to maintain public confidence in financial institutions
and to ensure the appropriateness and soundness of financial institutions’ services? Inaccordance with the Government Guidelines, do the representative directors declare the firm’s
basic policy against antisocial forces approved by the board of directors, both in and outside thebank?
(2) Directors and the board of directors(i)

Do directors warn against and deter dogmatic actions by the representative directors or othertop executives? Are directors actively involved in the board of directors’ processes to makedecisions for business execution and to oversee directors’ business execution?

(ii) Are outside directors fully aware of their own significance and mission to ensure the objectivityof business decisions? And are they actively involved in the board of directors’ activities? Whenthe board of directors reviews and approves a proposal for appointment of outside directors, inlight of the roles that outside directors are expected to perform, does the board closely check the
candidates’ personal, capital, and business relationships and other interests with the bank or its
personnel and carefully examine the candidates’ independence and qualifications?
Does the firm continuously provide information to outside directors or offer othermechanisms to help them make proper judgments at board meetings?
(iii) The board of directors may from time to time need to make some important business decisions
or management judgments in relation to compliance, credit risk management, or other criticalissues. On such occasions, does the board seek advice from outside experts, submit to a panel
consisting of outside experts, or take other appropriate steps, where needed, in order to ensure
the adequacy and fairness of those decisions or judgments in an objective manner?
(iv) Does the board of directors clearly define business policies based on the overall picture that
financial institutions should aim at? Then, does the board draw up clear-cut business plans inline with the established business policies and familiarize all personnel in the firm with thoseplans? Is the progress of each business plan reviewed periodically and revised whenevernecessary?
(v) Do directors and the board of directors sincerely promote compliance ahead of other personnel
in the firm and properly exert the functions to develop firm-wide internal control systems?
(vi) Is the board of directors fully aware that downplaying the risk management department could
have grave effects on the firm’s earnings? Does the board stress the importance of the risk

63management department? Among others, do the directors responsible for specified business
operations understand the form and locus of risks and possess in-depth recognition andunderstanding about various approaches for measuring, monitoring, and controlling diversified
risks?
(vii) Does the board of directors clearly define risk management policies based on the firm’s strategic
goals and familiarize the firm’s personnel with the established policies? Are those policies
reviewed periodically or whenever necessary? Does the board effectively use risk information in
the firm’s business operations and development of risk management systems? For example, arethey briefed on the status of risk management on a regular basis? And do they make necessary
dicisions based on the reported risk information?
(viii) Does the board of directors endeavor to enforce a culture in the firm where the importance ofgovernance is emphasized and demonstrated to all personnel in any job grade? And does theboard verify the adequacy and effectiveness of governance and aim at better governance systems?
(ix) Is the board of directors aware of the importance of internal auditing? Does the board properly
set the goals of internal auditing? Does the board develop systems to enable the internal audit
department to adequately perform its functions (and secure the independence of the internal
audit department)? Do they periodically verify the effectiveness of such systems? If the audit andsupervisory committees’ audits or the regulator’s inspections find out any problems in the firm’s
internal audit systems, does the board of directors actively promote efforts to address those
problems and to develop more effective systems?
When the board approves basic matters described in internal audit plans, including audit
policies and priority issues, does the board consider the status of risk management in thedivisions or departments to be audited?
In addition, does the board promptly take appropriate steps based on feedback from internal
audits?
(x) Are directors fully aware of the importance and benefit of the audit and supervisory committee’s
audits? To ensure such benefit, do they recognize that a proper environment needs to be
developed? When the board of directors reviews and approves a proposal for appointment of
directors who are to serve as audit and supervisory committee members, does the board carefully
examine each candidate’s independence and qualifications as an audit and supervisorycommittee member? In particular, do the candidates for outside directors who are to serve as anaudit and supervisory committee member recognize that the appointment of such outside
directors is statutorily required with a view to enhancing the impartiality and independence ofthe firm’s audit systems more definitely?
Does the board continuously provide information to outside directors serving as audit andsupervisory committee members or offer other mechanisms to help them make proper
judgments?
(xi) Developing internal control systems (including compliance management systems, risk

64management systems, and financial reporting systems) in the firm constitutes a part of directors’
duty of due care and duty of loyalty. Do the directors understand this and seek to perform suchduties properly?
(xii) Does the board of directors identify the prevention of damage from antisocial forces as one of
the issues in the firm’s compliance and risk management and incorporate clearly definedmechanisms to address this issue in the firm's internal control systems? For example, is the basic
policy against antisocial forces established in line with the Government Guidelines? Are thesystems to implement such policy developed? And is the effectiveness of those systems verified
on a regular basis?
(xiii) During the course of reviewing and approving a proposal for appointment of directors who are
to serve in the bank's business operations on a full time basis, are the candidates’ qualifications
properly checked? According to Article 7-2 of the Banking Act, banks’ executive members are
required to have knowledge and experience to enforce governance appropriately, fairly, andefficiently and to possess sufficient social credibility. Therefore, for example, are the following
aspects properly considered in the candidate screening process?
(A) Knowledge and experience to enforce governance appropriately, fairly, and efficiently
Do the candidates understand the regulator’s supervisory viewpoints to check firms’
governance as indicated in the Banking Act, other relevant laws and regulations, and theseSupervisory Guidelines? Do they have sufficient knowledge and experience to enforce thedesired governance? Do they have sufficient knowledge and experience of compliancemanagement and risk management required for the sound and appropriate management ofbanking services? Do they have knowledge and experience to properly execute services otherthan banking services that banks are allowed to perform under the law?
(B) Sufficient social credibilitya.

Have they avoided involvement in any antisocial conduct?

b.

Are they compliant with the requirement not to be an organized crime group member, andthe requirement not to be closely associated with an organized crime group?

c.

Have they violated any provision of the Financial Instruments and Exchange Act or any otherfinance-related laws or regulations of Japan or any equivalent foreign law or committed acriminal offense referred to in the Penal Code or the Banking Act on Punishment of PhysicalViolence and Others, resulting in imposition of a fine (or any equivalent punishment under
the applicable foreign law)?

d.

Have they been subjected to imprisonment or any heavier punishment in Japan (or any
equivalent punishment under the applicable foreign law)?

e.

If any firm to which a candidate previously belonged or currently belongs has been subject
to any compliance-related administrative disposition invoked by the competent financial
regulator in the form of a business improvement order, a business suspension order, or
revocation of a license, registration, or approval, was the candidate involved in the event or65

incident underlying such disposition, either as a main player or as a commander of the main
player? If so, was such involvement attributable to the candidate’s gross negligence or willful
misconduct? (In other words, was he/she aware of expected consequences or too careless toprevent the avoidable event or incident?)f.

Have they received a dismissal order from the competent financial regulator while in office
as an executive member in any firm?

g.

While in office as an executive member in a failing financial institution or firm, did they
contribute to such failure?

(3) Audit and supervisory committee(i)Is the independence of the audit and supervisory committee ensured in accordance with the
purport of Japan’s corporate system?

(ii) Does the audit and supervisory committee properly exercise its extensive authority granted under
the law? And does the committee conduct adequate accounting audits and operational audits andtake necessary steps in a timely manner?
(iii) To audit the legality and adequacy of directors’ execution of duties, does the audit andsupervisory committee effectively use employees serving as the committee’s assistant, theinternal audit department, financial auditors, and other persons?
Unlike a company with a board of company auditors where company auditors can readily
conduct on-the-spot inspections, the audit and supervisory committee’s activities are usuallyfocused on organizational audits through use of the firm’s internal control systems because mostcommittee members are outside directors. In light of such nature of the audit and supervisorycommittee, does the firm develop mechanisms to support the audit and supervisory committee,
especially through the internal audit department?
(iv) A proposal for appointment of directors who are to serve as audit and supervisory committee
members is prepared by the incumbent directors to seek approval by the shareholders meeting.
When the audit and supervisory committee deliberates such proposal and intends to give consent,
does the committee closely check the independence, qualifications, and other aspects of eachcandidate?
Among others, does the committee check the candidates for outside company auditors who
are to serve as audit and supervisory committee member in terms of their personal, capital andbusiness relationships and other interests with the bank or its personnel?
(v) During the course of reviewing and approving a proposal for appointment of directors who are
to serve as an audit and supervisory committee member, are the candidates’ qualifications
properly checked? According to Article 7-2 of the Banking Act, banks’ auditors are required tohave knowledge and experience to audit directors’ execution of duties appropriately, fairly, andefficiently and to possess sufficient social credibility. Therefore, for example, are the following
aspects properly considered in the candidate screening process?

66

(A)

Knowledge and experience to audit directors’ execution of duties appropriately, fairly, andefficiently
Do the candidates have sufficient knowledge and experience to oversee and verify thedevelopment and operation of the firm’s internal control systems and to perform proactiveroles in the board of directors’ deliberations for the development and operation of theinternal control systems? And do they have knowledge and experience necessary forauditing directors’ execution of duties from an independent standpoint in order to ensure
sound and appropriate operation of banking services?

(B) Sufficient social credibilitya.

Have they avoided involvement in any antisocial conduct?

b.

Are they compliant with the requirement not to be an organized crime group member, andthe requirement not to be closely associated with an organized crime group?

c.

Have they violated any provision of the Financial Instruments and Exchange Act or any otherfinance-related laws or regulations of Japan or any equivalent foreign law or committed acriminal offense referred to in the Penal Code or the Banking Act on Punishment of PhysicalViolence and Others, resulting in imposition of a fine (or any equivalent punishment under
the applicable foreign law)?

d.

Have they been subjected to imprisonment or any heavier punishment in Japan (or any
equivalent punishment under the applicable foreign law)?

e.

If any firm to which a candidate previously belonged or currently belongs has been subject
to any compliance-related administrative disposition invoked by the competent financial
regulator in the form of a business improvement order, a business suspension order, or
revocation of a license, registration, or approval, was the candidate involved in the event orincident underlying such disposition, either as a main player or as a commander of the main
player? If so, was such involvement attributable to the candidate’s gross negligence or willful
misconduct? (In other words, was he/she aware of expected consequences or too careless toprevent the avoidable event or incident?)f.

Have they received a dismissal order from the competent financial regulator while in office
as an executive member in any firm?

g.

While in office as an executive member in a failing financial institution or firm, did they
contribute to such failure?

(Reference)“Code of Audit and Supervisory Board Member Auditing Standards,” Japan Audit andSupervisory Board Members Association(4) General managers (those who head a sales office or branch or serve in an equivalent or higher position)(i)

Do general managers fully understand the form and locus of risks and various approaches for
managing risks? Then, do they choose among measuring, monitoring, and controlling
approaches suitable for the types of risks and enforce proper risk management in accordance67with the firm’s risk management policies?
(ii) Do general managers implement measures to make checks and balances work in the office orbranch in accordance with the policies established by the board of directors or other equivalentorgan?
(5) Internal audit department(i)

In order to make checks against audited divisions and departments work sufficiently, is theinternal audit department independent in the firm? At the same time, does the internal audit
department have the systems and abilities to timely gather important information about
operations of audited divisions and departments? And does it develop a scheme capable ofadequately responding to circumstances surrounding the bank and its business conditions andconducting effective internal audits?

(ii) Does the internal audit department figure out realities of risk management at audited divisions
and departments and make efficient and effective internal audit plans? Are those plans designed
to fit with the types and severity of risks at appropriate frequencies and depth? Are those plans
reviewed and adjusted flexibly according to circumstances? Then, are internal audits conductedefficiently and effectively in accordance with the plans?
(iii) Does the internal audit department report important audit findings to the representative
directors and the audit and supervisory committee without delay? Does the internal audit
department keep track of improvements promoted by audited divisions and departments basedon feedback from internal audits?
(6) Effective use of external audits(i)Does the bank fully recognize that effective external audits are essential to ensure sound andappropriate management of the bank’s services? And are external audits used effectively?

(ii) Is the effectiveness of external audits verified periodically? Is the feedback from external audits
utilized to take appropriate measures?
(iii) Regarding reappointment or retention of an external auditing firm, does the bank properly
consider such factors as the total duration of continuous appointment and the number ofconsecutive years for assignment of particular certified public accountants?
(7) Coordination among multiple auditing functions
Do external auditing functions and the firm’s internal audit department or audit and supervisorycommittee communicate and coordinate effectively?
(Reference)

The resources listed below are helpful to understand the supervisory viewpoints inconnection with firms’ governance systems.
(i)“Framework for Internal Control Systems in Banking Organisations,” September 1998, BaselCommittee on Banking Supervision68

(ii) “Enhancing Corporate Governance for Banking Organisations,” February 2006, BaselCommittee on Banking Supervision(iii) “Guidelines for Enterprises to Prevent Damage Caused by Antisocial Forces,” June 19, 2007,
Agreement at a Meeting of Cabinet Ministers Responsible for Anti-Crime Measures, Prime
Minister’s Office of JapanNote:

The subsequent paragraphs in these Supervisory Guidelines are basically intended for banks
which are a company with board of company auditors. When supervising banks which are acompany with a nominating committee, etc. or a company with audit and supervisory committee,
the instructions described in the subsequent paragraphs will apply with appropriate replacementof terms in a way to fit their realities.

III-1-3

Supervisory Approaches

Interviews and day-to-day supervisory activities described below are intended to verify governancesystems of supervised firms.
(1) Off-site monitoring(i)Interviews with firms on their risk management or internal auditing are intended to verify thefunctions performed by the board of directors and the board of company auditors and top
executives’ awareness and involvement.

(ii) Interviews with top managers
Interviews with banks’ top executives will be held whenever necessary to learn about theirbusiness strategies, management policies, and how they recognize and address risk management
issues.
(iii) Where appropriate, the bank’s recognition about governance may be checked through interviews
with the bank’s company auditors, outside directors, or financial auditors.
(2) Verification of governance systems through day-to-day supervisory activities(i)

In addition to interviews described in (1) above, the effectiveness of governance systems can bechecked to some extent in the course of day-to-day supervisory activities such as: screening
license applications, receiving notifications on appointment or registration of directors, executive
officers, company auditors, audit committee members, audit and supervisory committee
members or financial auditors, follow-up on the inspected banks’ activities in response to the
FSA’s notices of inspection results, receiving misconduct notifications, operating the early
warning system, and issuing an order for prompt corrective action.

(ii) In particular, if the FSA has asked a bank to report measures for improvement or remediation
pursuant to Article 24 of the Banking Act since problems have been found in the bank’s internal
control systems, or if the FSA has asked a bank to submit a business improvement plan pursuant

69

to Article 26 of the Banking Act since a particularly serious problem has been found, the FSA will
analyze the causes of such problems and, as necessary, examine whether the bank’s improvement
measures or plans are designed in a way to make governance functions work properly.
III-1-4

Supervisory Actions(1) If the effectiveness of a bank’s governance systems is determined to be questionable, as a result of offsite monitoring or day-to-day supervisory activities described above, the FSA will conduct more
profound interviews to discuss the cases and improvement measures and urge the bank to surely
improve its governance systems, where appropriate, through asking for reporting under Article 24 of
the Banking Act.
(2) If a bank’s officer has committed a material violation of any law or any other conduct undermining thebank’s social credibility, if a bank’s efforts to rectify its weak governance do not go well even afterissuance of a business improvement order, or if a bank has received many business improvement
orders on the grounds of multiple problems, the bank’s governance systems will be determined to bein critical condition. In this event, the FSA will issue a business improvement order pursuant to Article
26 of the Banking Act to ask for the establishment of decent governance systems. Depending on theseverity of the problems, the FSA may encourage the bank to consider a drastic improvement, e.g., (i)strengthening the internal audit functions and other mechanisms of checks and balances, (ii) the
introduction of a scheme of oversight through outside directors, external experts, or the like, or (iii)transition to a company with board of company auditors, a company with an audit and supervisorycommittee , or a company with a nominating committee, etc.
(3) The FSA may conduct in-depth interviews to examine the qualifications of directors, executive officers,
company auditors, audit committee members, or audit and supervisory committee members, their
execution of duties to enforce governance, how the firm recognizes their performance, the process forreviewing and approving a proposal for appointment of directors, company auditors, or audit andsupervisory committee members, the process for appointing executive officers or audit committee
members, or other important issues if it is found necessary for ensuring sound and appropriate
management of banking services because a certain director or executive officer serving in the bankbasically on a full-time basis or a company auditor, audit committee member, or audit and supervisorycommittee member is determined to be incompetent in terms of any aspect described in III-1-21(2)(xiii), III-1-2-2(1)(viii), III-1-2-2(3)(viii), III-1-2-3(2)(xiii), III-1-2-1(3)(vii), III-1-2-2(2)(iv),or III-1-2-3(3)(v), or because it subsequently turns out that their qualifications were not sufficiently
checked when approving a proposal for their appointment or nominating them as a candidate. If it isdetermined necessary as a result of such examination, the FSA may ask the bank to submit a reportpursuant to Article 24 of the Banking Act. If the FSA determines, as a result of reviewing a report70received from the bank, that there are serious problems in the bank’s governance systems and thatadverse impacts on sound and appropriate operation of banking services are unlikely to be avoided by
the bank’s self-initiated effort only, the FSA will issue a business improvement order pursuant to
Article 26 of the Banking Act.
Note:

Some viewpoints to check the knowledge, experience, and social credibility of directors, executive
officers, company auditors, audit committee members, and audit and supervisory committee
members are described in III-1-2-1(2)(xiii), III-1-2-2(1)(viii), III-1-2-2(3)(viii), III-1-2-3(2)(xiii),
III-1-2-1(3)(vii) and III-1-2-2(2)(iv), or III-1-2-3(3)(v). These viewpoints are merely illustrated
as examples of the points that the regulator may check to determine whether the qualifications set
forth in Article 7-2 of the Banking Act are adequately considered in each bank’s process of
appointing those executives or members, while paying due regard to individual bank’s initiatives
for operating such process. Therefore, such viewpoints are neither offered as a checklist nor
intended to mean that the compliance with or failure to comply with any specific item on the list
will immediately affect whether to qualify or disqualify. While those viewpoints may be informative
for banks, individual banks are expected to be creative and to make right judgments on theirrespective responsibility, taking into comprehensive consideration the respective candidates’
capabilities in light of the circumstances at the time of deciding a proposal for appointment of
directors, company auditors, or audit committee members or appointing executive officers or audit
and supervisory committee members. Then, banks are expected to fulfill accountability when filingan application for license, submitting a notification on appointment of directors, executive officers,
company auditors, audit committee members, or audit and supervisory committee members orcommunicating with the FSA in any other opportunities. (cf. Forms 1-1, 1-1[2], 4-10-1-1 to 4-103-2, 4-10-5-1 and 4-10-5-2 in the Forms and Reference Information and Reference Information/).

(4) If the bank has violated any applicable law, the Articles of Incorporation, or an administrative action
imposed by the Prime Minister, or committed any act detrimental to public interests and suchsituation is determined to be primarily attributable to a certain incompetent director, executive officer,
company auditor, audit committee member, or audit and supervisory committee member serving in
the bank basically on a full-time basis, or if the bank’s financial auditor has breached the professional
duty or failed to perform any duty for any reason attributable to the financial auditor, the FSA willconsider whether to order a bank to dismiss the director, executive officer, company auditor, audit
committee member, audit and supervisory committee member or financial auditor, as the case may
be, pursuant to Article 27 of the Banking Act.
III-2
III-2-1

Financial Soundness
Capital Adequacy71III-2-1-1
III-2-1-1-1

Appropriateness and Sufficiency of Capital
BackgroundTo ensure the confidence of depositors and other stakeholders in banking services, it is extremely
important for Major Banks to reinforce their capital base and maintain a solid financial foundation capableof addressing various types of risks. For this purpose, Major Banks need to have a process for evaluating
firm-wide capital adequacy based on risk profiles and to take appropriate measures to maintain capital thatis sufficient qualitatively and quantitatively.
III-2-1-1-2

Major Supervisory Viewpoints

III-2-1-1-2-1

Directors and the Board of Directors(1) Do the bank’s directors understand the characteristics and levels of various risks taken by the bankand the relations between risks and required levels of adequate capital?
(2) To achieve strategic goals, commensurate capital planning is essential. Do directors and the board of
directors understand this and formulate appropriate capital plans in line with the established strategic
goals?
(3) When formulating a business plan, does the board of directors analyze the amounts of capital baseneeded at the present and in the future in the context of the strategic goals? Does such business planshow the outlines of a desired level of capital base, the amounts of capital that need to be raised, andsuitable ways to raise capital in light of the strategic goals?
(4) Are directors adequately involved in the process for evaluating firm-wide capital adequacy based onrisk profiles and the effort to take appropriate measures to maintain capital that is sufficient both
qualitatively and quantitatively?
(5) The Basel Committee on Banking Supervision issued “Basel III: A Global Regulatory Framework forMore Resilient Banks and Banking Systems” in December 2010 (“Basel III”) and “Global Systemically
Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement” in July
2011; these two documents and other related accords established by the Basel Committee on Banking
Supervision are hereinafter referred to as “Basel Accords.” The Basel Accords require the phase-in ofcapital buffers from 2016. When a bank subject to international standards (“internationally activebank”) is to formulate a capital plan, do its directors and board of directors take such capital buffers
into full consideration?

72

III-2-1-1-2-2

Capital Adequacy Assessment(1) Is the bank’s scheme for assessing firm-wide capital adequacy in light of its risk profiles designed
properly? To be more specific, does it incorporate all the following factors?
(i)

Policies and procedures to identify, evaluate, measure, and report all sorts of risks(ii) Processes for assessing capital adequacy in comparison with the risks identified, evaluated, andmeasured as above(iii) Processes for setting a target capital base in comparison with the risks identified, based on its
strategic goals and business plans(iv) Processes for internal controls, including the verification by the internal control department forthe purpose of ensuring the adequacy of the bank’s overall risk management processes(2) Since the Public Notice on Standards for Banks has been issued to regulate internationally active banksin accordance with the purport of the Basel Accords, those banks are required to keep their Common
Equity Tier 1 capital, Tier 1 capital, and total capital above the levels specified in the Public Notice.
In addition, banks subject to domestic standards (“domestically active banks”) also are required tohold capital base above the level specified in the Public Notice on Standards for Banks. When suchinternationally active bank or domestically active bank assesses its capital adequacy, are both thequantity and quality of equity capital analyzed? Do such qualitative analyses cover at least thefollowing points?
(i)

Does the internationally active bank’s Common Equity Tier 1 capital or the domestically active
bank’s capital base consist of common shares as the primary component of the bank’s
shareholders' equity? And do the stated capital, capital surplus, and retained earnings pertaining
to common shares become a major part of the bank’s shareholders' equity?

(ii) If the bank is an internationally active bank, isn’t there any risk that could significantly affect thebank’s Common Equity Tier 1 ratio? Such risk will increase if the bank’s Common Equity Tier 1
capital becomes over-dependent on accumulated other comprehensive income, e.g., valuationdifference on available-for-sale securities.
(iii) Are an internationally active bank’s common shares, Additional Tier 1 capital instruments, andTier 2 capital instruments or a domestically active bank’s common shares and mandatorily
convertible preferred shares fully compliant with the requirements specified in the Public Noticeon Standards for Banks? And do they fully conform to the purport of the Basel Accords?
(iv) Do the bank’s common shares consist of a single class of voting shares? If the bank issues sharesof a certain class with restrictions on the capacity of exercising voting rights at the shareholders
meeting and such shares are to be treated as common shares for the purpose of application of the
Public Notice on Standards for Banks, are such shares identical to voting common shares of thebank in all respects except the absence of voting rights? And do those shares satisfy all the73requirements specified in the Public Notice?
(v)

Has the bank funded any holder for acquisition of the bank’s instruments, either directly or
indirectly? Have those instruments been acquired by any of the bank’s subsidiaries or affiliates?

(vi) If a capital instrument is issued in exchange for non-cash assets contributed, are the values of
those assets calculated properly? And has the competent authority approved such contribution
in kind?
(3) Deferred tax assets
If the bank records a large amount of deferred tax assets or its amount makes up a significant
proportion of the bank’s capital base, this may pose a problem in the bank’s soundness in terms of
the quality of its capital base. Such situation means that the bank is financially vulnerable because
the total value of its assets depends on future taxable income. In this view, deferred tax assets must
be properly processed and recorded in accordance with accounting standards for tax effectaccounting and other applicable practices.
(4) Based on the Basel Accords, internationally active banks are required to build up capital conservationand countercyclical buffers to keep the Common Equity Tier 1 above the levels specified in the Public
Notice on Standards for Banks. With regard to the G-SIBs designated under the Public Notice onStandards for Banks or the banks or bank holding companies designated under Article 2-2(5)(ii) of
the Public Notice on Standards for Banks or Article 2-2(5)(ii) of the Public Notice on Standards for
Bank Holding Companies (“D-SIBs designated under the Public Notice”), each such bank is required
to build up buffers (which may be called G-SIB buffers or D-SIB buffers) in order to hold Common
Equity Tier 1 capital exceeding the levels specified in the Public Notice on Standards for Banks.
A capital conservation buffer is a capital buffer that can be used to absorb losses in periods offinancial or economic stress.
A countercyclical buffer is a buffer that is required to be built up when credit growth is excessivein the financial market in order to cover potential losses from future economic fluctuations. A firm’s
countercyclical buffer is calculated by adding up the buffer for each of the jurisdictions to which thefirm has credit exposures. The buffer for each jurisdiction is obtained by multiplying the ratio
specified by the financial regulator in each jurisdiction by the total amount of assets with credit riskthat the firm holds (excluding exposures to sovereigns and exposures to financial institutions;
hereinafter the same applies in this (4)) in the jurisdiction divided by the total amount of assets withcredit risk of the firm. A countercyclical buffer rate is a rate specified by the Commissioner of the
FSA under Article 2-2(4)(i) of the Public Notice on Standards for Banks or Article 2-2(4)(i) of the
Public Notice on Standards for Bank Holding Companies. Such countercyclical buffer rates are
determined after comprehensively considering the indicators determined appropriate by the FSA(e.g., the ratio of total credit to GDP, the lending diffusion index for financial institutions) and theresults of discussions with the Bank of Japan. If the FSA raises a countercyclical buffer rate, the new74

rate will become effective within one year after its public announcement. If a countercyclical bufferrate is reduced, the new rate will become effective from the date of its public announcement. {Thisis confined to financial institutions that have applied new regulations (i.e, items (xxii) and (xxiii) of
the FSA Public Notice which were published in April 28th of 2022; the same applies hereinafter). In
this regard, however, financial institutions that have not yet applied the new regulations follow theprevious cases.}
G-SIB buffers and D-SIB buffers are set with the intention of obligating G-SIBs designated under
the Public Notice on Standards for Banks and D-SIBs designated under the Public Notice toreinforce their capital base to enhance loss absorbing capacity. This requirement aims at decreasing
the possibility of failure of such banks or bank holding companies, since they are systemicallyimportant. Therefore, the buffer requirements are supposed to be specified by the Public Noticebased on systemic importance.
The assessment of systemic importance for designating domestic systemically important banks (DSIBs) is conducted by the regulator in each jurisdiction. In the process of assessing systemic
importance in Japan, the banks and other financial institutions with consolidated total assets of notless than 15 trillion yen are listed and examined. Each bank is scored using 13 indicators pertaining
to the four categories of systemic importance specified in the Basel Accords; i.e., size,interconnectedness, substitutability/financial institution infrastructure, and complexity. In addition
to this score, the importance in a specific market or other factors peculiar to each entity are examined
if the bank is an entity subject to the international uniform standards (including bank holding
companies). After comprehensively considering the scores and other firm-specific factors, entities
found to be systemically important are designated as D-SIBs. If such D-SIBs are a bank or bankholding company, their designation will be enforced under the Public Notice on Standards for Banksor the Public Notice on Standards for Bank Holding Companies.
The 13 indicators pertaining to the four categories of systemic importance specified in the Basel
Accords and the weight applied against each indicator for calculating the score are as shown in thefollowing table.
Category
SizeInterconnectedness

Evaluation indicator
Total exposures (*) as defined for use in the
Basel III leverage ratio
Total amount (*) of intra-financial systemassets as listed below:● Deposits and loans receivable from otherfinancial institutions, etc. (including theunused portion of any commitment line)● Amounts of securities (i.e., secured bonds,
unsecured corporate bonds, subordinatedbonds, short-term bonds, negotiablecertificates of deposit, and shares) issued
by other financial institutions, etc. which

75

Weight25%
5%

are held by the firm
● Exposures of repo-style transactions withother financial institutions, etc. calculatedby the current exposure method(performing netting under legally valid
bilateral netting agreements, if applicable,
and limited to exposures which do not fall
below zero)● Fair value of oﬀ-exchange derivativetransactions or contracts with longsettlement periods with other financial
institutions, etc. and their add-ons forpotential future exposures calculated by
the current exposure method (performing
netting under legally valid bilateral netting
agreements, if applicable, and limited to
exposures which do not fall below zero)
Total amount (*) of intra-financial systemliabilities as listed below:● Deposits and loans payable to otherfinancial institutions, etc. (including theunused portion of any commitment line)● Exposures of repo-style transactions withother financial institutions, etc. calculatedby the current exposure method(performing netting under legally valid
bilateral netting agreements, if applicable,
and limited to exposures which do exceed
zero)● Fair value of oﬀ-exchange derivativetransactions or contracts with longsettlement periods with other financial
institutions, etc. and their add-ons forpotential future exposures calculated by
the current exposure method (performing
netting under legally valid bilateral netting
agreements, if applicable, and limited to
exposures which do not exceed zero)
Total balance (*) of issued and outstanding
securities (i.e., secured bonds, unsecured
corporate bonds, subordinated bonds, shortterm bonds, negotiable certificates of deposit,
and shares)
Values of shares corresponding to availablefor-sale securities with market value
Excess portions of the total balance of general

76

5%

5%

5%
5%

Substitutability/financial
institution infrastructure

Complexity

deposits or savings and the like over JPY 10
million, if such total balance exceeds JPY 10
millionAggregate amount of payments settled by thefirm via the Bank of Japan Financial Network
System (BOJ-NET), the Japanese Banks'
Payment Clearing Network or other equivalent
payment and settlement system during themost recently closed business year (limited toamounts settled in Japanese yen)
Total balance of trust assets and other assets
under custody (limited to those retained forcustomers resident in Japan)
Aggregate value of bonds and shares
underwritten by the firm during the mostrecently closed business year (limited to thoseunderwritten on the bond market or stock
market in Japan)
Aggregated trading volume
Total balance (*) of notional principal for offexchange
derivativetransactions
andtransactions with long settlement periods withother financial institutions, etc.
Cross-jurisdictional claims
Cross-jurisdictional liabilities

8.33%

8.33%

4.165%

4.165%
8.33%

8.33%
8.33%

*) Including exposures arising from insurance subsidiaries.
(5)

Internationally active banks are required to hold Tier 1 capital at a level equal to or greater than thelevel specified in the Public Notice titled "Standards for Determining Soundness of Leverage Levels
as Supplementary Indicators for Determining Whether Banks' Capital Adequacy is Appropriate inLight of Assets, etc. Held by Banks in Accordance with the Provisions of Article 14-2 of the Banking
Act" (hereinafter referred to as the "Public Notice on Leverage Ratio") with regard to the leverage
ratio, which is a supplementary indicator for determining whether the level of capital adequacy isappropriate and a simple and non-risk-based indicator for restraining excessive accumulation ofleverage. Based on the provisions of the proviso to Article 2 of the Leverage Ratio Public Notice, inan exceptional macroeconomic environment in which the Bank of Japan implements a monetary
policy that causes a large fluctuation in the amount of financial institutions' deposits with the Bank ofJapan, in order to harmonize with the monetary policy implemented by the Bank of Japan, theminimum required ratio shall be revised by excluding the amount of deposits with the Bank of Japan
from the total exposure that constitutes the denominator of the leverage ratio, and such ratio shall beseparately designated by the Commissioner of the FSA. The revised minimum required ratio shall berevised as appropriate in light of the macroeconomic environment, etc.

77

III-2-1-1-2-3

Measures to Maintain Sufficient Capital(1) Based on the capital adequacy assessment described above, does the bank carry out proper risk
management as described in III-2-3 and take appropriate measures to maintain capital that is
sufficient qualitatively and quantitatively?
(2) To prepare for potential capital shortage, does the bank examine ways to raise capital and estimate
amounts that can be raised? In such examinations, does the bank adequately consider its reputationand evaluation in the capital market, a greater likelihood of being more difficult than usual to raise
capital if the bank is in a slump due to unexpected losses, and other conceivable factors?
III-2-1-1-3

Supervisory Approaches and Actions(1) Off-site monitoring(i)

The regulator conducts interviews with individual firms on the occasion of semiannual settlement
and financial reporting to check their capital position and to verify their reported deferred tax
assets by reviewing the reasoning and calculation procedures. If the firm is an internationallyactive bank, the regulator checks its leverage ratios for the two most recent consecutive quarters
through the above interviews.

(ii) At interviews with banks’ top managers conducted whenever necessary or at any otherappropriate opportunities, the regulator may confirm their scheme for capital adequacy
assessment, internal analyses on capital position in terms of both quality and quantity, future
capital policies, and other related issues based on the viewpoints explained in III-2-1-1-2 above.
(2) Verification of capital instruments to check their eligibility as capital base in the context of regulatory
capital requirements
As part of the activities for monitoring capital adequacy assessment, the regulator will verify
whether the capital instruments listed below are eligible as capital base in the context of regulatory
capital requirements, upon receipt of a notification on issuance of such capital instruments or otherarrangement from a firm or on some other occasions. Such verification should be based on the Public
Notice on Standards for Banks and the Basel Accords, with the following points in mind.
(i)

Eligibility for inclusion in Additional Tier 1 capital (in light of the international uniform
standards)
When the regulator receives a notification pertaining to any instrument eligible for inclusion
in Additional Tier 1 capital filed by a bank; i.e., a notification on increase of the stated capital set
forth in Article 53(1)(iv) of the Banking Act, a notification on issuance of share options or bonds
with share options set forth in item (ii) of Article 35(1)(ii) of the Banking Act Enforcement78Regulation, a notification on borrowing in the form of a subordinated loan set forth in item
(xxxii) of the same article (“Subordinated Loan”) or issuance of subordinated corporate bonds
set forth in the same item (“Subordinated Bonds”), or a notification on fund-raising through a“consolidated subsidiary corporation, etc.” established by the bank exclusively for the purpose ofraising capital for the bank as set forth in item (xlii) of the same article (“Special Purpose
Company”), or when any other similar event occurs, the regulator will verify whether or not the
instrument covered by such notification is eligible for inclusion in Additional Tier 1 capital. The
points to note in such verification are as follows.
(A)

Dividends of surplus or interest paid for instruments eligible for inclusion in Additional Tier
1 capital cannot exceed the limits of the distributable amounts calculated pursuant to the law.
Therefore, if the referenced instrument is not classified into shares defined in the Companies
Act, the sum of the amounts of interest to be paid for such instrument and the bank’s othercapital instruments of the same priority in receiving interest and the amounts of dividendsof surplus to be distributed for the bank’s shares (excluding the amounts of surplus reduced
for such payments or distributions) cannot exceed the distributable amount to be calculated
in accordance with the Companies Act as of each interest payment date specified for thereferenced instrument. Do the terms and conditions for the referenced instrument specify
that the payments of dividends of surplus and interest adhere to the limitations explained
above?

Note:

When the bank is to decide the amount of dividends of surplus to be distributed for its
shares (including instruments eligible for inclusion in Additional Tier 1 capital or Tier 2
capital), the bank needs to substantially consider the amounts of interest for the
instruments eligible for inclusion in Additional Tier 1 capital which are not recognized asshares under the Companies Act, in the context of calculating the bank’s distributableamount pursuant to the Companies Act. This derives from the characteristics of thescheme peculiar to such capital instruments.

(B)

When the bank is to decide the terms and conditions for redemption in accordance with
Article 6(4)(v) of the Public Notice on Standards for Banks, the provisions concerning
confirmation prior to a redemption to be performed at the bank’s discretion should be
described in a way consistent with the Public Notice on Standards for Banks and the
instructions described in III-2-1-1-3(3) below.

(C)

If an instrument eligible for inclusion in Additional Tier 1 capital is a capital instrument withdebt-like features (hybrid debt capital instrument) as referred to in Article 6(4)(xi) of the
Public Notice on Standards for Banks, the terms and conditions for such instrument need tocontain a special clause to prepare for a situation where the Common Equity Tier 1 ratio on
a consolidated basis may fall below a specified level (“Going-concern Ratio”). Under suchspecial clause, the issuer of the instrument will be entitled to write down the principal orconvert the instrument to common shares, either in full or at an amount necessary for79

bringing the Common Equity Tier 1 ratio on a consolidated basis to the Going-concern Ratio(“Principal Write-down or Equity Conversion”). Therefore, do the special clauses or otherprovisions for the referenced instrument satisfy all of the following requirements?
Meanwhile, the full amount of the referenced instrument may not necessarily be includedin the basic elements of Additional Tier 1 capital. On the assumption that a Principal Writedown or Equity Conversion is implemented for the full principal amount for the referenced
instrument, only a reasonably estimated amount of Common Equity Tier 1 capital on aconsolidated basis to be generated from such Principal Write-down or Equity Conversion
can be recognized as the amount to be included in Additional Tier 1 capital.
a.

Is the Going-concern Ratio set at 5.125% of the Common Equity Tier 1 ratio on a consolidated
basis or higher? Whether or not the Going-concern Ratio is maintained will be judged basedon the Common Equity Tier 1 ratio on a consolidated basis as listed below. In the event that
the Common Equity Tier 1 ratio on a consolidated basis falls below the Going-concern Ratio
and a Principal Write-down or Equity Conversion follows, will the bank be obligated to
immediately announce this situation to the public and notify the holders of the instrument?
i)

The Common Equity Tier 1 ratio on a consolidated basis provided in an annual financial
flash report or interim financial flash reportii)

The Common Equity Tier 1 ratio on a consolidated basis provided in an annual business
report or interim business reportiii)

The Common Equity Tier 1 ratio on a consolidated basis reported to the regulator after
public disclosure in accordance with the law or relevant regulations of a financial
instruments exchange, if applicableiv)

The Common Equity Tier 1 capital ratio on a consolidated basis reported to theregulator at any time other than i) to iii), after consultation between the bank and its
audit corporation or other external auditor based on the regulator’s inspection findings
or other feedback
However, the bank will be allowed to avoid a Principal Write-down or Equity
Conversion if the FSA has received and approved a plan to increase the bank’s Common
Equity Tier 1 ratio on a consolidated basis to the Going-concern Ratio, without
performing such Principal Write-down or Equity Conversion, before the FSA is toreceive a report on the Common Equity Tier 1 ratio on a consolidated basis describedin i) to iii) above because the FSA determines that such plan is reasonable and feasible.

Note:

To meet the Additional Tier 1 criteria in relation to the bank’s capital ratio on a solo
(unconsolidated) basis, its Common Equity Tier 1 ratio on a solo basis must be at least
5.125%, which is set as the Going-concern Ratio referred to in Article 18(4)(xi) of the
Public Notice on Standards for Banksb. If there is a special clause concerning a principal write-down, does the clause satisfy all of thefollowing requirements?

80

● If principal is to be written down, the value pertaining to the right to demand distribution ofresidual assets or the principal mount, the amount of redemption, and the amount ofdividend of surplus or interest payable must be reduced accordingly.
● A principal write-down may be followed by a write-up to recover the whole or part of theprincipal amount previously written down, subject to fulfillment of predetermined
conditions. If the bank adopts such write-up mechanism, writing up principal should beallowed only when there is a high degree of probability that the Common Equity Tier 1 ratio
on a consolidated basis can remain at a satisfactory level after the intended write-up.
Therefore, such requirement should be clearly specified as a precondition for a write-up.
c.

If there is a special clause concerning conversion to common shares, does the clause satisfy allof the following requirements?
● In the event of failure to keep the Going-concern Ratio, the amounts of shares to beconverted and other conditions for the conversion must be immediately determined and theamount so determined or the full amount of the referenced instrument eligible for inclusion
in Additional Tier 1 capital must be immediately converted to common shares in accordancewith applicable laws and regulations.
● Appropriate minimum conversion prices must be set in order to avoid going over the total
number of shares that the bank is authorized to issue under its Articles of Incorporation evenafter common shares are issued or granted in the wake of failure to keep the Going-concern
Ratio. In addition, the total number of authorized shares must be set at a sufficient numberin the Articles of Incorporation.

(D)

If the terms and conditions for the referenced instrument contain a special clause for
enforcing a Principal Write-down or Equity Conversion upon occurrence of a Trigger Event(as defined in the subsequent sentence), this clause must conform to the Annex to Basel III
entitled “Minimum Requirements to Ensure Loss Absorbency at the Point of Non-Viability”
issued by the Basel Committee on Banking Supervision in January 2011 and all therequirements listed below. In this regard, a Trigger Event means a situation where theregulator determines that the bank needs to enforce a Principal Write-down or Equity
Conversion or to receive public-sector financial assistance pursuant to the main provision of
Article 6(4)(xv) or other provisions of the Public Notice on Standards for Banks because it
is found that the bank would become non-viable without such Principal Write-down orEquity Conversion or financial assistance.

a.

If the referenced instrument is supposed to be converted to the bank’s common shares uponoccurrence of a Trigger Event, the bank must maintain at all times all prior authorizationnecessary to immediately issue common shares to the holders of the instrument in accordancewith applicable laws and regulations. In the event that public-sector financial assistance orother equivalent arrangement is required, such issuance of new shares must occur prior to the
public-sector financial assistance or equivalent arrangement.

81

b. If the bank intends to include a capital instrument issued by any of its overseas subsidiaries(excluding Special Purpose Companies) in the basic elements of Additional Tier 1 capital forthe purpose of calculating the bank’s capital adequacy ratio on a consolidated basis, the terms
and conditions for the instrument must contain a special clause concerning a Principal Writedown or Equity Conversion. To be more specific, when either or both of the regulator in thejurisdiction where the overseas subsidiary is based and the regulator in Japan determine thatthe subsidiary needs to enforce a Principal Write-down or Equity Conversion or to receive
public-sector financial assistance because the regulator finds that the subsidiary would become
non-viable without such Principal Write-down or Equity Conversion or financial assistance,
this arrangement will need to be immediately enforced pursuant to applicable laws andregulations. In this event, the bank will not be precluded from issuing its own common sharesto the holder of the instrument, instead of the subsidiary’s common shares.
If the bank cannot not incorporate a special clause prescribed in Article 6(4)(xv) of the
Public Notice on Standards for Banks in a situation where the bank is subject to the provisoof the same article or other provisions of the Public Notice on Standards for Banks or any
other applicable laws and regulations, the bank will be required to disclose the principle
explained in the subsequent sentence at the time of issuing the instrument in question.
According to the principle to be disclosed, a measure corresponding to a Principal Writedown or Equity Conversion will be implemented pursuant to applicable laws and regulations,or the instrument in question will fully absorb losses arising in the bank before public-sector
capital is injected or other equivalent financial assistance is provided to the bank.
(E)

If the bank intends to issue an instrument eligible for inclusion in Additional Tier 1 capitalthrough a Special Purpose Company, the procedures for verifying the eligibility for inclusion
in Additional Tier 1 capital explained in (A) to (D) above must be carried out for both the
instrument to be issued by the Special Purpose Company and the instrument to be issued for
utilizing the proceeds from the Special Purpose Company’s issue.
Note:

One example for the points to check is the definition of Trigger Events for the
instrument to be issued by the Special Purpose Company. If the Special Purpose
Company’s parent corporation faces a Trigger Event, it must be treated as a Trigger
Event for the Special Purpose Company as well.

(ii) Eligibility for inclusion in Tier 2 capital (in light of the international uniform standards)
When the regulator receives a notification filed by a bank in connection with any of its
instruments eligible for inclusion in Tier 2 capital; i.e., a notification on increase of the statedcapital set forth in Article 53(1)(iv) of the Banking Act, a notification on issuance of shareoptions or bonds with share options set forth in item (ii) of Article 35 (1) of the Banking Act
Enforcement Regulation, a notification on borrowing in the form of a Subordinated Loan orissuance of Subordinated Bonds set forth in item (xxxii) of the same article, or a notification on
capital-raising through a Special Purpose Company set forth in item (xlii) of the same article, or82

when any other similar event occurs, the regulator will verify whether or not the instrument
covered by such notification is eligible for inclusion in Tier 2 capital in the context of regulatory
capital requirements. The points to note in such verification are as follows.
(A)

Regarding the priority in distributions in the bankruptcy proceedings, the right to claim
payment for the holders of the referenced instrument (subordinated creditors) must be
subordinated to other subordinate bankruptcy claims prescribed in the Bankruptcy Act. Are
the provisions to this effect contained in the terms and conditions for the referenced
instrument? In addition, upon occurrence of corporate reorganization, civil rehabilitation,or any other event causing subordination, subordinated creditors’ claims for payment will
be suspended and subsequently become enforceable on condition that all payments tosenior creditors will have been completed. Is the referenced instrument designed as aconditional claim described above to ensure that senior creditors will eventually be given
priority in payment or distribution of interest, dividends, or other assets?

(B)

Do the terms and conditions for the referenced instrument contain such provisions toprohibit or invalidate any change, revision, or modification that may be detrimental tosenior creditors or in contradiction to the subordination requirements?

(C)

When the bank is to decide the terms and conditions for redemption or cancellation inaccordance with Article 7(4)(v) of the Public Notice on Standards for Banks, the provisions
concerning confirmation prior to a redemption or cancellation to be performed at the bank’s
discretion should be described in a way consistent with the Public Notice on Standards for
Banks and the instructions described in III-2-1-1-3(3) below.

(D)

If the terms and conditions for the referenced instrument contain the special clauses orother provisions prescribed in Article 7(4)(x) or other provisions of the Public Notice onStandards for Banks, the points explained in III-2-1-1-3(2)(i)(D) above must be noted.

(E)

If the bank intends to issue an instrument eligible for inclusion in Tier 2 capital through aSpecial Purpose Company, the procedures for verification of the eligibility for inclusion in
Additional Tier 1 capital or Tier 2 capital explained in III-2-1-1-3(2)(i)(A) to (D) or III-21-1-3(2)(ii)(A) to (D) above must be carried out for both the instrument to be issued by
the Special Purpose Company and the instrument to be issued for utilizing the proceedsfrom the Special Purpose Company’s issue.
Note:

One example for the points to check to verify the points described in (2)(i)(D) or(2)(ii)(D) above is the definition of Trigger Events for the instrument to be issued by
the Special Purpose Company. If the Special Purpose Company’s parent corporation
faces a Trigger Event, it must be treated as a Trigger Event for the Special Purpose
Company as well.

(iii) Adequacy of capital instruments verified under the former notifications
To verify the adequacy of some capital instruments issued before the release of these Supervisory83

Guidelines, FSA officials need to refer to III-2-1-1-3(2) of the Supervisory Guidelines of a version
prior to the revision by the Partial Amendment of the Comprehensive Guidelines for Supervision ofMajor Banks announced by the FSA as of August 7, 2012. Such former guidelines apply to the capital
instruments issued by internationally active banks on or before March 30, 2013 which are not eligible
for inclusion in Additional Tier 1 capital or Tier 2 capital and the capital instruments issued bydomestically active banks on or before March 30, 2014 which are not classified into either commonshares or mandatory convertible preferred shares. Regarding such capital instruments, the eligibility
as qualifying Tier 1 capital instruments or qualifying Tier 2 capital instruments or the eligibility as
qualifying perpetual preferred stock or capital instruments respectively should be checked under theformer framework of regulatory capital requirements.
(3) Verification of the capital adequacy in the event of non-mandatory redemption, cancellation, or buyback(i)When the regulator is to accept a notification filed by a bank pursuant to Article 35(1) of the
Banking Act Enforcement Regulation; i.e., a notification on accelerated redemption of bonds withshare option set forth in item (ii)-2, a notification on accelerated repayment of a Subordinated
Loan or accelerated redemption of Subordinated Bonds set forth in item (xxxiii), a notificationon acquisition of treasury shares set forth in item (xxxiv), a notification on acquisition of sharessubject to call set forth in item (xxxv), a notification on acquisition of shares subject to class-widecall set forth in item (xxxvi), or a notification on accelerated payment or accelerated redemptionof any instrument issued by a Special Purpose Company set forth in item (xliii), the regulator willverify whether the capital adequacy ratio can remain at a satisfactory level even after suchaccelerated payment or redemption (or the discretionary repayment or redemption, in case of an
instrument with no maturity date) or even after such acquisition of shares. Such verification
should be based on the Public Notice on Standards for Banks and the Basel Accords.

(ii) When an internationally active bank intends to redeem, cancel, or buy back the referenced
instrument eligible for inclusion in Additional Tier 1 capital or Tier 2 capital before maturity, or
when a domestically active bank intends to redeem, cancel, or buy back mandatory convertible
preferred shares, the regulator will need to check whether the terms and conditions for suchaccelerated redemption, cancellation, or buy-back are appropriate in terms of the issuer’s
profitability and verify whether capital to replace the redeemed, bought back, or canceled
instrument is going to be raised before the intended redemption, cancellation, or buy-back (oncondition that the new capital must be the quality same as or better than the quality of theredeemed, canceled, or bought back instrument). The points to note in such verification are as
follows.
(A)

If new capital needs to be raised to redeem, cancel, or buy back the referenced instrument,
was such capital-raising completed before the redemption, cancellation, or buy-back? Or issuch capital-raising going to be surely completed before the redemption, cancellation, or84

buy-back is enforced? If the new capital-raising has been completed, does the bank face any
situation that is likely to make it difficult for the bank to maintain its capital adequacy ratio
at a satisfactory level? In the case where the bank raises new capital (substituting capital)
to redeem, cancel, or buy back the instrument eligible for inclusion in Additional Tier 1
capital (if it is an internationally active bank) or the mandatory convertible preferred shares(if it is a domestically active bank), the paid-in amount cannot be included in the bank’s
capital during the period from the date of acquisition of substituting capital to the date ofredemption, cancellation, or buy-back, except for the portion in excess of the amountscheduled to be redeemed, canceled, or bought back.
(B)

Isn’t the redemption, cancellation, or buy-back of the referenced instrument exclusively
intended to respond to the holders’ expectations for payouts? For example, if the interest
rate for the instrument issued for raising new capital (substituting capital) is substantiallyhigher than the rate for the instrument redeemed, canceled, or bought back, is such newcapital-raising justifiable regardless of an increased burden of interest payment on the partof the bank?

(C)

Are the bank’s interest payments for the instrument issued for raising new capital(substituting capital) feasible in light of the bank’s profit forecast as well as its financial
strength to maintain capital adequacy?

(iii) To verify the adequacy of some capital instruments issued before the release of these Supervisory
Guidelines on the occasion of receiving a notification on redemption before maturity, buy-back,or other cancellation, FSA officials need to refer to III-2-1-1-3(3) of the Supervisory Guidelines
of a version prior to the revision by the Partial Amendment of the Comprehensive Guidelines forSupervision of Major Banks announced by the FSA as of August 7, 2012. Such former guidelines
apply to the capital instruments issued by internationally active banks on or before March 30,
2013 which are not eligible for inclusion in Additional Tier 1 capital or Tier 2 capital and thecapital instruments issued by domestically active banks on or before March 30, 2014 which are
not classified into either common shares or mandatory convertible preferred shares.
(4) Verification of firms’ efforts to maintain quality of equity capital and their capital policies
With a view to adherence to the capital adequacy principles and maintenance of the quality ofcapital, firms will be asked to submit the documents explaining the matters listed below wheneverthey implement a capital increase (including issuance of an instrument eligible for inclusion in
Additional Tier 1 capital or Tier 2 capital).
(A)

Reasons for choosing such instrument, in comparison with other types of instruments(B)

Appropriateness of valuation of the assets if non-cash assets are contributed(C)

Plan for future capital policies (including alternative capital-raising plans)

Note:

Regarding compliance management in capital increase (including issuance of instruments
eligible for inclusion in Additional Tier 1 capital or Tier 2 capital), see III-3-1-5.

85

(5) Supervisory actions
If the FSA determines, as a result of conducting interviews or monitoring described in (1) to (4)above, that the bank needs to take improvement measures, the regulator may ask the bank to submit
a report pursuant to Article 24 of the Banking Act, as needed. If the problem faced by the bank is
considered critical, the FSA will issue a business improvement order or implement any othermeasures pursuant to Article 26 of the Banking Act (or an order for prompt corrective action (asexplained in III-2-1-3) pursuant to Article 26(2) of the Banking Act, as needed in terms of theadequacy of the bank’s equity capital).
(6) Points to note in the context of the Banking Act on Special Measures for Strengthening Financial
Functions
When applying the Banking Act on Special Measures for Strengthening Financial Functions to
Major Banks, relevant instructions specified in the Comprehensive Guidelines for Supervision ofRegional Financial Institutions must be followed.
III-2-1-2
III-2-1-2-1

Accuracy of Capital Adequacy Ratios and Leverage Ratios
Background

Accurately calculating capital adequacy ratios and leverage ratios is of utmost importance because they arebasic indicators representing the financial soundness of banks.
The accuracy of calculations of capital adequacy ratios and leverage ratios should conform to the Public
Notice on Leverage Ratio and the purport shown in the Basel Accords.
III-2-1-2-2

Points to Note

Each firm’s capital adequacy ratios and leverage ratios are calculated based on its consolidated financial
statements in accordance with the calculation rules, and such consolidated financial statements are prepared inconformity with Japan’s various ordinances and regulations concerning consolidated financial statements. In
addition to this, the points listed below, among others, should be considered when checking the accuracy of
calculations of capital adequacy ratios and leverage ratios.
(1) Does the firm undergo external audits on the calculation of capital adequacy ratios and leverage ratios?
External audits on the calculation of capital adequacy ratios and leverage ratios refer to external audits orother equivalent processes compliant with Practical Guideline No. 30 issued by the Industry Audit
Committee established by the Japanese Institute of Certified Public Accountants entitled “Instructions for
Examination and Audit Services on Calculation of Capital Adequacy Ratios through Agreed-upon86Procedures” or other appropriate guidelines.
(2) Adequacy of capital instruments intentionally held within the financial system
If members in the financial system reciprocally hold other members’ capital instruments with theintention of increasing their respective capital adequacy ratio, such instruments will eventuallyconstitute unsubstantial capital. Since such reciprocal capital holdings will make the financial systemfragile, a mechanism of regulatory adjustments and deductions to exclude such reciprocally held
portions from the firm’s capital base is provided in Article 8(6), Article 29(4) or other provisions of
the Public Notice on Standards for Banks in line with the Basel Accords. If it is determined that abank holds a capital instrument issued by another financial institution to increase the capital adequacy
ratio and that this firm holds a capital instrument issued by the bank first mentioned or its
consolidated corporation, etc. (“Intentional Reciprocal Holdings”), the bank will be required to
exclude the full amount of that firm’s capital instrument held by the bank or its corporation, etc. fromthe bank’s capital base as regulatory adjustments or deductions. While the regulator checks whether
or not banks’ capital holdings fall under Intentional Reciprocal Holdings, the sample cases illustrated
below are considered to constitute Intentional Reciprocal Holdings.
(A)

On or after July 31, 1997, the bank or its subsidiary and a certain deposit-taking institution in
Japan promised to mutually hold the other party’s capital instrument. The primary purpose ofsuch cross holdings is to mutually cooperate on capital reinforcement. To this end, the bank or
subsidiary holds an instrument of the deposit-taking institution and this firm holds aninstrument of the bank or subsidiary.

(B)

On or after December 17, 2010 (in case of an internationally active bank) or on or after
December 12, 2012 (in case of a domestically active bank), the bank or its subsidiary and anotherfinancial institution which is not a deposit-taking institution in Japan promised to mutually holdthe other party’s capital instrument. The primary purpose of such cross holdings is to mutually
cooperate on capital reinforcement. To this end, the bank or subsidiary holds an instrument of
the financial institution and this firm holds an instrument of the bank or subsidiary.

*

If the financial institution in question does not hold any instrument of the bank or its subsidiary,
this case does not constitute Intentional Reciprocal Holdings. In addition, each party’s holdingsof the other party’s instrument are not regarded as Intentional Reciprocal Holdings in the casewhere such holdings are not intended to cooperate for the other party’s capital reinforcement(for example, where each firm has separately acquired the other firm’s instrument in the trading
market and continues to hold it purely for investment purposes, or where the mutual holdings
are solely intended to promote their business alliance, or where a bank’s subsidiary which is asecurities firm tentatively holds the other firm’s instrument for market-making purposes).
**

If the bank is a domestically active bank, regulatory capital adjustments and deductions will
apply to the following amounts, in addition to the amounts of Intentional Reciprocal Holdings
as explained above: amounts of common shares or other instruments of financial institutions,87etc. held as a minority interest holder which are recognized as adjustment or deduction items
in core capital, amounts above the limit of 10% of common equity which are recognized as
specified adjustment or deduction items, or amounts above the limit of 15% of common equity
which are recognized as specified adjustment or deduction specified items. If the differences
arising from mark-to-market valuation of the amounts of common shares or other capital
instruments listed in the preceding sentence are recognized as valuation difference on
available-for-sale securities and then recorded under accumulated other comprehensive
income or under valuation and translation adjustments, such common shares or capital
instruments will be included at their book value, without mark-to-market valuation, for the
purpose of regulatory capital calculations.
(2-2)

Verification of capital investments in other financial institutions subject to regulatory capitaladjustments and deductions

According to Article 8(12)(i), Article 20(9)(i), Article 29(9)(i), or Article 41(8)(i) of the Public Noticeon Standards for Banks, if banks are to hold a certain capital instrument for the purpose of providing
financial assistance to bail out or liquidate a non-viable firm, the bank may, for a period to be approved, beallowed to exclude such instrument in the calculation of the amounts of adjustment or deduction items in
Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital, or core capital, subject to theCommissioner of the FSA ’s approval to be given after examining special circumstances leading to suchfinancial assistance or other relevant factors.
In this event, whether or not it is extremely difficult for the firm in question to survive will be determined,taking into comprehensive consideration the financial standing and business performance of the issuer ofthe instrument, economic conditions, business environments, and other factors at the time of the bank’s
acquisition of the issuer’s instrument. Conceivable issuers of such instrument may include financial
institutions which are likely to suspend repayments of deposits or payments of other obligations in light of
their business performance or financial position or which have already suspended such repayments or
payments.
Note: One example of capital instruments described here is an instrument issued by an “assuming financial
institution” or “assuming bank holding company, etc.” defined in Article 59(1) of the Deposit
Insurance Act, which may be held by the bank on the occasion of a merger or other arrangement set
forth in Article 59(2) of the same Act, subject to the confirmation of eligibility, etc. of such merger
or arrangement as prescribed in Article 65 of the same Act.
The period to be approved for exclusion referred to above should be a reasonable time frame necessary
to stabilize the financial system, to be determined based on the factors mentioned above and various otherfactors including: the issuer’s size and presence in the financial system, the type of the instrument and theamount held by the bank, the bank’s capital position, the developments until the bank has made a decision
to hold the instrument and the purpose of such holding, the relationship between the issuer and the bank,88and all other background information. This time frame is basically set at up to 10 years from the date ofacquisition of the instrument, which may be subsequently extended or reduced or accompanied by phasedown of the scope of exclusion to alleviate effects of a drastic change, as appropriate.
If the bank desires to adopt the exclusion explained here, an application for approval of such exclusionmust be filed with the FSA, in principle, concurrently with or immediately after its acquisition of therelevant instrument.
Moreover, as for domestically active banks, according to Article 29(9)(ii) or Article 41(8)(ii) of the
Public Notice on Standards for Banks, in addition to the above, if a bank is to hold a certain capital
instrument for the purpose of providing a potentially non-viable firm with financial assistance or othersupport for the latter’s business improvement, the bank may, for a period to be approved, be allowed to
exclude such instrument as well in the calculation of the amounts of adjustment or deduction items in core
capital, subject to the Commissioner of the FSA’s approval to be given after examining special
circumstances leading to such holding of the capital instrument or other relevant factors.
In this event, whether or not the firm in question falls under the category of a potentially non-viable firm
will be determined, taking into comprehensive consideration not only the financial standing and businessperformance of the issuer of the instrument at the time of the bank’s acquisition of the issuer’s instrument,
the economic conditions and business environment, but also sustainable profitability and present andfuture soundness of the firm to continuously play the role of a financial mediator in the region, and otherrelevant factors. For example, conceivable issuers of such instrument may include a financial institution ofwhich the capital adequacy ratio might not meet the minimum requirement in a future time unless it
receives financial assistance or other support for its business improvement in light of the future earnings
trend based on its reasonable business plan, although its capital adequacy ratio does meet the minimum
requirement at the time of the bank’s acquisition of the issuer’s instrument.
The period to be approved for exclusion referred to above should be a reasonable time frame necessary
to stabilize the financial system, to be determined based on the factors mentioned above and various otherfactors, including: the issuer’s size and presence in the financial system, the type of the instrument and theamount held by the bank, the bank’s capital position, the developments until the bank has made a decision
to hold the instrument and the purpose of such holding, business improvement prospects for the issuer inthe wake of the bank’s temporary holding of the instrument and the subsequent contribution status as acontinuing financial mediator in the region, the relationship between the issuer and the bank, and all otherbackground information. This time frame is basically set at up to five years from the date of acquisition of
the instrument and it may be subsequently extended or reduced or accompanied by a phase-down of thescope of exclusion to alleviate the effects of a drastic change, as appropriate.
If the bank desires to adopt the exclusion explained here, an application for approval of such exclusionmust be filed with the FSA, in principle, concurrently with or immediately after its acquisition of therelevant instrument.

89

(3) Calculation of risk assets(i)

If a bank’s asset has been securitized, regardless of whether or not such securitization is treated as atransfer of an asset in terms of legal formalities, has the bank transferred all risks in relation to thesecuritized asset to the transferee? This means that the effects of such securitization are required tobe substantially equivalent to those of a transfer of the asset.

(ii) Assignment of a claim, subject to the bank’s right to buy back the claim, is regarded as a transaction
to reduce the bank’s risk assets, in principle.
If, however, such assignment occurs around the end of a business year and the bank is given an
incentive to exercise the buy-back right within one year following the end of the year under theassignment agreement in question, an effect of reducing risk assets cannot be recognized.
If assignment of a claim along with a buy-back right is implemented in an attempt to temporarilyraise the capital adequacy ratio, such assignment shall never bring about reduction in the bank’s risk
assets under any circumstances.
(iii) If the bank has a claim with a guarantee provided by another financial institution or firm around orat the end of a business year, it can be excluded from the bank’s risk assets, in principle, only when
the remaining period of the claim is fully covered by the guarantee period.
Nevertheless, even when the unexpired guarantee period does not fully cover the remaining periodof the claim, reduction in risk assets may be allowed on condition that such short guarantee isjustifiable and reduction of credit risk exposures is reasonably expected.(*)
If a guarantee agreement has been concluded in an attempt to temporarily raise the capital adequacy
ratio, such guarantee shall never bring about reduction in the bank’s risk assets under any
circumstances.
Note:

For the time being, a guarantee agreement with an unexpired period of one year or more isqualified. If, however, an incentive to cancel the guarantee agreement within one year issubstantially incorporated in the guarantee agreement even when its unexpired period is one year
or more, an effect of reducing risk assets cannot be recognized.

(iv) For the time being, the following rule applies to foreign exchange positions to be covered by thecalculation of market risk exposure. Does the bank follow this rule?
● Among gold and foreign exchange positions mentioned in II-2-(3) in Exhibit 3 attached to these
Guidelines, investments in foreign currency assets made by injecting and converting yen funds
can be excluded from the foreign exchange risk position calculated for regulatory capital purposes.
This rule will remain effective from now onward. {Except for the financial institutions that haveapplied the new regulations - financial institutions that have already applied the new regulations
which should refer to the Public Notice after the revision.}(v) With regard to capital surcharge related to non-performing loans (NPL) exposure, doesn’t the bankengage in any acts that fall under regulatory arbitrage?
Especially as for Article 267-4(2) or Article 245-4(2) of the Public Notice on Standards for Bank

90

Holding Companies’ Capital Adequacy, even if the bank meets all the requirements set forth inthese provisions, the bank is not allowed to apply the risk weight(s) set forth in these provisions
when the bank aims to reduce its risk assets in its loan assets other than NPL.
(4) Verification of use of the proportional consolidation method in calculating the capital adequacy ratio
on a consolidated basis(i)

If a bank has filed a notification on use of the proportional consolidation method for affiliatedcorporations, etc. engaged in financial services, for the purpose of calculating the capital adequacy
ratio on a consolidated basis, the points listed below must be noted.
(A) Each of the agreements for investments or projects set forth in Article 9(1)(ii)(a) or Article
32(1)(ii)(a) of the Public Notice on Standards for Banks (“Joint Venture Agreement”) must be
checked in the following respects.
a.

Do the parties to the agreement include all jointly controlling partners? Do they include any firmthat is not a jointly venture partner?

b. Does the Joint Venture Agreement stipulate all necessary matters for operating a joint venture?
The matters to be covered in the agreement may include the establishment of an affiliatedcorporation, etc. engaged in the financial services to be operated through the joint venture (the“joint venture company”), issuance of shares, the ratio of voting interest (meaning the ratio ofvoting rights held as referred to in Article 9(1)(i) of the Public Notice on Standards for Banks; thesame applies in III-2-1-2) of each joint venture partner, appointment of officers serving in the
joint venture company including those who are dispatched by joint venture partners, andrespective partners’ involvement in the joint venture company’s management (e.g., methods orprocedures for resolutions at the shareholders meeting, composition of the board of directors,
methods or procedures for board resolutions).
(B) In accordance with Article 9(1)(ii)(b) or Article 32(1)(ii)(b) of the Public Notice on Standards for
Banks, the joint venture company must be controlled and operated jointly by all the members,
based on their ratio of voting interest, pursuant to the Joint Venture Agreement. To verify whether
the regime and various systems to ensure such operation are implemented, the points listed below
must be checked.
a.

Is each joint venture partner granted voting rights exercisable at the joint venture company’s
shareholders meeting or other equivalent body (“Decision-Making Body” in III-2-1-2) in thesame proportion as their ratio of voting interest?

b. Is each joint venture partner entitled to appoint directors of the joint venture company in thenumber in proportion to their ratio of voting interest? This means the proportion of the numberof directors to be appointed or replaced at each joint venture partner’s discretion to the total
number of directors specified in the Joint Venture Agreement. If this proportion is not consistent
with the joint venture partner’s ratio of voting interest, is substantial consistency ensured in someway, for example, in terms of the lineup of the Representative Director, the President, theChairman, or other senior-level officers?

91

c.

Is there any mechanism that could change the ratio of voting interest specified in the Joint Venture
Agreement without amending the Joint Venture Agreement (except for the case described in (D)below)?

d. Does the scope of matters subject to resolutions of the Decision-Making Body or the board of
directors and the methods or procedures for resolution conform to the law and the joint venturecompany’s Articles of Incorporation?
e.

During the course of operating the joint venture company, joint venture partners may need toperform various risk-bearing activities such as additional investments, lending (including suchcases where a subsidiary or affiliate of a joint venture partner is a lender), and debt guarantee. Are
those actions supposed to be implemented in consistency with their ratio of voting interest? Or is
any inconsistency found?

f.

The joint venture company may be established by incorporating a new entity or taking over abusiness transferred by any existing firm, or in any various other forms. Regardless of whatever
form is used, has the joint venture company obtained a license, permission, authorization, or the
like required for operating the business specified in the Joint Venture Agreement and completed
other required procedures, if any? Is the joint venture company in operation on the date of thebank’s calculation of the capital adequacy ratio?

g. With regard to the joint control and operation that must be consistent with the ratios of votinginterest specified in the Joint Venture Agreement, are there any inconsistencies?
(C) When judging whether an agreement falls under an agreement in which the bank makes acommitment to take any liability exceeding its ratio of voting interest in connection with the joint
venture company’s business as referred to in Article 9(1)(i) or 9(1)(ii)(d) or Article 32(1)(i) or
32(1)(ii)(d) of the Public Notice on Standards for Banks, whether it has been made in writing ororally, or whether it is an express or implied one will not be taken into account.
(D) The Joint Venture Agreement may allow for changing the ratios of voting interest upon fulfillmentof some predetermined conditions. Insofar as such conditions are defined clearly and consideredreasonable and those conditions are not obviously fulfilled at the time of the bank’s commitment
to assume excessive liabilities, this Joint Venture Agreement will not be treated as an agreement
involving a specific party’s commitment to assume excessive liabilities.
(E) When judging conformity with the requirements prescribed in Article 9(2) or Article 32(2) of the
Public Notice on Standards for Banks, a judgment should be made in light of the principle ofconsistency prescribed in Article 4(1)(iv) of the Ordinance on Terminology, Forms andPreparation Methods of Consolidated Financial Statements.
(ii) If the bank uses the proportional consolidation method for its affiliated corporations, etc. engaged infinancial services, their assets, liabilities, revenues, and expenses will be included in the scope of
consolidation solely to the extent attributable to the bank and its consolidated subsidiaries investingin the affiliated corporations, etc. Except for this point, all other rules are the same as those applicableto full consolidation. However, Japan’s accounting system does not adopt the proportional

92

consolidation method. Due to unfamiliarity coupled with heavier workload for accounting operations
under the proportional consolidation method, the firms using a simplified method explained below
are deemed to adopt the proportional consolidation method for the time being.
(A) When the bank is an internationally active bank and uses a simplified method for consolidation of
its affiliated corporations, etc. engaged in financial services, those entities’ capital instruments(excluding instruments issued by other financial institutions, etc. and held by those affiliatedentities for Intentional Reciprocal Holdings; the same applies in (B) to (F) below) can be excluded
from the calculation of the amounts of: instruments of other financial institutions, etc. eligible forinclusion in Additional Tier 1 capital set forth in Article 6(2)(iv) or other provisions of the Public
Notice on Standards for Banks; instruments of other financial institutions, etc. eligible for inclusion
in Tier 2 capital set forth in Article 7(2)(iv) of the Public Notice on Standards for Banks; othereligible instruments of other financial institutions, etc. used in the calculation of the amounts set
forth in Article 8(9)(i) and Article 8(10)(i) of the Public Notice on Standards for Banks; and assets
with credit risk set forth in Article 76-3 or Article 178-3 of the Public Notice on Standards for
Banks. When the bank is a domestically active bank and uses a simplified method for consolidationof its affiliated corporations, etc. engaged in financial services, those entities’ capital instruments
can be excluded from the calculation of the amounts of: eligible common shares, etc. of otherfinancial institutions, etc. used in the calculation of the amounts set forth in Article 29(6)(i) or
Article 29(7)(i) of the Public Notice on Standards for Banks; and assets with credit risk set forthin Article 76-2-3, Article 76-4, Article 178-2-3 or Article 178-4 of the Public Notice on Standards
for Banks. In such case, the bank is required to adopt the equity method, regardless of the latterpart of the main clause of Article 9(1) or the latter part of the main clause of Article 32(1) of the
Public Notice on Standards for Banks. To adopt the equity method, the formula for calculating thecapital adequacy ratio on a consolidated basis is used with an adjusted denominator. The
denominator in this formula, before making the adjustment as aforesaid, represents the sum of:the amounts of assets with credit risk, an amount obtained by dividing the market risk exposure by
8% (limited to the case where the market risk exposure needs to be included in the denominatorin this formula), and an amount obtained by dividing the operational risk exposure by 8%; thisdefinition applies in (B) to (F) below.
Note 1:

A simplified method for consolidation incorporates the equity method, in order torecognize affiliated entities’ net profit or loss, adjust the value of goodwill, eliminate
unrealized gains and losses, eliminate dividends, and process other necessary operations
for consolidation.

Note 2:

No adjustment is made to the value of the numerator in the formula for calculating thecapital adequacy ratio on a consolidated basis. The value of the numerator covers theamount of Common Equity Tier 1 capital, the amount of Tier 1 capital, and the total
amount of capital, in case of an internationally active bank, and the capital amount, in caseof a domestically active bank.

93

(B) The value of the denominator in the formula for calculating the capital adequacy ratio on aconsolidated basis is obtained by subtracting the amount stated in a. below from the value ofthe denominator for the same formula excluding the affiliated corporations, etc. engaged infinancial services from the scope of consolidation and then adding the amount stated in b.
below.
a.

Amounts of instruments issued by the affiliated corporations, etc. engaged in financial
services (limited to the amounts recorded under the shareholders' equity section)b. An amount obtained by multiplying the sum of the amounts listed below to be calculated
based on the balance sheet of each affiliated corporation, etc. engaged in financial services asof the last day of each business year (or the first half of each business year) by the ratio ofvoting interesti)

The value of the denominator for the affiliated corporations, etc. engaged in financial
services obtained by applying Articles 10 to 12 or Articles 33 to 35 of the Public Noticeon Standards for Banksii)

1,250% of the sum of the values of such instruments subject to adjustments or deductions
in Common Equity Tier 1 capital, Additional Tier 1 capital, or Tier 2 capital as specified
in Article 5(2), Article 6(2) or Article 7(2) of the Pubic Notice on Standards for Banks,
in case of an internationally active bank, or 1,250% of the sum of the values of such
instruments subject to adjustments or deductions in core capital as specified in Article
28(2) of the Pubic Notice on Standards for Banks, in case of a domestically active bank(C) For the calculation specified in (B)b. above, the bank may choose not to offset claims andobligations outstanding between the bank and each affiliated corporation, etc. engaged in financial
services. If choosing to offset those claims and obligations, the value of the denominator referred
to in (B)b. above is calculated by deducting the values of the claims held by the bank or the affiliatedcorporation, etc. engaged in financial services from the total assets.
(D) With regard to the value referred to in (B)b.i) above, the amounts of assets with credit risk held by
each affiliated corporation, etc. engaged in financial services may be calculated by using an amountgreater than the amount of assets with credit risk specified in Article 10 of the Pubic Notice onStandards for Banks.
(E) With regard to the value referred to in (B)b.ii) above, an amount that is reasonably determined to
be greater than the amount shown in (B)b.ii) may be used.
(F) Does the bank use the proportional consolidation method in conformity with generally accepted
accounting principles in all other respects?
(5) Consistency in use of the methods for calculating capital adequacy ratios and leverage ratios
Banks may be given a free hand, to a certain extent, in choosing among the methods for calculating
capital adequacy ratios or leverage ratios, including the methods that banks are allowed to use as atransitional measure under the Public Notice on Standards for Banks or the Public Notice on Leverage

94Ratio. Does the bank use a specific method consistently, except in the case of a shift to a different method
on reasonable grounds?
III-2-1-2-3

Internal Control over Transactions Subject to Market Risk Regulations

Transactions subject to banking regulations concerning market risk refer to “specified transactions, etc.”
defined in Article 10(2)(ii) of the Pubic Notice on Standards for Banks, mainly consisting of the specified
transactions defined in Article 13-6-3(2) of the Banking Act Enforcement Regulation. Specified transactions
are transactions conducted by banks for the purpose of earning profits by using short-term movements ininterest rates, currency exchange rates, market prices on financial instruments markets, or other indexes, byusing differences among markets, or by using other means, or for the purpose of reducing losses that may arise
from transactions for such profit-earning purposes. Due to these characteristics, specified transactions are
subject to market risk regulations. In this context, the scope of transactions subject to market risk regulations
needs to be clearly identified. Then, transactions which do not fall under such transactions (*), if any, must be
eliminated and regulated transactions must be properly managed. In this view, the points listed below need to
be checked. {Except for financial institutions that have applied the new regulations.}(1) Are the transactions that must be recorded under specified transaction accounts and the methods andprocedures for managing such transactions defined clearly and put into writing? Such methods andprocedures include those for properly measuring values of transactions based on their respective
characteristics and with due consideration for estimated holding periods and the probability of extensionof holding periods beyond estimations. Are those accounts properly managed in accordance with the
documented methods and procedures? Is such management verified through periodic internal audits?
Regarding the methods of measuring values and actual valuations, is their adequacy verified through bothinternal audits and accounting audits? {Except for financial institutions that have applied the new
regulations.}(2) If a specified transaction or any other equivalent transaction is managed under any account other than sucha specified transaction account, is the transaction managed similarly as in a way in the specified transaction
account? {Except for financial institutions that have applied the new regulations.}
Transactions subject to market risk regulations mainly consist of products held and classified into trading
accounts by banks in accordance with the relevant provisions set forth in the Public Notice. Transactions
included in the trading accounts are transactions that banks conduct for the purpose either of gaining
profits by taking advantage of short-term fluctuations or arbitrage opportunities among markets such as
differences in interest rates, currency prices, market prices in financial product markets or other indices,
or of reducing losses that might be incurred by such transactions. Market risk regulations are applied under
the consideration of these characteristics. Accordingly, it is crucial to clarify transactions subject to market

95risk regulations and eliminate inappropriate transactions (see Note below). In addition, transactions
subject to market regulations need to be properly managed. From these viewpoints, the following point needs
to be checked.｛Applied to ﬁnancial institutions that have applied the new regulations｝
・Are the transactions subject to market risk regulations and the management procedure for suchtransactions defined clearly and stated in documents? The management procedure include methods toproperly measure values of transactions based on their respective characteristics while considering
estimated holding periods and the probability where the holding periods may exceed estimations. Are themanagement procedures properly operated as described in the document? Is such operations verified
through periodic internal audits? Regarding the methods of measuring values and actual valuations, is theirappropriateness verified through both internal audits and accounting audits? {Applied to financial
institutions that have applied the new regulations}
Note:

According to paragraph 271 of the Application of Basel II to Trading Activities and the Treatment of
Double Default Effects (issued by the Basel Committee on Banking Supervision in 2005), open equity
stakes in hedge funds and private equity investments are exemplified as exposures to be excluded.

III-2-1-2-4

Supervisory Approaches and Actions(1) Off-site monitoring
If the FSA’s examination in response to an inquiry from a bank finds a problem in relation to theaccuracy of its calculation of capital adequacy ratios or leverage ratios, the FSA will inform the bankof examination findings and give a warning to the bank.
(2) If the FSA’s inspection finds a problem in relation to the accuracy of the bank’s calculation capital adequacy
ratios or leverage ratios, the FSA will ask the bank to make a report pursuant to Article 24 of the Banking
Act and urge the bank to make steady improvement. If the FSA determines, because of the graveness of the
problem found in such inspection or on any other ground, that more resolute response is needed to ensure
the bank’s implementation of its improvement plan, the FSA will issue a business improvement orderpursuant to Article 26(1) of the Banking Act.
III-2-1-3
III-2-1-3-1

Order for Prompt Corrective Action
BackgroundTo ensure the financial soundness of banks, it is extremely important for the banks to enhance theircapital base and maintain a solid financial foundation capable of addressing various risks at their initiative.
To back up such banks’ self-initiated efforts, the FSA needs to issue necessary orders for corrective actions

96

promptly and appropriately and to urge banks to push forward management reforms, effectively using
objective indicators such as capital adequacy ratios and leverage ratios.
III-2-1-3-2

Supervisory Approaches and Actions

Details on orders for prompt corrective action are set out in a government order entitled “Order
Providing for the Categories, etc. Prescribed in Article 26, Paragraph (2) of the Banking Act” (Ordinanceof the General Administrative Agency of the Cabinet and the Ministry of Finance No. 39 of 2000), whichis called the “Categorization Order” in III-2-1-3 and III-2-1-4. Concrete corrective measures required
under such orders are treated in the following manner.
(1) Levels of capital adequacy ratios or leverage ratios that trigger the issuance of an order for prompt
corrective action
The capital adequacy ratio or leverage ratio referred to in each of the categories indicated in thetables in paragraphs (1)(i), (1)(iii), (2)(i), and (2)(iii) of Article 1 of the Categorization Order(“Category Requiring Prompt Corrective Action”) is the capital adequacy ratio or leverage ratio
described below.
(i)

The capital adequacy ratio or leverage ratio provided in an annual financial flash report or interim
financial flash report, as applicable, which will be subsequently replaced with the capital
adequacy ratio or leverage ratio provided in the definitive annual business report or interim
business report after its submission to the regulator(ii) The capital adequacy ratio or leverage ratio reported by the bank to the regulator, at any timeother than annual or interim financial reporting, after consultation between the bank and its
audit corporation or other external auditor based on the regulator’s inspection findings or otherfeedback
Note:

The capital adequacy ratios of an internationally active bank consist of the three ratios(Common Equity Tier 1 ratio, Tier 1 ratio, and total capital ratio) and a capital buffer. The
capital adequacy ratios used as a trigger for issuing an order for prompt corrective action are
Common Equity Tier 1 ratios, Tier 1 ratios, and total capital ratios.

(2) Issuance of orders based on the Categories Requiring Prompt Corrective Action(i)Difference between Category 1 or Leverage Category 1 orders, Category 2 or Leverage Category
2 orders, and Category 2-2 or Leverage Category 2-2 orders
If a bank falls under Category 1 or Leverage Category 1, the bank will be ordered to submit
and implement a reasonable improvement plan (which must include measures for capitalenhancement, in principle) to secure sound management. The purpose of this order is to ensurethat the bank will surely achieve a level exceeding the range of the capital adequacy ratio
specified for Category 1 or the range of the leverage ratio specified for Leverage Category 1,

97

which serves as a threshold for judging the bank’s management soundness. Therefore, emphasis
is placed on overall planning to ensure management soundness and the plan is, in principle,
supposed to be implemented at the bank’s initiative.
If a bank falls under Category 2 or Leverage Category 2, the bank will be ordered to take anyof the measures listed in such category. Such order is intended to prompt the bank’s efforts toimprove its capital base because its capital adequacy ratio or leverage ratio is well below thethreshold for ensuring management soundness. While the regulator will ask for the bank’s
opinions to reflect its actual business conditions in the measure to be ordered, the type ofcorrective measures to be required will be finally determined at the regulator’s discretion. If
multiple corrective measures are required to be implemented, the bank must complete each andevery one of them based on the order.
If a bank falls under Category 2-2 or Leverage Category 2-2, the bank will be ordered to choose
among capital enhancement, drastic reduction of business, merger, or abolition, etc. of banking
services and to implement the measure as chosen. Such order is intended to urge the bank topromptly improve its business or to withdraw from banking business because the bank isextremely undercapitalized.
(ii) Time frame for improvement
To enable the bank to improve the capital adequacy ratio or leverage ratio, a sufficient timeframe must be set to ensure that the bank will formulate and implement a plan for improving
management to maintain or restore the confidence in the bank from depositors, investers, andmarket participants.
If the bank is an internationally active bank, the restoration of market confidence will be themost urgent priority, depending on the degree of the bank’s involvement with the market. In
this view, such bank’s plan should be designed to aim at a return to a level exceeding the rangeof the capital adequacy ratio specified for Category 1 or the range of the leverage ratio specified
for Leverage Category 1 at least within one year (by the end of the following business year, inprinciple).
If the bank is a domestically active bank falling under Category 1, its improvement plan should
aim at achieving the capital adequacy ratio at 4% or higher within one year, in principle. If thebank is a domestically active bank falling under Category 2 (requiring capital enhancement) or
Category 2-2 (requiring capital enhancement, drastic reduction of business, merger, or abolition,etc. of banking services) and chooses a measure which is neither a merger resulting in dissolutionof the bank nor abolition of banking services, the bank’s improvement plan should aim atachieving the capital adequacy ratio at 2% or higher within one year.
If the bank applies for subscription for shares or other securities pursuant to Article 105 of
the Deposit Insurance Act, the time frame for improving its capital adequacy ratio or leverage
ratio must be identical to the period set for a business revitalization plan referred to in paragraph(3) of the same article.

98In a situation where a bank has submitted an improvement plan pursuant to Article 2(1) of
the Categorization Order and this plan is determined reasonable for ensuring improvement tosurely exceed the range of the capital adequacy ratio or leverage ratio specified for the Category
Requiring Prompt Corrective Action applicable to the bank, the FSA may issue an order to thebank to encourage achievement of the capital adequacy ratio or leverage ratio specified for ahigher-level category in the corresponding table in the Categorization Order. In this case, thetime frame for achieving the capital adequacy ratio or leverage ratio specified in the order issued
as aforesaid will not include the period used for achieving the capital adequacy ratio or leverage
ratio set out in III-2-1-3-3(1) below.
(iii) Measures applicable to Category 2-2 or Leverage Category 2-2
If the bank chooses a merger or any other measure among capital enhancement, drastic
reduction of business, merger, or abolition, etc. of banking services, the measure chosen must
be convincingly feasible. In case of a merger, for example, a merger partner’s intention must be
clarified.
III-2-1-3-3

Criteria for Judging the Reasonableness Prescribed in Article 2(1) of theCategorization Order

When judging whether or not a plan submitted by a bank is reasonable to surely improve the capital
adequacy ratio or leverage ratio and to make it exceed the range specified for the relevant category pursuant
to Article 2(1) of the Categorization Order, the following criteria must be used.
(1) The plan must contain concrete capital reinforcement strategies that are conducive to facilitating
sound and appropriate management of banking services and reestablishing the confidence in the bankfrom depositors and other stakeholders. And the plan must be designed with the substance aiming at
unfailingly improving the capital adequacy ratio or leverage ratio, within three months in principle, tomake it exceed the range specified for the relevant Category Requiring Prompt Corrective Action.
Note:

If a capital increase or other measure is planned, the intention of prospective capital providers
or other relevant stakeholders to back up the plan must be clarified.

(2) If the bank applies for subscription for shares or other securities pursuant to Article 105 of the Deposit
Insurance Act, the bank’s improvement plan must be consistent with a business revitalization planreferred to in paragraph (3) of the same article.
III-2-1-3-4

Levels of Capital Adequacy Ratios or Leverage Ratios Underlying Order Categories

When issuing an order to a bank pursuant to Article 2(1) of the Categorization Order, the category forsuch order is required to correspond to a category lower than the capital adequacy ratio or leverage ratio99

that the bank is expected to achieve after implementing the relevant plan (excluding the categories called“exception from category” or “exception from category leverage category” in the respective tables in theCategorization Order). For the purpose of application of Article 2(1) as aforesaid, the category applicableto the capital adequacy ratio or leverage ratio that the bank will probably be able to achieve, in principle,
within three months (excluding the columns called “exception from category” or “exception from category
leverage category”) will be used to issue the order to the bank.
III-2-1-3-5

Progress Reporting

The progress of an improvement plan must be reported to the regulator after each business year (andeach first half) until the plan is completely implemented. Unless the progress reported deviates significantly
from the plan, new or additional orders will not be issued, in principle, during the remaining period of theplan. However, a bank subject to an order for Category 2-2 or Leverage Category 2-2 may be given anotherorder applicable to Category 1, Leverage Category 1, Category 2, or Leverage Category 2, as the case may
be, when the bank’s capital adequacy ratio or leverage ratio indicated in the former order reaches the range
specified for a higher category as aforesaid. In addition, a bank subject to an order for Category 2 orLeverage Category 2 may be given another order applicable to Category 1 or Leverage Category 1, as thecase may be, when the bank’s capital adequacy ratio or leverage ratio in the former order reaches the range
specified for Category 1 or Leverage Category 1, as the case may be.
In a situation where a bank has submitted an improvement plan pursuant to Article 2(1) of theCategorization Order and this plan is determined reasonable for ensuring improvement to surely exceed
the range of the capital adequacy ratio or leverage ratio specified for the Category Requiring Prompt
Corrective Action applicable to the bank, the FSA may issue an order to the bank to encourage achievementof the capital adequacy ratio or leverage ratio specified for a higher-level category in the corresponding
table in the Categorization Order. If the bank chooses capital enhancement (a capital increase) in thissituation, the bank must achieve a level exceeding the capital adequacy ratio or leverage ratio specified forthe category relevant to the order, in principle, immediately after expiration of the period required forcompleting the procedures for the capital increase and other steps. If this is not achieved, the FSA will issue
a new order corresponding to the category of the capital adequacy ratio or leverage ratio then applicable tothe bank.
III-2-1-3-6

Criteria for Revaluation of Assets Listed in Article 2(2) of the Categorization Order

The assets set forth in the respective items of Article 2(2) of the Categorization Order include the assets
listed below, which will be evaluated by the methods specified respectively as follows.
(1) “Securities” in item (i)The “closing price which is published on the date” referred to in Article 2(2)(i) of the100Categorization Order means a trading price on a financial instruments exchange, an indicative priceserving as a benchmark, a reference price, or the like. A “value calculated by a reasonable method
equivalent to it” referred to in the same item means an appraised value obtained from a financial
instruments business operator or registered financial institution as the market value information asof the calculation date, or a value calculated by an evaluation method prescribed by the bank which
is objectively determined to be reasonable.
For this calculation, the points listed below need to be noted.
(i)

If there are serious concerns about failure to redeem shares or bonds as scheduled because theissuing company’s liabilities far exceed assets or any other critical event occurs, those securities
are evaluated based on actual conditions.

(ii) Foreign currency securities are evaluated by conversion to Japanese yen at the telegraphictransfer middle rates on the calculation date.
(2) “Tangible fixed assets” in item (ii)
(i)

Land
The amount used in revaluation of land is as follows: appraisal values (appraisal within thepast one year) or roadside land prices, posted prices, standard land prices, and objectively
estimated amounts based on actual land transactions.

(ii) Buildings and movables
In principle, the book value is used for revaluation for buildings and movables.
(3) “Assets other than the assets listed in the preceding two items” in item (iii)
Regarding securities (including foreign securities) managed as trust property in money trusts (limited
to those operated independently and primarily intended for securities investment), revaluation is
performed in the same way as specified in Article 2(2)(i) of the Categorization Order and III-2-1-3-6(1)above. If a money trust contains derivative transactions, their unsettled valuation gains and losses must
be incorporated in the revaluation of the money trust.
III-2-1-3-7

Miscellaneous Notes for Prompt Corrective Action(1) If the FSA issues an order to a bank pursuant to Article 1(1)(i) or 1(1)(iii), Article 1(2)(i) or 1(2)(iii),
or Article 2 of the Categorization Order, the provisions of the Administrative Procedure Act or otherapplicable laws must be observed. In particular, the FSA must grant the bank an opportunity for
explanation under Article 13(1)(ii) of the Administrative Procedure Act and carry out otherappropriate procedures as required.
(2) If a bank cannot achieve the lower limit of the range of the capital adequacy ratio for Category 1 or of
the range of the leverage ratio for Leverage Category 1, the bank will, in principle, be required to101

calculate the values of the assets listed in the respective items of Article 2-2 of the Categorization
Order by the respective methods specified and submit a balance sheet adjusted based on suchcalculations (in any unprescribed form) to the FSA.
(3) Orders for prompt corrective action are issued on the assumption that the capital adequacy ratios orleverage ratios calculated by banks properly show their financial condition. In this sense, banks should
be warned never to deliberately manipulate the data of capital adequacy ratios or leverage ratios in an
attempt to evade an administrative order for early corrective action.
III-2-1-4

Capital Distribution Constraints

III-2-1-4-1

BackgroundTo mitigate procyclical amplification and reduce systemic risk in the financial system, the regulator needs
to ensure banks’ credit-granting functions by imposing capital distribution constraints on internationallyactive banks in a prompt and appropriate manner, depending on circumstances, through effective use ofcapital buffers (including leverage buffers for G-SIBs as designated in the Public Notice) as objective
indicators.
III-2-1-4-2

Supervisory Approaches and Actions

Capital distribution constraints to be imposed on banks, which are specifically described in theCategorization Order (as defined in III-2-1-3-2), are operated in the following manner.
(1) Levels of capital buffer ratio or leverage buffer ratio that trigger capital distribution constraints
The capital buffer ratio (meaning either a capital buffer on a solo basis or a capital buffer on aconsolidated basis; the same applies hereinafter) or the leverage buffer ratio (meaning either a leverage
buffer on a solo basis or a leverage buffer ratio on a consolidated basis; the same applies hereinafter) referred
to in each of the categories indicated in the tables in paragraphs (1)(ii) and (iv) as well as (2)(ii) and (iv)of Article 1 of the Categorization Order (hereinafter referred to as “Category Requiring Distribution
Constraints”) is either of the following capital buffer ratio or leverage buffer ratio.
(i)

The capital buffer ratio or the leverage buffer ratio provided in an annual financial flash reportor interim financial flash report, which will be subsequently replaced with the capital buffer ratioor the leverage buffer ratio provided in the definitive annual business report or interim business
report after its submission to the regulator(ii) The capital buffer ratio or the leverage buffer ratio reported by the bank to the regulator, at any
time other than annual or interim financial reporting, after consultation between the bank andits audit corporation or other external auditor based on the regulator’s inspection findings or102

other feedback(2) Issuance of orders based on the Categories Requiring Distribution Constraints(i)Measures applicable to Capital Buffer Categories 1 to 4 or Leverage Buffer Categories 1 to 4
If a bank is ordered to submit and implement a reasonable improvement plan described in thetable in paragraph (1)(ii) or (2)(ii) of Article 1 of the Categorization Order to replenish capital
buffer ratio (which must contain planned capital distribution constraints) or if a bank is orderedto submit and implement a reasonable improvement plan described in the table in paragraph(1)(iv) or (2)(iv) of Article 1 of the Categorization Order to replenish leverage buffers (whichmust contain planned capital distribution constraints), emphasis should be placed on overallplanning to ensure that the bank will surely replenish capital buffer ratio or leverage buffer ratio.
Furthermore, the capital distribution constraints to be stated in the plan need to surely curb
capital distributions below the limits of distributable amounts in accordance with the orderapplicable to the relevant category. To implement this plan, which events should be included in
the scope of restrictions is, in principle, determined at the bank’s initiative.

(ii) Amounts available for capital distributions
One example of “special circumstances” referred to in Article 1(10) or other provisions of theCategorization Order is a situation where the bank issues a new capital instrument to increase
its Common Equity Tier 1 ratio during the business year covered by a capital distribution
constraint plan and intends to disburse amounts running over the ceiling amount available forcapital distributions, but not exceeding the amount newly raised.
(iii) Calculation of adjusted profit after tax
To calculate the tax amount that would be payable if the amount equivalent to capital
distributions were not recorded as expenses, as referred to in Article 1(11) or other provisionsof the Categorization Order, banks are allowed to use a simplified method. Under this method,
adjusted profit after tax can be obtained by multiplying the amount equivalent to capital
distributions which were actually recorded as expenses for accounting purposes for the previous
business year (excluding amounts not included in expenses for taxation purposes) by theeffective tax rate as of the end of the previous business year at the relevant taxable unit andadding the actual tax amount for the previous business year.
(iv) Definition of bonus
Bonus referred to in Article 1(10)(v) of the Categorization Order means any salary-likepayment made separately from regular salaries; i.e., year-end bonus, semi-annual bonus, yearend allowance, term-end allowance, and other similar payments. Regarding some types of
payments, it may be uncertain as to whether they should be treated as salary or bonus. Above
all, the following payments should be classified into bonus.
(A) Remuneration to be paid based on the firm’s net income(B) Remuneration to be paid without predetermined rules on amounts or payment criteria

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(C) Remuneration to be paid without predetermined rules on times for payment, except for
remuneration for temporary or just-in-time employment(D) Salaries set forth in Article 34(1)(ii) of the Corporation Tax Act (excluding payments madeunder provisions to pay a fixed amount at a designated time of year on an ongoing basis tothose who do not receive any other regular pay)(E) Profit-linked salaries set forth in Article 34(1)(iii) of the Corporation Tax Act
In addition, “bonuses and other economic benefits” are economic benefits having thenature described above, regardless of what they are called, e.g., an ad hoc or one-off payment
added to a regular salary, retirement benefits, or any other predetermined payment.
(v) Definition of subsidiary companies, etc.
Whether or not an entity affiliated with a bank is a “subsidiary company, etc.” of the bankas referred to in Article 1(19)(v) of the Categorization Order depends on whether or not it isa major subsidiary for the bank, and this judgment is basically left to each bank. If the bankforms a group (as defined in III-3-2-4-4(1) of these Supervisory Guidelines; the same applies
in III-2-1-4-2(2)-5(v) and (vi)), the regulator will consider the eligibility of each affiliate asa subsidiary company, etc. in light of its financial standing or influence on the entire group.
As an example for using some numeric criteria to make a judgment, the affiliated entity canbe excluded from “subsidiary companies, etc.” of the bank if the entity’s total assets make up
2% or less of the bank’s total assets on a consolidated basis. For another example, however,such a small-size entity may need to be included in the scope of subsidiary companies, etc. of
the bank if the entity plays an important role in the group’s management.
(vi) Definition of important officers or employees
Officers or employees who are important for a bank’s management as referred to in Article
1(19)(v) or other provisions of the Categorization Order are selected from among those who
receive high compensation from the bank or its subsidiary company, etc. and therefore could
have a significant impact on the firm’s business operation or financial condition. To identify
such officers or employees, the criteria shown in paragraphs b. and c. of III-3-2-4-5(2)(i)(B)
may be informative.
Outside directors and outside company auditors of a bank may be excluded from the scopeof important officers at the bank’s discretion. If, however, an outside director or outsidecompany auditor receives high compensation or other large benefits from the bank andtherefore could have a significant impact on business operation or financial condition of thebank or its subsidiary companies, etc., such outside director or outside company auditor mustbe treated as an important officer.
III-2-1-4-3

Submission of Plans and Progress Reporting

A bank receiving an order for any Category Requiring Distribution Constraints will be required to submit104

a plan based on such order every business year and may be asked to report the progress of implementationof the plan, whenever necessary.
III-2-1-4-4

Miscellaneous Notes for Prompt Corrective Action(1) If the FSA issues an order to a bank pursuant to either Article 1(1)(ii) or (iv), 1(2)(ii) or (iv), or
Article 2-2 of the Categorization Order, the provisions of the Administrative Procedure Act or otherapplicable laws must be observed. In particular, the FSA must grant the bank an opportunity for
explanation under Article 13(1)(ii) of the Administrative Procedure Act and carry out otherappropriate procedures as required.
(2) If a bank’s capital adequacy ratio or leverage ratio (including the leverage buffer ratio) falls under botha Category Requiring Prompt Corrective Action and a Category Requiring Distribution Constraints,
the FSA will issue an order covering the two categories.
III-2-2

Improvement in Profitability

III-2-2-1

Background(1) Since Major Banks’ business entails large-scale and complicated risks, Major Banks must adequately
prepare for the occurrence of events falling under such risks. More specifically, they are required toreinforce their capital base, to secure a certain level of periodic profits through risk-based profit
management, and to maintain a solid financial foundation capable of addressing risks. Promoting
these efforts is important for Major Banks to properly exercise financial functions and to ensuresustainability to serve as a banking service provider.
(2) Major Banks’ various efforts to enhance financial functions are underway, which include a shift in
lending techniques by such ways as the development of “middle-risk and middle-return” products
using scoring models or effective utilization of financial covenants, construction of interest rate
systems allowing for flexible adjustment according to adequate credit risk exposures based on credit
ratings, redesigning fee structures, and expansion of market-based indirect finance including
securitization and syndicated loans. These trends are accompanied by the diversification of revenue
sources.
(3) If banks can make profit constantly and accumulate internal reserves on an ongoing basis, their risktaking capacity will increase and they will become able to offer more advanced financial services.
Successful improvement in banks’ profitability in this way is expected to eventually contribute topromoting proactive efforts to reduce non-performing loans and prompting borrowers’ business

105

revitalization.
(4) On the other hand, unprofitable banks suffering from persistent deficits are obviously reducing theirequity capital, even though they have sufficient capital at this moment, and their capital is very likely
to fall below the threshold for ensuring financial soundness. Once an unprofitable bank falls into sucha worrisome situation, its attempt to gain investor understanding and smoothly carry out a capitalincrease will result in deadlock in most cases. Therefore, the regulator needs to move early to
encourage banks’ efforts to improve profitability (meaning capacity to make a profit in terms of profit
and loss accounting; the same applies hereinafter).
III-2-2-2

Major Supervisory Viewpoints in Profitability Improvement

Major Banks should constantly endeavor to offer better services and products responding to diversified
customers’ expectations, along with the effort to reduce costs and pursue more efficient business operation.
Through continuing these efforts, Major Banks are expected to increase profit-making capacity and ensure
management soundness. For this purpose, do they develop profit analysis and evaluation systems as well asa regime capable of business restructuring and promoting various other efforts for profitability
improvement? More specific points to check may be described as follows.
(1) Does management analyze and evaluate the firm’s profitability in a comprehensive manner? Morespecifically, can management effectively use the firm’s operating profits, ordinary income, net income,and other quantitative indicators, as well as profit margin, ROA, ROE, OHR, and other performanceindicators? And does management properly check systems for controlling credit risk, market risk, andother risks?
(2) Does the firm properly operate managerial accounting systems and precisely analyze and evaluate
profitability of each business unit or each customer segment? In particular, do those systems work
effectively to help management make reasonable decisions in relation to large loans? To be more
specific, are borrowers of large loans monitored with due consideration for their status of credit risk
exposures and various transactions with the firm to accurately understand their profitability? In lightof large-scale and complicated risks faced by Major Banks, do they conduct proper risk management(integrated risk management) as explained in III-2-3-1 and precisely analyze and evaluate riskadjusted profitability of respective business units?
(3) To improve the convenience of business processes in line with diversified sales and marketing
channels and to reduce back-office expenses, does the firm consider strategic use of information andcommunications technology (IT)?

106

(4) To promote firm-wide efforts to improve profitability, are the authorities and responsibilities assigned
to officers and employees clearly defined and segregated?
III-2-2-3

Supervisory Approaches and Actions (including Early Warning System)(1) Basic stance
As one of the methods to ensure the soundness of each bank’s business management, the regulator is
authorized to issue an order for prompt corrective action to maintain the bank’s capital adequacy ratio
and leverage ratio pursuant to Article 26(2) of the Banking Act. Even when the bank is not included in
the scope of banks to which a measure of demanding prompt corrective action is applicable, the bank isstrongly recommended to continue business improvement efforts to maintain or even strengthen the
management soundness. In light of the significance of improvement in profitability (III-2-2-1), among
others, the regulator needs to implement preventive measures (i.e., effectively use the early warning
system) while they are profitable.
(2) Interview(i) The regulator conducts interviews with banks’ members on the occasion of semi-annual andannual settlement and financial reporting and conducts comprehensive interviews, to stay
updated on and analyze the banks’ circumstances including profitability and profit management
systems.
(ii) Through interviews with banks’ top executives conducted whenever necessary, the regulator
checks their management strategies to improve profitability, business restructuring policies, andother strategic efforts.
(iii) If a bank has formulated a medium-term business plan or the like, the regulator will conduct
interviews with the bank’s key persons at any time and verify the bank’s management strategies
and business restructuring efforts.
(3) Early warning system
If a bank’s basic profit indicators show the necessity of improvement in profitability, the regulator will
act as explained in III-2-3-1-5(4)(i) to (iii). As necessary, the regulator will ask the bank to make reports
pursuant to Article 24 of the Banking Act to encourage steady improvement. If the FSA determines that
more resolute response is needed to have the bank unfailingly implement improvement measures, the
FSA will issue a business improvement order (as a measure for improvement in profitability) pursuant
to Article 26 of the Banking Act.
III-2-2-4

Points to Note for Financial Institutions in the Context of the Industrial Competitiveness
Enhancement Act

107

When reviewing a business reorganization plan or a plan for reorganization of specified businesses prescribedin the Industrial Competitiveness Enhancement Act or other law, the following points need to be noted in linewith the instructions for preparing financial statements and related documents of financial institutions.
(1) Setting goals for improving productivity and financial soundness through business reorganization
pursuant to Part I of the Guidelines for the Implementation of Corporate Restructuring establishedby the Ministry of Economy, Trade and Industry (the “Restructuring Guidelines”)(i) Operating income referred to in I.(A)(1) of the Restructuring Guidelines means net operating
profit, for example.
(ii) The turnover ratio of tangible fixed assets referred to in I.(A)(2) of the Restructuring Guidelines
means operating revenue (e.g., earnings from fund management, earnings from service
transactions, other business earnings) divided by the book value of the tangible fixed assets, forexample.
(iii) Added value per capita in the final business year for a business restructuring plan referred to in
I.(A)(3) of the Restructuring Guidelines means added value per employee (i.e., the sum of net
operating profits, personnel expenses, and depreciation expenses), for example.
(iv) Total interest-bearing liabilities referred to in I.(B)(1) of the Restructuring Guidelines include
deposits payable and all other capital instruments with debt-like features, for example. Working
capital referred to in the same section means loan claims other than non-performing loans, forexample.
(v) Ordinary revenue and ordinary expenditure referred to in I.(B)(2) of the Restructuring
Guidelines respectively mean ordinary profits and ordinary expenses, for example.
(2) Definition of business restructuring in II.(A) of the Restructuring Guidelines(i) Sales referred to in II.(A)(3) of the Restructuring Guidelines means operating revenue, forexample.
(ii) Sales expenses for provision of products or services referred to in II.(A)(5) of the Restructuring
Guidelines means sales, and general and administrative expenses, for example.
(3) Criteria for industries or business sectors causing oversupply due to structural reasons as referred toin II.(B)(3) of the Restructuring Guidelines
In connection with the ratio of operating profit on sales referred to in II.(B)(3)(ii) of the
Restructuring Guidelines, operating profit means net operating revenue, and sales means operating
revenue, for example.
(4) Setting goals for improving productivity and financial soundness through specified businessreorganization pursuant to Part III of the Restructuring Guidelines
In III.(A)(1) to (3) and III.(B)(1) and (2) of the Restructuring Guidelines, the definitions stated108

in III-2-2-4(1)(i) to (v) are used.
(5) Definition of specified business restructuring referred to in IV.(A) of the Restructuring Guidelines
Net sales referred to in IV.(A)(4) and (5) of the Restructuring Guidelines means operating revenue,
for example.
III-2-3

Risk Management

III-2-3-1
III-2-3-1-1

Risk Management (General) and Integrated Risk Management
Background (Risk Management)

To ensure financial safety and soundness and improve profitability, banks are required to adequately
manage various risks in a systematic and integrated manner. Such risk management needs to be optimized
in light of their own business strategies and the characteristics of related risks ranging from credit risk,
market risk to liquidity risk, as well as operational risks (including administrative risks and system risks).
In particular, for the purpose of effective risk management for financial instruments involving
complicated risks, each bank’s top managers need to be well-qualified, competent, and timely andadequately briefed on various risks faced by different business units in the bank. Then, the top managers
must establish a scheme for integrated risk management as explained below so that they can make promptand shrewd management decisions in a leadership position and from cross-functional standpoints.
III-2-3-1-2

Background (Integrated Risk Management)(1) Major Banks, which face large-scale and complicated risks, are undoubtedly required to properly
control risks inherent in different business units, based on risk categories such as credit risk andmarket risk. At the same time, it is more important to develop a scheme capable of controlling thoserisks in an integrated manner. While a standardized framework for integrated risk management is yet
to be completely established, Major Banks have already been promoting their own efforts of integrated
risk management.
(2) Risk control based on capital baseFirst, the risks faced by a bank’s respective business units are quantitatively measured to the extent
possible on common measurement criteria (e.g., value at risk, or VaR), and the bank’s capital isallocated to respective risk categories and respective business units in proportion to their risk
quantities (i.e., risk portions to be covered by the equity capital) within the limit of the bank’s capitalbase; this kind of allocated capital is called “risk capital.(*)” Second, each business unit specifies its
position limit and other rules, and controls its business operations to keep its risk position within the109risk capital. With all business units of the bank carrying out this process, the total volume of risks takenby the entire bank is expected to be constantly maintained within the limit of the bank’s financial
strength (i.e., the bank’s capital base).
Note: Risk capital can be described as “allocated capital.”(3) Risk-based profit management
The profitability of each business unit after risk adjustment can be estimated through quantitative
indicators (e.g., the business unit’s risk-adjusted return) or other financial ratios (e.g., RAROC).
This approach is used to evaluate each business unit’s performance and enables profit management
in consideration of risks. Such profit management is expected to enhance the bank’s businessefficiency and profitability.
Note 1:

Examples of quantitative indicators
Risk-adjusted return (= Operating proﬁts − Expected losses), known as RAR or RACAR
Economic proﬁt (= RAR − Risk capital x Ratio of capital cost), known as EP

Note 2:

Examples of financial ratios
Risk-adjusted return on capital (= RAR / Risk capital), known as RAROC

III-2-3-1-3

Major Supervisory Viewpoints Common in All Types of Risk Management(1) Does the board of directors clearly define a risk management policy based on the strategic goal
established in conformity with the bank’s overall management policy? In addition, does the board of
directors implement appropriate measures to familiarize all related personnel in the bank with theestablished risk management policy?
(2) Does the board of directors put in place risk management departments, together with a scheme for
integrated management of the risks controlled by all those departments? Is this scheme designed in a
way to enable the mutual check-and-balance system and other aspects to function sufficiently?
(3) Do the board of directors and other relevant organs in the bank effectively use risk information for thebank’s business operations and development of risk management systems? For example, are the boardof directors and other relevant organs briefed on the status of risk management on a regular basis?
And do they make necessary decisions based on the reported risk information?
(4) With regard to the risks involving or inherent in the bank’s respective business offices, branches, andconsolidated subsidiaries (including overseas business establishments), do they manage those risks bythemselves to the extent not contrary to laws and regulations? At the same time, are those risks
managed by the head office Risk Management Department in an integrated manner? Does the head
office risk management department take control of all risks managed by respective risk management110departments?
(5) Has the board of directors developed a scheme to enable internal audit departments to function
sufficiently? Does the board of directors regularly check whether internal audit departments function
effectively?
(6) Is the effectiveness of internal controls (including risk management activities) in the bank checked
through external audits by financial auditors, etc. at least once a year? If the bank is a financial
institution subject to international uniform standards, does each of its overseas businessestablishments undergo external audits in a way that fits in with the respective country’s
circumstances?
(7) Do the board of directors and other relevant organs in the bank play a leading role toward fostering
the bank’s risk management culture? For example, are the bank’s officers and employees sufficiently
aware of the importance of risk management? For another example, is psychological safety (i.e.,situations or atmospheres where each employee can speak out and/or take action without any fear atwork) ensured? In addition, has a sound and open corporate culture been well-established in the bank?
For example, in such bank, employees should spontaneously be willing to share information promptly
and exchange opinions in a candid manner.
(Reference) “Concept and Procedures of Supervisory Activities Concerning Compliance Risk
Management (Compliance Risk Management Basic Policy)” (October 2018)
III-2-3-1-4

Major Supervisory Viewpoints in Integrated Risk Management(1) To understand various risks in a comprehensive manner, after identifying all risks, are the risk
categories appropriately identified as the ones that need to be controlled quantitatively within
integrated risk management?
(2) In the context of integrated risk management, are all quantitatively controlled risks measured undercommon criteria? Are the objectivity and adequacy of such measurement criteria ensured? For
example, if VaR is used, is the method of setting confidence intervals and holding periods defined
clearly?
(3) Does the bank conduct ongoing review to further enhance the accuracy of measurements? For
example, are correlations among different types of risks (diversification effects) examined in order toensure the appropriateness of measurements?

111

(4) Are the processes of allocating risk capital and reviewing such allocation appropriate?
(5) With regard to major risks, is the loss absorbency of the capital base considered properly? For example,
are major risks covered by Common Equity Tier 1 capital if the bank is an internationally active bank?
Or are major risks covered by the bank’s capital base recognized in the context of regulatory capitalrequirements (excluding such instruments eligible for inclusion in Tier 1 capital that are classified
into Tier 2 capital under the previous Basel regulatory framework) if the bank is a domestically activebank?
(6) Is the allocation of risk capital to respective business units consistent with the bank’s business plans,earnings plans, and the like?
(7) Are business operations controlled properly to make sure that the risk quantity of each business unit
will not exceed the allocated risk capital?
(8) If the bank is a domestically active bank, does the bank take actions with due regard to thecharacteristics of the risks faced by the bank or its capital base? For example, when allocating risk
capital, does the bank take into due consideration the impacts of valuation difference on available-forsale securities?
III-2-3-1-5

Supervisory Approaches and Actions(1) Basic stance
As one of the methods to ensure the soundness of each bank’s business management, the regulator
is authorized to issue an order for prompt corrective action to maintain the bank’s capital adequacy
ratio and leverage ratio pursuant to Article 26(2) of the Banking Act. Even when the bank is notincluded in the scope of banks to which a measure of demanding prompt corrective action is applicable,
the bank is strongly recommended to continue business improvement efforts to maintain or evenstrengthen the management soundness.
(2) Off-site monitoring(i) The regulator analyzes the data obtained through interviews on risk management and off-sitemonitoring of integrated risk management to stay updated on the functions of banks’ integrated
risk management systems and, where necessary, analyzes or assesses the effectiveness or otherfeatures of those systems.
(ii) The regulator may conduct interviews with banks’ top managers at any time, where necessary. The
issues covered by such interviews may include integrated risk management, as needed.
(iii) On the occasion of a bank’s review of capital allocation to its respective business units, or in the112event of deterioration in a bank’s business performance, fluctuations in interest rates or asset
prices, or other unfavorable economic developments, the regulator may conduct ad hoc interviews
with the bank, as needed, or verify the effectiveness or other features of the bank’s integrated risk
management systems.
(3) If any problem is found in a bank’s risk management systems or integrated risk management systems
as a result of the regulator’s financial inspections or off-site monitoring, the regulator may ask thebank to submit detailed reports pursuant to Article 24 of the Banking Act, as needed. If the problem
is considered critical, the regulator will issue a business improvement order or implement any othermeasures pursuant to Article 26 of the Banking Act.
(4) Effective use of the early warning system
Major Banks’ risk management activities are expected to be promoted through their self-initiatedefforts to set integrated risk management in place in light of the supervisory viewpoints enumerated
above. They will also be encouraged to develop their existing systems into more appropriate ones in
the wake of the regulator’s monitoring or verifications explained in (2) and (3) above.
At the same time, some particular risks need to be controlled on an individual basis in order toprevent them from adversely affecting the bank’s soundness. For example, it is necessary to prevent asituation where a deficiency in the risk management scheme will eventually be actualized. The
regulator is therefore encouraged to effectively use the early warning system applicable respectively
under III-2-2-3(3) (profitability), III-2-3-2-6(1)(iii) (credit risk), III-2-3-3-3(1)(iii) (market risk), or
III-2-3-4-3(1)(iii) (liquidity risk). If a bank fails to satisfy the predefined minimum requirement forany specific risk, the regulator will take any measure described in the following three items or othermeasures.
(i) The regulator’s analyses
The regulator’s analyses may cover specific risks involving the bank’s failure to satisfy theminimum required criteria, as well as related business environments and business models. The
regulator may comprehensively analyze the factors existing in present circumstances
surrounding the bank’s profitability, risk-taking, or capital base, and then formulate
hypotheses about the issues faced by the bank and their causes.
(ii) Clarifying the issues and creating shared understanding through mutual communication
Based on the hypotheses formulated, and taking the bank’s self-evaluation into fullconsideration, the regulator and the bank will carry out in-depth discussions, clarify the issues
that the bank should address and their causes, and create shared understanding.
(iii) Supervision and communication aiming at improvement
Based on the shared understanding of the issues to be addressed, the regulator willencourage the bank to prepare a plan for necessary improvement actions including the steps
to address the identified causes. Where necessary, the regulator will conduct follow-up

113monitoring to check the progress of the bank’s improvement actions.
Note 1:

Under the early warning system, a bank failing to satisfy any minimum required criterion
specified for respective risks will be subject to the regulator’s supervision in the ways describedin the three paragraphs above. However, this kind of situation does not mean that the bank’sbusiness management is automatically determined to be unsound, and the regulator does notnecessarily ask the bank to take prompt corrective actions.
Even when the regulator finds it necessary to ask a bank for improvement, the regulator
should closely observe the impacts on financial markets, trends in small and medium businessfinancing, and other factors, and pay particular attention so as to encourage the bank toimplement optimum improvement actions in an optimized schedule.
In the course of follow-up monitoring of the bank’s improvement activities, the regulator
must check the objectives of the respective improvement steps and the schedule for
implementation.

Note 2:

While a bank failing to satisfy any minimum required criteria specified for respective risks is,in general, instructed to take action as described in the three paragraphs above, the regulator
is expected to act in ways commensurate with the bank’s size, characteristics, or othercircumstances.

III-2-3-2

Credit Risk Management

III-2-3-2-1

Outline of Credit Risk Management

III-2-3-2-1-1

Background

Credit risk is the risk that a bank will incur losses from the decline or disappearance of the value of assets(including off-balance sheet assets ) due to a deterioration in the financial condition of an entity to which
credit is provided. The bank needs to strive to ensure its financial stability by properly developing aninternal control system related to the risk.
Especially in the process of recent rapid materialization of credit risk, issues such as troubles caused byexcessive credit concentration and the necessities of strict asset assessment and credit risk management asa group have come to light. Therefore, the bank needs to develop a system for preventing NPL problems
from happening again, by selecting appropriate credit portfolio management and credit risk management
methods.
III-2-3-2-1-2

Major Supervisory Viewpoints(1) Has the board of directors formulated a credit risk management policy based on the strategic

114

objectives established in conformity with the bank’s overall corporate management policy? In addition,
has the board of directors formulated a credit policy that defines loan borrowers, credit rating
standards, portfolio management policies, settlement authorities, etc., based on the credit risk
management policy?
(2) Has the board of directors developed appropriate credit management and screening management
systems by separating the marketing and sales division and the screening management division, or
establishing a credit audit division and a risk management division, etc.? For example, does the audit
division conduct proper internal checks, in terms of whether the relevant scheme puts emphasis on
maximization of collection when working on business rehabilitation or handling of problem loans?
(3) Does the board of directors, etc. periodically receive reports on credit risk conditions and utilize themfor risk management, including the verification of compliance with the credit risk management policy
and instructions for reducing the credit risk amount? In addition, does the board of directors, etc. takemeasures to ensure the fairness and appropriateness of the development and review of internal rules
and organizations, etc. related to credit risks, including utilization of external experts, etc. asnecessary?
(4) In managing credit risk, has the bank established a system to exert integrated control over the bank,its consolidated subsidiaries, and affiliates to which the equity method is applicable, to the extent notcontrary to laws and regulations? Does the bank implement proper loan loss provisions on aconsolidated basis especially when its subsidiary companies guarantee loans lent by the bank?
(5) Does the screening management division accurately comprehend the status of the borrower’s financial
condition, the purpose of the use of funds, financial sources for loan repayments, etc. and accordingly
conduct appropriate screening and management, including verification of the accuracy of credit
ratings? For example, has the screening management division developed a management system tocontrol risks by accurately grasping the actual condition of the whole group of debtor companies?
(6) Has the bank established a system for providing appropriate credit management of conditions of theborrowers, including the trends of their business performance? In addition, for example, have efforts
been made to prevent loans from becoming problem loans, to enhance consultation and support
functions for business partners, and to prompt business revitalization, in terms of preventing theoccurrence of new NPL? Has a risk management system been developed for a business model on theassumption that a certain amount of NPL occur?
(7) When acquiring or holding shares, does the bank provide appropriate risk (*1, *2) management, fully
aware of the risks of share price decline or impairment when holding shares, the risk of losses on sale115

of shares, and the risk of difficulty in selling shares, especially when holding shares in large volume or
non-listed shares?
In particular, based on the fact that regulations on holding of voting rights were reviewed inaccordance with the revision of the Banking Act in 2013, in order for banks to supply capital-likefunds more flexibly, it is necessary to note the following when acquiring and holding the voting rights
whose total number will exceed the maximum threshold for voting rights:(i) When acquiring and holding shares of “a company specified by Cabinet Office Order as thatengaged in new business activities found to contribute considerably to the improvement ofmanagement,” (which is called a business revitalization company) provided in Article 162(1)(xiii) or Article 52-23(1)(xii) of the Banking Act, has the bank developed a system forproperly examining the company’s business rehabilitation plan as well as accurately evaluating
and analyzing the progress status of the plan, etc.?
Furthermore, has the bank developed a system for giving support and advice, as necessary, for
the improvement of the management of the company in order to raise its corporate value?
(ii) In cases where the bank uses its investment subsidiary company to acquire and hold shares ofthe following companies, although risk isolation measures are thought to have been implemented
to some degree in order to protect the bank itself, has the bank developed a system for grasping,analyzing, managing, etc. the status of the risk management of the subsidiary company?
(A) “A company specified by Cabinet Office Order as that exploring new business fields” (whichis called a venture company) provided in Article 16-2(1)(xii) or Article 52-23(1)(xi) of the
Banking Act(B) “A company specified by Cabinet Office Order as that conducting business activities found tocontribute to regional revitalization ” (which is called a company revitalizing (reinvigorating)the overall regional economy) provided in Article 16-4(8) or Article 52-24(8) of the Banking
Act.
Note 1:

Also see “III-2-3-3 Market Risk Management.”

Note 2:

About the conflict of interests of the bank between its position as a shareholder and its
position as a creditor regarding the acquisition and holding of shares, also see “V-5
Establishment of a System for Protection of Customers' Interests.”(8) About creation of an interest rate (proper lending rate) system which builds on adequate credit riskvolume based on credit rating, does the management recognize its importance involving the bank’s
credit risk? Has the bank developed a system and smoothly managed it while gaining understanding
from customers?
(9) Does the bank appropriatly manage sponsorship business, etc., such as ABCP program, etc., keeping
in mind the possibility of being required to complement liquidity, etc. due to reputational risk, etc.,116irrespective of the content of contracts?
(10) Does the bank appropriately manage the credit risk of major counterparties to derivatives transactions,
including the following?
(i) Managing exposures for each counterparty and based on the types of counterparty(ii) Understanding of potential risks arising from the increased exposure due to the changes inmarket value of the reference assets under the derivative transactions(iii) Confirmation of the effectiveness of collateral and other credit enhancement(iv) Appropriate stress-testing incorporating the scenario assuming tightening market liquidity(11) Does the bank appropriately manage risks arising from transacting with a central counterparty(“CCP”) in relation to centrally cleared derivative transactions, etc., including the following?
(i) Risks specific to the transactions with a CCP(ii) Risks arising from material flaws in the framework to regulate and supervise a qualified CCP(iii) With regard to a CCP other than the qualified CCP, risks that the unpaid portion of the clearing
fund to be paid upon request from the CCP will be applied to cover the loss of the CCP(12) Do Major Banks (including those whose total average amount of notional value arising from over-thecounter derivatives transactions which fall under Article 123(10)(iv)(b) of the Cabinet Office Orderon Financial Instruments Business is less than 300 billion yen ) make efforts to develop a system for
managing counterparty risk, for example, in exchange of variation margin in non-clearing over-thecounter derivatives transactions with financial institutions, etc.?
Also, do Major Banks, subject to the provisions of Article 123,(1)(xxi)-6 (Initial Margin) of the
Cabinet Office Order on Financial Instruments Business, make an effort to develop a system for
managing counterparty risk, for example, in exchange of initial margin in non-clearing over-thecounter derivatives transactions subject to the given item?
For specific supervisory viewpoints, refer to “IV-2-4 (4) Non-Clearing Over-the-Counter
Derivatives Transactions, etc.” described in “Comprehensive Guideline for Supervision of Financial
Instruments Business Operators, etc.”
III-2-3-2-2

Credit Risk Management for Large Borrowers

III-2-3-2-2-1

BackgroundIn the process of rapid materialization of credit risk in recent times, concentration of credit-granting ona specified group of companies has shown some cases in which the debtor’s unfavorable situation castconcerns over the survival chances of the bank, and early recognition of and response to the financial andoperational conditions of large borrowers has become one of the biggest management challenges for the117bank.
III-2-3-2-2-2

Major Supervisory Viewpoints(1) Does the board of directors, etc., based on rational criteria, extract large borrowers which are likely tohave a significant effect on the management of the bank, and continuously monitors their credit andfinancial conditions? In particular, with regard to an internationally active bank, in cases where thebank’s credit provision to a single borrower is 5% or more of the amount of the bank’s Tier 1 capital,
does the bank provide credit risk management for the large borrower taking into consideration theamount of credit provision to an entity deemed to have an economically interdependent relationship(*) with the borrower?
Note:

An entity deemed to have an economically interdependent relationship is that found by thebank to have any of the following relationships with its borrower(s): However, when an entity,
which has any of the following relationships, can avoid financial problems or a chain reactionof defaults by finding other business partners or new funding sources in a timely manner, theentity does not fall under the category of those deemed to have an economicallyinterdependent relationship.

・ When 50% or more of an entity’s annual gross income or gross expenditure rises only from thetransactions of the counterparty (for example, when 50% or more of the annual income of anentity owning residential and/or commercial real estates depends on the rents paid by otherentities)
・ When an entity bears all or some of the credit provided to the counterparty by means ofguarantee, and an entity is likely to default if the right to guarantee is exercised・ When most of the products made by an entity are sold by the counterparty who is an importantcustomer which cannot be easily replaced
・ When the loan provided by an entity to the counterparty is the same as the expected repayment
source, and the entity doesn’t have other sufficient income sources to finish repaying the loan.
・ When an entity’s ﬁnancial problem is likely to cause a diﬃcult situation to the counterparty, interms of repaying all the debts in a timely manner
・ When an entity’s inability to pay debts (as they become due) or default is likely to havesomething to do with the counterparty’s inability to pay debts (as they become due) or default
・ When multiple entities rely on the same funder for most of their ﬁnancing needs, and if thefunder defaults, none of them can find another funder(2) Are internal definitions of sectors important in terms of risk management properly given, including
the targets whose risk characteristics are similar such as a specific business type, enterprise group,
country, region, or loan product? Also, does the bank accurately understand the breakdown of the118positions and related risks of each business type, country, region, etc.?
(3) In compliance with the internal sector definitions, has the bank developed a management system inwhich credit risks can be diversified, for example, by establishing credit limits suited to each portfolio
and using credit securitization?
(4) In order to recognize and respond to credit risks at an early stage, has the bank developed amanagement system in which the amount of credit provision can be controlled according to credit
risks, for example, by utilizing covenants, syndicated loans, credit securitization, etc.?
(5) In order to deal with large borrowers, does the board of directors, etc. give close examination andprecise instruction when implementing strict self assessment and revitalizing businesses? Especiallywhen examining business restructuring plans for large borrowers, has the bank developed a system formaking a full and careful examination of the validity and effectiveness of the plans?
(6) In terms of necessity to recognize the condition of a debtor at an early stage in order to contribute tobusiness rehabilitation, does the bank, in a timely and accurate manner, reflect market signals(including changes in stock prices and ratings) in its credit rating and promptly clarifies its stance(support policies)? Also, has the bank developed a system in which it can properly reflect its
willingness to support when approving the disclosure of NPL?
(7) Has the bank developed a system in which, based on the condition of a debtor, market prices, andratings, the bank can properly judge credit risks of bonds and the preferred shares acquired throughdebt equity swaps (DES) as well as loans?
(8) With regard to an internationally active bank, when managing the credit-granting to funds or
securitization products, does the bank identify the parties concerned (including originators, fundmanagers, and providers of protections such as liquidity support for investment vehicles, CDS, andguarantees) who can be an additional risk factor inherent in the structure itself other than theunderlying asset, and, based on that understanding, manages credit for large borrowers? Morespecifically, does the bank consider (i) managing the total sum of credit-granting, etc. to the structures
it is investing in when there are additional risk factors common to these structures, and (ii) managing
the credit-granting, etc. to the structures relevant to the parties concerned who can be an additionalrisk factor, together with the credit-granting, etc. to those concerned?
Note that the bank does not always need to manage the above-mentioned parties as an additionalrisk factor. For example, when the assets managed by funds are not managed separatly from those ofmanagement entities and other funds, the bank needs to consider implementing credit risk
management combined with credit-granting to management entities and other funds. Moreover,119

when the ABCP program in which the bank is investing relies on credit and liquidity enhancements
by the same sponsor company, or when the same party provides protections, such as CDS andguarantee, to synthetic-type securitization products, the bank needs to consider the necessity ofmanaging sponsor companies and protection providers as large borrowers.
(9) Does the bank perform stress tests? Also, does the bank analyze the scenario where the amount of loss
will greatly increase in measuring credit risks?
III-2-3-2-3

Disposal of Non-performing Loans and Business Rehabilitation (Integrated
Revitalization of Industry and Finance)

III-2-3-2-3-1

BackgroundRisk taking is an essential element in financial intermediation, and non-performing loans (NPL) areconstantly generated in some portion of the credit portfolio, in line with economic fluctuations andcompetitions between companies.
What is important for the financial stability of the bank is first to manage credit risk properly, and torecognize the occurrence of NPL at an early stage under strict asset assessment and take appropriate
measures to turn NPL into sound loans according to each credit risk, and by doing this, to properly manage
credit risks arising from occurrence of NPL within its own ability to cover risks. It is particularly essential
to strictly manage NPL of large borrowers who might have a significant effect on the bank’s finances.
From the perspective of a debtor company, the continued existence of NPL might lead to unnecessary
continuation of credit-granting to a problem company and its survival. Therefore, in terms of realizing
effective allocation of fund resources in Japan, it is extremely important to judge strictly the possibility ofrevitalizing problem companies, and implement the measures for rapid revitalization, etc. by establishingand carrying out drastic and highly feasible reconstruction plans.
By dealing properly with NPL in this way in order to prevent non-performing loan problems fromoccurring again, it is important to keep the non-performing loan ratio of Major Banks as a whole below thelevel as of the end of March 2005, and it is expected that each bank will make the best efforts.
III-2-3-2-3-2

Major Supervisory Viewpoints(1) Management system for NPL(i)

In addition to fully recognizing the effects of occurrence of NPL on the financial soundness ofthe bank, has the bank established an appropriate corporate governance system for early response,
including early recognition of NPL and measures to turn such NPL into sound loans?

(ii) Has the policy of NPL management been clearly defined? Also, has the policy ensured
consistency with the bank’s management policy and business model, etc.?

120

(iii) Is proper management of NPL implemented in the responsible departments, along with
development of the system based on the policy of NPL management? Also, is the internal audit
needed to judge the appropriateness and sufficiency of that management system implemented ina timely manner?
With regard to the NPL required to be specially managed as problem ones, does the bankidentify its scope and clarifies its stance toward the problem borrower, and takes sufficientcountermeasures by properly grasping its management condition, etc.?
(2) Strict self-assessment and write-offs and loan loss provisions, etc. relating to NPL(i)Does the bank conduct strict self-assessment relating to NPL and implements proper write-offs
and loan loss provisions?
Especially, in addition to implementing the bank’s internal ratings reflecting corporate results
and market signals in a timely manner, does the bank ensure accurate borrower classifications
and implements write-offs and loan loss provisions in consideration of recent trends in bad debts,
bankruptcies, etc.?

(ii) With regard to the large borrowers which needs special attention, does the bank estimate loan
loss provisions of the borrowers based on the DCF (Discounted Cash Flow) method?
(iii) As for loans categorized as doubtful or below, or loans adopting the DCF method and use thecollateral value, it is important to conduct appropriate appraisal in order to implement write-offs
and loan loss provisions based on the appraised collateral. To this end, it is necessary to note
whether the bank deals with the following regarding the appraisal related to these claims.
(A) Enhancement of utilization of statutory appraisal and clarification of statutory appraisal
proceedingsa.

The request shall be made to an appraiser independent from the bank (*)

Note:

.

The bank shall not be able to exert significant effect on the appraiser’s finance andits decision of operations or business policy.

b. With regard to high-valued collaterals (with an appraised value of 5 billion yen or more)which are special properties (such as a golf course, ball park, marina, or circuit) whose
collateral value is difficult for financial institutions to calculate rationally and objectively, thebank shall conduct at least one statutory appraisal when reviewing its appraised collateralvalues, financial institutions.
c.

In order to ensure that the appraised value is of sufficient precision as an appraised collateralvalue, a request for an appraisal shall be made based on the actual situation of the type ofcollateral real property, appraisal conditions, request purposes, etc.

d. Necessary corrections shall be made as needed by considering appraisal prerequisites, etc.
and actual transaction cases.
e.

Internal rules related to collateral appraisal incorporating the above points shall beestablished.

121

Note:

As for statutory appraisal, “appraised value” refers to an appraisal based on Real
Estate Appraisal Standards (notification from the Administrative Vice-Minister ofLand, Infrastructure, Transport and Tourism), and does not include appraisals
carried out by a simplified method.

(B)

Enhancement of utilization of the bank’s self-assessment (including assessment by its
subsidiary companies)a.

The assessment method based on statutory appraisal shall be established and if there is agreat difference between the actual transaction value and the appraised value, the bank shalltake measures such as multiplying the appraised value by the appropriate assessment rate ofcollateral or correcting the collateral valuation method.

b. The audit division shall verify the precision of collateral valuation periodically.
c.

Internal rules related to collateral appraisal incorporating the above points shall beestablished.

(3) Efforts to turn NPL into sound loans(i)

As for non-performing loan disposal, does the bank appropriately assess the debtor’sreconstruction possibilities, and for a debtor which could be reconstructed, make the utmost
efforts towards its reconstruction?

(ii) As for reconstruction of enterprises, does the bank strive to create a reconstruction plan which isrespected by the market, making effective use of SME Revitalization Support Councils, laws andregulations related to company split, debt-equity swap (DES), debt-debt swap (DDS), corporate
restructuring fund, etc., and executes quick handling, through voluntary liquidation according to
the Private Liquidation Guidelines or Guidelines for Business Revitalization, etc. of Small- andMedium-sized Enterprises, and through corporate rehabilitation by legal procedures?
(iii) In order to strictly examine the debtor’s reconstruction possibilities, etc., does the bank make thefollowing efforts?
(A) Continuous and strict inspection of the progress and validity of reconstruction plans(B) Implementation of loan loss provisions using the DCF method for the large borrowers whichneeds special attention(C) Application of mark-to-market valuation for DES by large borrowers(4) Liquidation of NPL(i)

In cases where the bank moves its NPL off balance sheet by selling and securitizing them, arecredit risks of loans to be securitized clearly separated? Does the bank continue substantiallybearing the credit risks of those loans by using credit enhancement?

(ii) In cases where the bank buys securitized NPL directly or indirectly, does the bank secure
consistency with its corporate management policy, business model, etc.?
As for the NPL to buy, does the bank make appropriate evaluation of newly generated credit122risks, including information asymmetry, industrial and geographical concentration and otherviewpoints, conduct full deliberation on the correlation between risk and return, and expect
those loans to have a good chance of securing profitability? Also, does the bank implement
proper management of those loans after purchasing them?
When securitizing NPL, does the bank holding the loans subject to securitization take due
care to protect the original debtors?
Does the bank ensure that the loan claim is not transferred to parties who may oppress the
debtor or disrupt the debtor’s everyday life and business, etc.?
(5) Approaches to loans categorized as doubtful or below(i)

As for loans categorized as doubtful or below, the credit risk is enormously enhanced; therefore,
it is extremely important to recognize such loans at an early stage and dispose of NPL at an earlystage. Has the bank developed a policy regarding early recognition and early disposal of loans
categorized as doubtful or below, based on the above viewpoints?

(ii) As for borrowers having significant effect on banking management and categorized as “debtors
in danger of bankruptcy,” does the bank execute quick handling by taking measures including
preparation of a thorough reconstruction plan based on the Private Rehabilitation Guidelines,
corporate restructuring by legal procedures such as the Civil Rehabilitation Law, or sales ofloans?
(iii) When implementing off-balance-sheet treatment, etc. (*), has due attention regarding thefollowing points been paid?
(A)The judgment should be made based on economic rationality, considering the risks to the
management of each bank and the effects on the regional economy, etc.
(B)The bank shall appropriately assess the debtor’s reconstruction possibilities, and for a debtor
that can be reconstructed, make the utmost efforts towards its reconstruction.
(C)Especially in relation to small and medium-sized enterprises (SMEs), the bank shall fully
consider the characteristics of SMEs and the actual condition of each enterprise, and makedetailed and accurate judgment of reconstruction possibilities and measures to turn those loans
into sound loans.
(D)The bank shall need to avoid a chain-reaction collapse of sound SMEs, clients of the debtor
company.
(iv) As for disposal of loans categorized as doubtful or below, does each bank announce its quarterly
results regarding off-balance-sheet disposal, etc. in order for depositors to evaluate the financial
condition of each bank?
Note:“Off-balance-sheet treatment, etc.” described here refers to what is called “off-balance-sheet
treatment” (meaning that loans categorized as doubtful or below are dropped from the balance
sheet due to sales or collection, relinquishment of loans, restructuring type disposal, etc., or
upgrade to the classification of special attention loans or above ) and to “measures to lead to123

off-balance-sheet treatment.”
Note that “measures to lead to off-balance-sheet treatment” are those mentioned below:(A) Legal liquidation
Note:

Claimsinbankruptcy,

liquidation(including

specialliquidation),

corporate

reorganization, or corporate rehabilitation, and under civil rehabilitation proceedings,
and claims against a debtor whose bank transaction has been suspended(B) Measures equivalent to legal liquidation
Note:

Claims under legal procedures such as a conciliation of civil affairs (including special
conciliation) or a judicial settlement, and claims during the period of a repayment plan
based on these procedures(C) Company splits to so-called good and bad companies
Note:

With regard to bad companies scheduled to be rationalized after the splits, limited tothose to be rationalized promptly.

(D) Implementing partial direct write-offs of small loans on individuals and SMEs (less than one(1) billion yen [on principal amount])(E) Trust to the Resolution and Collection Corporation in cases where the following requirements
are met:a.

Cases where the purpose of trust is corporate rehabilitation, etc. under the involvement of
the Resolution and Collection Corporationb. Cases where off-balance-sheet treatment through revitalization or sale is done by the end of
the trust period
Note:

Loans related to “Trust-Type Schemes to Revitalize SMEs” apply to this matter.

(v) As for the finance (DIP finance, etc.) to a debtor who is working on a reconstruction plan, does
the bank fully consider facilitating it and make an active effort to supply funds? Note that thebank will not refrain from active actions after fully examining potential profitability of DIP
finance, etc. irrespective of (A) and (B) of the above (iv).
III-2-3-2-4

Country Risk Management

III-2-3-2-4-1

Background

Country risk (including transfer risk) refers to a risk related to the economic, social, and politicalenvironment of the client’s home country in engaging in international credit-providing and investing
activities. It is important for Major Banks, etc. operating globally to properly develop an internal control
system related to the risk and to appropriately control country risk.
III-2-3-2-4-2

Major Supervisory Viewpoints

124(1) Does the board of directors, etc. recognize the importance of country risk and perform continuous
monitoring by developing a system for accurately grasp the risk?
(2) Has the board of directors, etc., based on appropriate evaluation of country risk, developed a systemfor controlling and properly coping with country risk by establishing regulations for implementing
adequate provisions to international credit-providing activities?
(3) Has the bank developed a system for responding flexibly to changes in international situations in order
to control country risk?
III-2-3-2-5

Credit Risk Reduction Method

III-2-3-2-5-1

BackgroundThe credit risk reduction method provided in section 5 of the Public Notice, in general, is used as aneffective risk control tool as it reduces credit risk significantly. In a framework for reducing the credit risk,on the other hand, the method may cause potential regulatory arbitrage, including utilization of the credit
risk reduction method against securitization exposure.
Especially in profit and loss calculation, regulatory arbitrage can be found about transactions where thepaper profits can be immediately enjoyed in calculating the capital adequacy ratio, by reducing the risk
weight of exposure guaranteed by the bank through transfer of nominal risk, along with delaying ofrecognition of loss and cost arising from guarantee. For example, this regulatory arbitrage is practiced as tothe credit guarantee transactions with an unusually high level of premium, fees, and other direct andindirect expenses (hereinafter referred to as “high-cost credit guarantee transactions” ) as compared withthe amount of credit risk to be transferred. It can be said that these high-cost credit guarantee transactions
have a problem in that, without substantial risk transfer, they enjoy desirable treatment in calculating therequisite equity capital for the short term, while they postpone the realization of losses for the long term.
III-2-3-2-5-2

Major Supervisory Viewpoints(1) Based on the above problem, when evaluating the credit risk reduction method using guarantee andcredit derivatives (hereinafter referred to as “credit guarantee transactions” ) provided in section 5 of
the Public Notice, the bank itself should consider the following points, and the FSA will judge theapplicability of the credit risk reduction method based on the following points.
(i) Comparison between the current values of premium and expenses that are not yet recognized in
calculating the capital adequacy ratio, and the expected losses of the exposures under guaranteethat can occur under various stress scenarios.
(ii) Comparison of transaction prices to market prices (including adequate consideration of premium
paid in property other thancash)

125

(iii) Timing of payments of premium, etc. by the guarantee buyer (including the potential difference
between the timing of loan loss provisions or impairment loss to guarantee exposure by theguarantee buyer and the timing of deposit payment by the guarantee provider)(iv) Analysis on the date of future deposit payment to evaluate the relationship between the timing
when potential future losses may occur and the duration when there is a high possibility of credit
guarantee(v) Analysis on a specific condition where an increase in the level of dependence of the guarantee
buyer on the guarantee provider and a decrease in the level of ability for the guarantee provider toperform its payment obligation can occur at the same time(vi) Analysis on whether the guarantee buyer can pay premium properly based on its income, capitaland financial conditions, etc.
(vii) Analysis on the internal record which contains the analysis by the guarantee buyer on therationality of guarantee transactions and future expenses and benefits arising from the guarantee
transactions(2) The FSA pays more careful attention to credit guarantee transactions that have the following
characteristics:(i) Transactions where premium paid is higher than the amount of guarantee exposure. For example,
transactions where the total amount of expenses arising from the guarantee is as large as or larger
than that of the guarantee exposure, or where, according to the price volatility and performancelevel of guarantee exposure, the guarantee provider pays back to the guarantee buyer part of thepremium paid in the form of a rebate, resulting in excessive payment of the premium.
(ii) Transactions where the guarantee exposure is not subject to mark-to-market valuation, and loss
related to the guarantee exposure is not recognized through profit and loss calculation.
(iii) Transactions where the amounts of risk-weighted assets and regulatory capital decreasesignificantly as a result of a credit guarantee transaction. For example, cases where the ratio of therisk-weighted assets to the exposure subject to credit guarantee exceeds 150%.
(iv) Transactions where payment of premium to the guarantee is not proportional to the amount ofguarantee exposure. For example, a transaction where payment amount of premium is guaranteed
irrespective of the presence or absence of impairment and default of guarantee exposure, and atransaction where advance payment premium and the premium scheduled to be paid when theguarantee expires are not recognized as expenses in profit and loss calculation.
(v) Transactions where the total amount of expenses related to credit risk reduction may increase.
Examples include a transaction whose costs are high for the guarantee buyer, a transaction where
the guarantee buyer takes on obligation to provide additional collateral to the guarantee provider,a transaction where additional payment is required when the transaction expires, a transaction
where the guarantee buyer has the right to cancel the transaction prematurely, and a transaction
where there is a pre-agreement between the guarantee provider and the guarantee buyer regarding126

the discontinuation of the transaction at a pre-determined price at a specific time in the future.
III-2-3-2-6

Supervisory Approaches and Actions Related to Credit Risk Management(1) Off-site monitoring(i) Continuous monitoring
The FSA always grasps and analyzes the status of credit risk of the bank based on the off-sitemonitoring data (quarterly) on credit risk information, midterm settlement of accounts, financial
flash report, etc.
(ii) Off-site monitoring on an as-necessary basis
The FSA grasps and analyzes the status of credit risk of the bank by holding interviews asneeded; for example, in cases where financial support measures are announced along withbusiness reconstruction plans for large borrowers, a timely disclosure is made regarding theimpossibility of collection of receivables, and revisions to the bank’s financial forecasts areannounced.
(iii) Early warning based on off-site monitoring
In cases where the bank is deemed to be required to improve its credit risk management system,measures indicated in (i) through (iii) of III-2-3-1-5(4) should be implemented against thosebanks, based on the equity capital ratio in view of the amount of the impact if a risk to a specificlarge-lot borrower had become apparent (that is, the amount of loss assuming that a certain
amount of the unsecured portion of claims (the amount of the claim not secured by
security/guarantee and allowances) to large-lot borrowers who are classified as “need special
attention” or below was recognized as a loss ), in addition to basic indicators such as: NPL ratio;
the ratio of large-scale credit provision (the larger of the sums of credit provided to either
borrowers that have been given 10% or more of the Tier 1 capital amount when the bank is aninternationally active bank, and the amount of equity capital (excluding items corresponding to
supplementary items of the eligible old capital-raising instruments ) if the bank is a domestically
active bank, or a certain number of borrowers whose credit balance is ranked in the upper level(excluding credits provided to the national government, local governments, government-relatedorganizations, etc.)); and the concentration of a specific business type. When necessary, the FSA
encourages the bank to improve the risk management system steadily by requiring to make areport based on Article 24 of the Banking Act. Also, in cases where it is found necessary to ensurethat a bank will implement its improvement plan, the FSA issues a business improvement order
based on Article 26 of the Banking Act (credit risk improvement measures).
(2) Gap between self-assessment and inspection results
In cases where a bank is deemed to have difficulty in enhancing its risk management system, etc.,with voluntary improvement efforts left to the bank, including those where, after being notified of the127inspection results, the bank is required to submit a report under Article 24 of the Banking Act, and thegap between self-assessment by the bank and the inspection results by the FSA is found to be wide
without justifiable reasons, the FSA issues a business improvement order based on Article 26 of the
Banking Act.
(3) If a problem other than that mentioned in the above (1)(iii) and (2) is found in a bank’s credit risk

management system in light of inspection results or off-site monitoring, the FSA requires the bank tosubmit a report based on Article 24 of the Banking Act, as needed. If a serious problem is found, the
FSA issues a business improvement order or implement any other measures based on Article 26 of the
Banking Act.
(4) It is necessary to note that credit decisions on individual counterparties should be made solely by the
management of the bank concerned. In other words, the duties of financial supervisors is to ensure
the financial soundness of a bank by inspecting and supervising the bank. Although financial
supervisors may inspect the feasibility of the borrower’s business improvement plans when inspecting
borrower classifications and self assessment results of credits, the inspection results do not reflect onanything other than the amount of the bank’s NPL and write-offs/allowances. It is necessary to notethat whether to sell NPL and how to revitalize a borrower should be determined by the managementof the bank (and the borrower) and that supervisors shouldn’t instruct or participate in such decisionmaking or have any right to do so.
(5) Large-scale credit provision(i) When an application for the approval pursuant to the proviso of Article 13(1) of the Banking Act(including cases where applied mutatis mutandis pursuant to Article 13(2); the same applies in
the following (ii). ) has been filed, the FSA examines if there is unavoidable reasons why the total
amount of credit extended, etc. by a bank to one person exceeds the limit on extensions on credit,
etc., such as a result of a merger or transfer of another person’s business by one person who takes
credit extended, etc. or other reasons specified by the Order for Enforcement of the Banking Act(“Banking Act Enforcement Order” ) and the Banking Act Enforcement Regulation.
In said approval, as a general rule, the FSA requires the bank to establish a plan to eliminate
an excessive amount of the limit on extensions on credit, etc. in the future and also requires theregular submission of reports on the implementation of the plan, except for cases where such
elimination is done by the end of the accounting period (including the end of the interim period).
(ii) The cases where an approval pursuant to the proviso of Article 13(1) of the Banking Act will be
made, and which correspond to “other things found to be appropriate by the Commissioner of
the FSA “ stipulated in Article 14-3(2)(iii) of the Banking Act Enforcement Regulation(including cases where applied mutatis mutandis pursuant to Article 14-6(1) of the Banking Act
Enforcement Regulation) , can be regarded as cases where there is no trouble concerning the128soundness of the bank, taking into consideration the circumstances listed in the following (A) to
(C).
(A)

Cases where credits are provided based on obligations under laws and regulations(B)

Cases where the restructuring of the financial group organization and the reconstructionof business models are implemented and are deemed to be necessary to realize the aim ofrestructuring the organization, etc.

(C)

Cases where it is deemed necessary to exceed the limit on extensions on credit, etc.
regarding call loans and other inter-bank exposures in order to secure the stability of theinter-bank market under stress situations

In cases which correspond to the above (A) or (B) and where an approval pursuant to theproviso of Article 13(1) of the Banking Act is made, the plan to eliminate an excessive amountof the limit on extensions on credit, etc. will not be required, irrespective of the above (i).
III-2-3-3
III-2-3-3-1

Market Risk Management
Background(1) Market risk is the risk that a bank will incur losses from changes in the value of assets and liabilities
and off-balance-sheet transactions due to fluctuations in market risk factors such as interest rates,
foreign exchange rates, and stock prices, and the risk that a bank will incur losses from changes inearnings generated from assets and liabilities. The bank needs to strive to ensure its financial
soundness by properly developing an internal control environment related to the market risk,
regardless of whether or not the losses are included in the capital defined under regulations concerning
capital adequacy requirements.
(2) In particular with regard to shares, it is necessary to note that the restrictions are placed on banks’shareholdings, provided in “the Banking Act on Limitation on Shareholding by Banks, etc.“ in order
not to “impair the soundness of banks’ management, by keeping the price fluctuation risk of shares
held by banks within banks’ risk management capability, along with measures to promote off-balancesheet disposal of NPL for the purpose of promoting the structural reform of Japan’s financial systemand enhancing confidence in its stability” (Emergency Economic Package, April 2001).
Note:

Limitation on shareholding by banks is expected to promote structural reform and activation of
the stock market in Japan by reducing cross-shareholdings, in addition to issues regarding thefinancial soundness and risk management of banks, and to contribute to recovery of Japan’s
economy through improvement in corporate governance.

(Reference)“Report on Shareholding by Banks” by the Financial System Council (June 26, 2001)
III-2-3-3-2

Major Supervisory Viewpoints

129(1) Risk management system(i)

Does the board of directors define a market risk management policy based on the strategic
objectives established in conformity with the bank’s overall corporate management policy? Also,
has the board of directors developed an appropriate market risk management system inaccordance with the bank’s strategic objectives and risk management policy, and commensuratewith the bank’s profit objectives, etc.?

(ii) In the rules for market risk management, has the board of directors clarified the respective roles
and responsibilities of the manager of each department: the market department (front office),
the administrative department (back office), and the risk management department (middle
office)?
(iii) In managing market-related risks, has the board of directors established a system for coveringboth the segregated trading department and the non-segregated trading (banking) department?
(iv) Has the management decided a policy for actively and quickly conducting business operations
and risk management from a wide range of viewpoints?
(v)

Has the bank established a control environment for reporting important information to the
management in a timely manner so that the management can decide a policy for appropriately
and quickly conducting business operations and risk management, in addition to collecting andanalyzing the information, including economic movements both domestic and abroad that affects
the prices of owned assets, etc.?

(vi) In cases where the operational departments conduct investment management of each owned
asset without exchanging information, has a system been established for judging investment
properly and quickly in terms of the whole portfolio, recognizing the possibilities of disrupting
effective risk management by, for example, resulting in the risk concentration as a whole, or
failing to unwind its position in a timely manner as a whole with each department persisting its
own position.
(vii) Does the risk management department not only mechanically distribute risk capital to each
operational department and set the limit (for loss cutting points, warning points, etc.), but alsocollect and analyze various information contributing to risk management, and take the initiativein identifying risks in order to conduct daily risk management?
(viii) Does the risk management department report identified risks to management as needed, in
addition to regularly reporting?
(ix) Is risk management conducted across the whole group, including overseas operation bases? Has
the risk management division responsible for the whole group established a system to capture,
analyze, and manage risks on its own, as well as simply receiving reports from the groupcompanies? In order to facilitate this, has the bank established a control environment in which
the whole Group, including overseas operation bases, can quickly identify the informationnecessary for risk management?

130

(2) Content and method of risk management(i)

Does the bank accurately understand the position converted to present value, and the breakdownof risks by owned asset and by contract date? In particular, does the bank properly grasp risks ofowned assets

which have special risk characteristics?

(ii) Does the bank conduct research, as needed, for elaboration and sophistication of internal models
under the market risk management policy?
(iii) The calculated risk amount of the interest rate risk in the banking book varies significantly,
depending on the definition of the so-called core deposits (deposits that have no clearly defined
period for interest rate revision and are withdrawn as needed by the depositor which are left withthe bank for a long term without withdrawal). Does the bank understand this, give the internal
definition of the core deposits properly, and conduct an inspection based on a back test, etc.?
(iv) In utilizing the VaR (Value at Risk) for risk management, does the bank make efforts to verify
the measurement results and secure the validity of the results, in addition to making efforts toproperly select the observation period, the holding period, the confidence interval, themeasurement method, and the data to populate, based on commodity characteristics?
(v)

There is a certain limit to statistical risk measurement methods, including the possibility that the
VaR is too small when the past results are not sufficient or when the credibility of data is low.
Based on this recognition, is the bank enhancing the risk management method including stresstests, while using various risk measurement methods (for example, for grasping gross notionalamount positions and grasping changes in volatility)? Does the bank flexibly review thepreconditions of risk management based on economic movements, etc.?

(vi) In conducting stress tests, does the bank conduct an analysis based on hypothetical stressscenarios, as well as historical scenarios (adopting major cases of crises and examples ofmaximum loss)? Does the bank set multiple hypothetical stress scenarios regarding economic
movements, both domestic and abroad, while properly simulating situations that mightsignificantly affect owned assets, etc.? Moreover, when conducting such analysis, does the banktake into consideration situations that may break the correlation of prices of the owned assets
assumed in the stress tests?
(vii) In establishing position limits (limits to interest rate sensitivity, notional principal, etc.), risk
limits (limits to expected loss amount of the VaR, etc.), loss limits, and stress tests, does theboard of directors clearly define the basic concept of the bank’s risk management policy inestablishing each limit? Also, does the board of directors, etc. regularly (at least once per quarter)
reconsider the operations of each department, and review the above established limits and tests?
(viii) Are the reporting system and authority (such as policies and procedures) clearly specified forprompt reporting to the manager when the risk limits, position limits, and loss limits are exceededor likely to be exceeded?
(ix) Has a system been established in which stress test results are fully inspected and analyzed by the131management and are utilized to specific judgement related to risk management?
(x)

Does the bank manage shareholding risks properly, based on the limits on shareholdings
stipulated in “the Banking Act on Limits on Shareholdings, etc. of Banks, etc.”?

(3) Risk management of credit investments such as securitization products
In the case of investments in marketable credit products such as securitization products, does the bankconduct risk management with due regard to the following points? It should be noted that similar
consideration is required for marketable loans (regardless of whether the bank originates them or
acquires them in the secondary market) and transactions of CDS.
(i)

Proper price evaluation of products
Does the bank evaluate the price of marketable credit products (including marketable loans and
CDS transactions) with due consideration to the following points?
(A)

Does the bank evaluate a price in as objective a manner as possible? For example, throughsuch measures as evaluating the price by referencing the frequently-traded price when sucha price is available, and, in cases where such a price does not exist, by referencing the prices
of similar products. In addition, in cases where a price evaluation model is used, does thebank understand that such a model is based on certain assumptions and verify theappropriateness of the model by regularly reviewing the assumptions and reasoning behind
it?

(B)

In cases where a product price calculated by the front office is used as the market value forrisk management purposes, is such a price independently verified by the risk management
department, etc.?

(C)

In cases where a price evaluation is obtained from brokers and external vendors, is the bankseeking as much information as possible regarding the methods of price evaluation andmaking efforts to verify the appropriateness of the relevant price evaluation? Furthermore,in cases where a price evaluation model provided by external vendors is used, does the bankrequest these vendors to provide as detailed information as possible and make efforts tounderstand the assumptions, characteristics, and limitations of such a model?

(D)

In cases where a price evaluation model is used and the liquidity risk or uncertainty risk ofthe price evaluation model is deemed to be significant, does the bank give due consideration
to such risks?

(ii) Proper understanding of product details in the investment of securitization products, etc.
(A)

Has the bank established a control environment in order to avoid relying excessively on
external credit ratings for investments in securitization products, etc. and for its intra-term
management by, for example, precisely understanding the rating methods used by the credit
rating agencies and the meaning of such ratings before using them?

(B)

Does the bank, when investing in securitization products, etc., make efforts to understandthe nature of those products, such as by understanding the contents of underlying assets;

132

analyzing their structures by looking into the priority-subordinate structure (extent ofleverage) and the status of liquidity support, credit enhancement, and details of credit events;
and understanding the situation of price fluctuations, etc.?
(C)

The operation and management of the portfolio of underlying assets rely on relevant parties
such as the originators and managers. As such, does the bank investing in securitization
products make efforts to understand and monitor the skills and qualifications of the relevant
parties and the organizational structure?

(D)

When the originator, in structuring the underlying assets, intends to transfer the entirety of
the underlying assets to vehicles of securitization for securitization products at the initialstage, the risks of the interests in the relevant securitization products may be heightened asa result of inappropriate structuring of the underlying assets due to, for example, inadequate
analysis of the investments. As such, it is desirable that the originator continuously retain thepart of the risks associated with such securitization products. In view of this, does the bankcheck if the originator continuously retains the part of the risks associated with thesecuritization products? In cases where the originator does not retain such risks, does thebank perform deeper analyis of the status of the originator's involvement in the underlying
assets, as well as the quality of such assets?

(iii) Management of market liquidity risk
(A)

Does the bank properly verify the market liquidity for investments in securitization products
and for their intra-term management? It should be noted that the following methods can beconsidered for verifying market liquidity.

a.

Check whether the operator's invested amount represents an excessive share relative to theoverall market sizeb. Grasp the bid-offer spread in the market, and the price level at which the products can actually
be sold, through interviews, etc.
c.

Monitor changes in market conditions through analysis of various indices (such as those of
securitization products)

d. Design stress scenarios regarding the market liquidity drying up, and assess the profit/loss,
etc. of the securitization portfolio(B)

Does the bank have a control environment in order to promptly consider responses whenconcerns arise regarding market liquidity of securitization products, etc.?

(iv) Management of risks associated with the structuring of securitization products, etc.
(A)

Has the bank taken into consideration the pipeline risk (i.e. possibility that risks attributable
to the underlying assets (or the risk associated with relevant loans) might become difficult totransfer to investors due to changes in market conditions during the process from thestructuring of the securitization products to their sale (or the sale of marketable loans))? Also,
has the bank previously considered measures to be taken after the buy-back (measures suchas securing new investors, the inclusion of the product in the proprietary portfolio, etc.) when133

it buys back a securitization product, as well as the risk that it may retake the risks associatedwith the underlying assets after their sale as a result of, for example, special clauses such as a
buy-back clause in the sale contract? Does the bank judge the relevant risks and returns in
the provision of securitization (syndication) services, taking the above risks into
consideration?
(B)

Even if the risks associated with the underlying assets are transferred to investors bystructuring and selling securitization products through unconsolidated special purpose
companies, etc., the bank may retake the risks associated with underlying assets due to, forexample, reputational risk, depending on the changes in market conditions. As such, has thebank previously considered the above possibility through measures such as reflecting thispossibility in its stress tests? Does the bank judge the relevant risks and returns in theprovision of securitization (syndication) services, taking the above risks into consideration?

III-2-3-3-3

Supervisory Method and Actions(1) Off-site monitoring(i)

Regular monitoring (monthly)
The FSA always grasps and analyzes the status of market risks, based on off-site monitoringdata (monthly) regarding market risk information.

(ii) Off-site monitoring on an as-necessary basis
When changes in interest rates and asset prices occur, the FSA grasps and analyzes the statusof market risks by holding interviews on an as-necessary basis.
(iii) Early warning based on off-site monitoring
Measures indicated in (i) through (iii) of III-2-3-1-5(4) should be implemented against banks
that fall under any of the following, and, when necessary, the FSA encourages the bank to improve
the risk management system steadily by requiring to make a report based on Article 24 of the
Banking Act. In addition, in cases where it is found necessary to ensure that a bank will implement
its improvement plan, the FSA issues a business improvement order based on Article 26 of the
Banking Act (stability improvement measures).
(A)

Banks that are deemed to be required to improve their management system for market risks,etc. based on the effects of changes in prices of securities, etc(B)

Banks that are deemed to be required to hold in-depth dialogs on the improvement actions
according to the following a. and b. (applicable to domestically active banks since March
2019, excluding the following b-iv))a.

Materiality test
Banks whose maximum value (as for domestically active banks, the maximum value of
those which are calculated based on upward parallel shift, downward parallel shift, or
steepening in ΔEVE) of the ΔEVE (calculated as a decrease in economic value against

134interest rate shock in measuring the interest rate risk in the banking book, and calculated
based on the interest rate shock defined in “Disclosure requirements for capital adequacy
specified by the Commissioner of the FSA under Article 19-2(1)(v)(d) and Other
Provisions of the Regulation for Enforcement of the Banking Act” (“Public Notice on
Disclosure “; the same applies hereinafter )) corresponds to the following elements are
subject to the below b.
i)As for internationally active banks, banks whose maximum value of the ΔEVE
exceeds 15% of their Tier 1 capital.

ⅱ) As for domestically active banks, banks whose maximum value of the ΔEVE exceeds
20% of their equity capitalb. Additional analysis of off-site monitoring data
Analyze substantial effects of the balance of profitability, risk taking, equity capital, andthe interest rate shock on equity capital. Specifically, regarding as a basic viewpoint therelationship between “the interest rate risk of all the positions held by the bank in thebanking book” and “the excess of equity capital” (the amount exceeding the minimum levelof equity capital provided in the Public Notice on Standards for Banks' Capital Adequacy;
the same applies in this (B) ), the necessity of holding in-depth dialogs with the bank shallbe judged based on the following viewpoints.
i)Relationship between “the risks regarding changes in prices of securities by theinterest rate shock” and “the excess of equity capital” (taking into consideration the
unrealized profits/losses of securities in the excess of equity capital of a domestically
active bank )ii)

Relationship between “the interest rate risk by currency” and “the excess of equity
capital”

iii)

Relationship between “risk taking related to the interest rate” and “profit-earning
power”

iv)“Effects of the interest rate shock on future earnings” (applicable to domestically
active banks since March 2020)

Note 1:

In cases where a bank uses its internal models to measure the interest rate risk in thebanking book, the bank shall be required to properly document the necessary
information (objectives, intended use, underlying theories, limits, assumptions, etc.),
the management framework (policies, inspection procedures, organizational system,etc.), and the inspection process of the models, after properly establishing monitoring
methods and governance system for the models. In supervision, attention should be
paid to the effect of the use of the internal models on the amount of calculated interest
rate risk.

Note 2:

In measuring the interest rate risk in the banking book, the bank shall be required toproperly consider, accordingly with importance levels, so-called behavioral options

135

(the effects of changes in the customer’s behavior, not always based on economic
rationality alone, in face of changes in the interest rate, on the cash flow, such as
liquidity deposit retention, prepayment of lending fixed interest rate, early cancellationof the time deposit, and implementation of personal interest rate commitment line),by using the internal models or reflecting conservative assumptions.
Note 3:The bank cannot be regarded as taking excessive risks simply because the bankcorresponds to a category for materiality tests. In cases where a bank is deemed to berequired to hold in-depth dialogs in terms of soundness during the additional analysis
of off-site monitoring data, the bank will not automatically be required improvement.
In cases where improvement is needed, full consideration shall be given to the effects
on the financial market and attention shall be paid to supervising the bank in order toensure that the method and timing of improvement are properly chosen.

Note 4:

With regard to the Japan Post Bank, it is obliged to hold risk-free assets such as
Japanese Government Bonds as some of its assets by laws and regulations. Therefore,
when taking supervisory actions based on the above (B), proper consideration should
be given to said special circumstances.

(2) If a problem other than that mentioned in (iii) above is found in a bank’s market risk management
system by the inspection results, etc., the FSA requires the bank to submit a report based on Article
24 of the Banking Act, as needed. If a serious problem is found, the FSA issues a business improvement
order or implement any other measures based on Article 26 of the Banking Act.
III-2-3-4
III-2-3-4-1

Liquidity Risk Management
Background

Liquidity risk consists of the risk that because of deterioration in financial conditions or other factors, abank will face a credit crunch as it fails to raise necessary funds, or will incur losses as it is forced to obtainfunds at markedly higher interest rates than under normal circumstances (funding risk), and the risk thata bank will incur losses because it is unable to conduct market transactions or is forced to conducttransactions at far more unfavorable prices than under normal circumstances, because of market turmoil,etc.
(market-liquidity risk). It is important for banks to properly manage liquidity risks by developing anappropriate internal control environment related to the risks.
III-2-3-4-2

Major Supervisory Viewpoints(1) Does the board of directors consider funding risks in establishing the strategic objectives in conformity
with the bank’s overall corporate management policy? In addition, has the board of directors, in136

managing funding risks, established a system in which check-and-balance functions can be fully
exercised in order to conduct proper risk management, by separating the funds management
department from the risk management department?
(2) Do the managers of the funds management department and the risk management department classify
the funds status (e.g. “normal”, “needs care”, and “crisis”) according to the urgency level of funds
need, and establish the provisions concerning the management method, reporting method, andsettlement method for each time period classified as such after obtaining the approval of the board of
directors?
(3) Does the funds management department constantly keep track of the outstanding amount of assetsthat can be immediately sold or used as collateral in and outside Japan (e.g. Japanese Government
Bonds) and the amount of funds that can be raised from yen investments, yen conversions, etc. andthe possible timing of such funding, and also secure funding instruments in anticipation of a futureliquidity crisis (for example, by obtaining credit lines from central banks and commercial banks)?
(4) Have Major Banks, in light of the fact that they often secure liquidity from domestic and international
markets, established a system for dealing with crises as well as carefully monitoring in particular themarket funding environment?
(5) As for an approximate indicator (“approximate LCR” ) created on the basis of liquidity coverage ratio
in order to understand early that liquidity coverage ratio meets the minimum requirement (meaning
the liquidity coverage ratio on a solo basis provided in Article 8 of “Standards for Determining theSoundness Related to Liquidity Which are Defined as Standards for the Banks to Judge the Soundnessof Management based on Article 14-2 of the Banking Act (Public Notice on Liquidity Ratio), the same
applies hereinafter.), have internationally active banks established a system for daily calculating theapproximate LCR based on the following (applicable from the day following the recording date whenliquidity coverage ratio is first calculated and reported to the authorities)?
(i)Content of data to be updated
Do the numerator and denominator making up the approximate LCR include as many updated
data items as possible in order to properly capture the liquidity coverage ratio? In order to secure
the capturing power for liquidity coverage ratio, are numerators, for example, dealt with by
updating more than 80% (compared to the most recent liquidity coverage ratio) of the assets
corresponding to numerators of liquidity coverage ratio?

(ii)

Due date for calculating approximate LCR
Is the approximate LCR calculated within two business days following the date when thecalculation is made?
(iii) Report to the authorities

137

In cases where the liquidity coverage ratio of the most recent month falls below the level 10
percentage points higher than the lowest level, will the bank promptly start the daily report on theapproximate LCR to the authorities? Will the bank continue to submit the daily report until theliquidity coverage ratio after the next month exceeds the level 10 percentage points higher than thelowest level?
(iv)

Due date for reporting to the authorities
In cases where the bank has to report to the authorities in the above (iii), does the bank send thereport to the authorities within the business day following the date when the approximate LCR is
first calculated?
(v)

Documentation
Does the bank document the method of calculating the approximate LCR?

(6) In the case of internationally active banks, if it is expected that the “non-consolidated stableprocurement ratio” (hereinafter referred to as the “stable procurement ratio”) prescribed in Article
78 of the Public Notice on Liquidity Ratio is likely to fall below the minimum level, whether it isreported to the authorities promptly?
III-2-3-4-3

Supervisory Method and Actions(1) Off-site monitoring(i)

Regular monitoring (monthly or quarterly)
The FSA always grasps and analyzes the status of liquidity risks, based on off-site monitoringdata (monthly or quarterly) regarding liquidity risk information.

(ii)

Off-site monitoring on an as-necessary basis
When the market funding environment deteriorates, for example when the rise in foreign

currency funding costs occurs, the FSA grasps and analyzes the status of liquidity risks by holding
interviews on an as-necessary basis.
(iii) Early warning based on off-site monitoring
Banks that are deemed to be necessary to improve their liquidity risk management system basedon changes in the deposit status and on the level of liquidity reserve are required to make frequent
reports on the status of deposits and liquidity reserve. In addition, measures indicated in (i) through(iii) of III-2-3-1-5(4) should be implemented against those banks, and, when necessary, the FSA
encourages the bank to improve the risk management system steadily by requiring to make a reportbased on Article 24 of the Banking Act. In addition, in cases where it is found necessary to ensurethat a bank will implement its improvement plan, the FSA issues a business improvement order
based on Article 26 of the Banking Act (cash flow improvement measures).
(2) If a problem other than that mentioned in (1)(iii) above is found in a bank’s liquidity risk management138system by the inspection results, etc., the FSA requires the bank to submit a report based on Article
24 of the Banking Act, as needed. If a serious problem is found, the FSA issues a business improvement
order or implement any other measures based on Article 26 of the Banking Act.
III-2-3-4-4

Liquidity Ratio Regulation (for Internationally Active Banks)III-2-3-4-4-1

Background

In order to secure financial soundness, banks need to prepare for liquidity risk as well as to enhance theirequity capital. With respect to the short-term preparation for liquidity risk, it is important that the banks,
by holding sufficient liquid assets to withstand liquidity risk, increase resilience to business continuity evenwhen they are in a difficult situation for financing. The authorities need to grasp banks’ liquidity risk andencourage them to hold sufficient liquid assets as needed.
As a medium - to long-term measure against liquidity risk, it is important to maintain a stable funding
structure according to the composition of banks' assets (including off-balance sheet assets). The authorities
need to understand the characteristics of banks' assets and funding sources and encourage banks to securesufficiently stable funding sources as necessary.
From these viewpoints, internationally active banks shall be required to hold sufficient liquid assets andensure sufficient stable funding sources by using the objective standards of liquidity coverage ratio and net
stable funding ratio.
III-2-3-4-4-2

Accuracy of Calculation of Liquidity Coverage Ratio and Net Stable Fundi006Eg
Ratio

III-2-3-4-4-2-1

Background

The liquidity coverage ratio and net stable funding ratio must be calculated accurately, since these ratios
are basic indicators showing the soundness of a bank’s liquidity risk management process.
The accuracy of calculation of the liquidity coverage ratio and net stable funding ratio needs to be
sufficiently based on the Notice on Liquidity Ratios and the purpose of the Basel Agreement.
III-2-3-4-4-2-2

Points of Attention

As for the accuracy of calculation of the liquidity coverage ratio and net stable funding ratio, whether theratios are accurately calculated in accordance with the provisions of the Notice on Liquidity Ratios. Checks
shall be made while paying special attention to the following.
(1) Points to be considered regarding cases where the bank formulates specific calculation methods and139

identification methods of assets and liabilities
In cases where special provisions concerning the qualifying operational deposits in Article 29 of the
Notice on Liquidity Ratios, the additional collateral amount required in times of market-valuechanges based on the scenario method in Article 38 of the same notice, and interrelated assets andliabilities on the net stable funding ratio in Article 101 of the same notice are applied for outflow
items in the liquidity coverage ratio, the bank is required to formulate specific calculation methods oridentify eligible assets and liabilities that are within the scope of the prescribed requirements. In suchcases, the FSA will make sure the specific calculation methods and identification methods of assets
and liabilities have been formulated according to the Notice on Standards for Banks' Capital
Adequacy by checking the following points beforehand.
(i)

In cases where the bank plans to use the special provisions regarding the qualifying operational
deposits, whether the method to calculate the amount of the qualifying operational deposits isformulated in ways that meet the requirements for qualifying business, requirements for
operational deposits, qualitative standards, and quantitative standards.

(ii) In cases where the bank plans to use the additional collateral amount required in times of marketvalue changes based on the scenario method, whether both the formulation of the stress scenario
and the method to estimate the amount meet the selection standards for stress scenarios,
quantitative standards, and qualitative standards.
(iii) In cases where banks intend to use special provisions concerning interrelated assets and liabilities,
whether the eligible assets and liabilities subject to the special provisions are set in a manner thatsatisfies all of the requirements prescribed in Article 101 of the Notice on Liquidity Ratios.
(2) Judgment of the entities that the calculations of liquidity coverage ratios and net stable funding ratioscover
In calculation of the liquidity coverage ratio and net stable funding ratio, internal controls at thebank should be taken into account in order to judge the entities that its calculations will cover. Is thebank appropriately handling the following specific aspects?
(i)

Judgment of "entities that are considered to be of low importance from the viewpoint ofmanaging risks related to liquidity" in the definition of "financial institutions, etc.”
With regard to "financial institutions, etc." prescribed in Article 1(xix) of the Notice on
Liquidity Ratios, "entities that are considered to be of low importance from the viewpoint ofmanaging risks related to liquidity" are excluded. In relation to this, whether the bank is
engaging in inappropriate practices, such as arbitrarily excluding an entity deemed to be ofimportance from the definition of “financial institutions, etc.” with a purpose of raising theliquidity coverage ratio by reducing cash outflows or raising the net stable funding ratio byincreasing the amount of available stable funding, should be checked.

(ii) Treatment of consolidated subsidiary companies, etc. that are small in scale
For small-scale consolidated subsidiaries, etc. having a significantly small impact on the level140

of the consolidated liquidity coverage ratio and the consolidated net stable funding ratio,
simplified calculations are allowed, as long as they are conservative (for example, the eligiblehigh quality liquid assets or the amount of available stable funding are assumed to be zero).
In such cases, whether the bank is engaging in inappropriate practices, such as applying therelevant calculation to a financial institution that represents a significantly large percentage ofassets (debts) relative to the total consolidated assets (total consolidated debts), or applying therelevant calculation to an entity that is expected to have a large amount of cash outflows from
off-balance sheet items by ignoring that and categorizing it as a small-scale consolidated
subsidiary, etc.
(3) Judgement of past liquidity stress periods
In judging the "past liquidity stress periods," the bank, while it is basically required to refer to data
as old as 2007 (2008 in the case of Japan), is nonetheless urged to look into data as far back as thelate 1990s, so far as it is possible. In this regard, does the bank use the data that are available andcover the periods that meet the requirements to be judged as past liquidity stress periods?
(4) Confirmation of rate of decline in prices, etc.
In judging Level 2A and 2B assets under the Notice on Liquidity Ratios, the bank is required toconfirm the rate of drop in prices or the extent of haircut of the assessment rate of collateral during
past market liquidity stress periods. For example, does the bank properly confirm the granularity ofcredit ratings and maturity when judging?
(5) Appropriateness of classification of cash inflow/outflow items and the outflow rate
The Notice on Liquidity Ratios has provisions that call for setting a classification of cash
inflow/outflow items as well as the outflow rate (amount) and cash inflow amounts with regard to theliquidity coverage ratio, and for setting the amount of stable funding available and the amount of
stable funding required with regard to the net stable funding ratio. The bank is required to properly
set and verify them. Specifically, attention should be paid to the points listed below.
(i)

Does the bank consider the need to set an additional classification for "less stable deposits"
under Article 21 of the Notice on Liquidity Ratios as part of its internal controls, and introduce
an appropriate classification if needed? In addition, does the bank set the outflow rate consistent
with the outflow rate during the past liquidity stress periods? Further, does the bank check thatthe possibility that the outflow rate will exceed 10% is sufficiently low even when it does not
apply the past outflow rate directly but apply it to the composition of the current, less stabledeposit?

(ii) With regard to the items "other contingency cash outflow" prescribed in Article 53 of the Noticeon Liquidity Ratios and contingency liabilities prescribed in Article 100(iii) of the same notice,whether appropriate classification is made with consideration of internal controls. Also, whether

141the appropriateness of this classification is examined periodically.
(iii) Are the "amount of other contracted cash outflow" prescribed in Article 60 of the Notice on
Liquidity Ratios and the "amount of other contracted cash inflow" prescribed in Article 73 of
the same notice set appropriately with consideration of the importance of managing liquidity
risk? Also, is the appropriateness of this classification examined periodically?
(6) Validity of Method for Setting Remaining Maturity
In the calculation of the liquidity coverage ratio and net stable funding ratio, if the remaining
maturity is calculated by using a pricing model, whether the operator understands that the model isbuilt on certain assumptions, periodically reviews the assumptions and logic of the model and verifies
the appropriateness of the estimation of the remaining maturity.
(7) Appropriateness of allocation method of securities
In the calculation of the liquidity coverage ratio and net stable funding ratio, if the source of
securities is unknown (for example, in cases where the source of securities that are offered as collateralfor short positions in securities or transactions in the form of repurchase agreements is unknown),
and if any allocation method specified by the bank is used, whether the allocation method is clarified
in writing and appropriately managed in accordance with the document.
(8) Consistency of calculation methods for liquidity coverage ratio and net stable funding ratio
In some cases, the bank is allowed a certain level of discretion regarding calculation methods forthe liquidity coverage ratio and the net stable funding ratio, such as handling of netting (referring tothe offsetting of some amounts in the calculation process of cash outflow and inflow amounts) under
Article 35(2) of the Notice on Liquidity Ratios, and handling of the special provision regarding thequalifying operational deposits under Article 29 of the same notice and adoption of the scenario
method prescribed in Article 38 of the same notice as well as the special provision concerninginterrelated assets and liabilities prescribed in Article 101 of the same notice. In such cases, whether
the bank adopts consistent and conservative calculation methods except in the case of changes basedon reasonable grounds.
III-2-3-4-4-2-3

Supervisory Method and Actions(1) Off-site monitoring
If a problem is found in the accuracy of calculation of the liquidity coverage ratio and net stable
funding ratio, the FSA requests submission of a detailed report and holds an interview with the bank
if it is deemed necessary.
For banks that adopt the special treatment of the qualifying operational deposits stipulated in Article
29 of the Notice on Liquidity Ratios and the scenario method prescribed in Article 38 of the same142

notice, and in the special provision concerning interrelated assets and liabilities prescribed in Article
101 of the same notice, the FSA requires them to submit reports periodically and review whether the
calculation method satisfies the requirements stipulated in the said notice and whether the calculation
method has not been changed from the previous reporting period.
(2) If a problem is found in the accuracy of calculation of the liquidity coverage ratio and net stable
funding ratio through the inspection or off-site monitoring as described in (1), the FSA requires thebank to submit a report based on Article 24 of the Banking Act. If a serious problem is found, the FSA
issues a business improvement order based on Article 26 of the Banking Act.
III-2-3-4-4-3

Supervisory Measures Regarding the Regulation on Liquidity Ratios

In order to complement the bank's efforts in managing liquidity risk, the FSA takes necessary measuresin a timely and appropriate manner by using the objective standard of the liquidity coverage ratio and thenet stable funding ratio, and requests the bank to make efforts to improve its business management.
III-2-3-4-4-3-1

Supervisory Method(1) Periodic monitoring (monthly or quarterly)
The FSA periodically requires banks to report their liquidity coverage ratio and net stable funding
ratio, and constantly monitors the condition of liquidity risk.
(i)

Liquidity coverage ratio (monthly)
The liquidity coverage ratio as of the reporting date, which can be either the final day or final
business day of each month, shall be reported on a monthly basis in a specified format by the10th business day of the next month. Based on the report, the FSA reviews the level and trendsof the liquidity coverage ratio and analyzes the factors and background of such changes by
examining the composition of the numerator and denominator of the liquidity coverage ratio.
Additionally, by analyzing other data from off-site monitoring and financial/economic
indicators, the FSA will check whether there are signals that may show that the overall financial
system may be under stress related to liquidity.

(ii) Net stable funding ratio (quarterly)
The net stable funding ratio as of the end of each quarter is submitted by the reporting
requirement. Based on the report, the FSA reviews the level and trends of the net stable funding
ratio and analyzes the factors and background of such changes by examining the compositionof the numerator and denominator of the net stable funding ratio.
Although the reporting date of the liquidity coverage ratio is basically the last day of themonth, it is permitted to use the final business day of the month only if that is consistent withaccounting rules adopted by the bank. The choice of reporting date cannot be changed in the143absence of reasonable grounds.
(2) Monitoring on an as-necessary basis
In addition to (1), the FSA instructs the bank to submit a report on the status of the liquidity
coverage ratio and the net stable funding ratio if needed.
III-2-3-4-4-3-2

Supervisory Actions(1) The liquidity coverage ratio and the net stable funding ratio that supervisory measures are based on
The liquidity coverage ratio or the net stable funding ratio that is subject to supervisory measures
under (2) is the one reported in the periodical or as-necessary monitoring under III-2-3-4-4-3-1.
(2) Supervisory measures
If the liquidity coverage ratio or the net stable funding ratio falls below the minimum requirementlevel, the FSA promptly instructs the bank to submit a report on the reason and measures to improve
the liquidity coverage ratio or net stable funding ratio in accordance with Article 24 of the Banking
Act. If a significant improvement is deemed necessary, the FSA shall issue a business improvement
order based on Article 26 of the Banking Act.
If it is expected that the liquidity coverage ratio or the net stable funding ratio may fall below theminimum requirement level at some future date, the FSA holds interviews to ask the bank to explain
the reason for such a situation and the likeliness of the situation to be improved. After the interviews
with the bank, if there are still issues to be fixed, the FSA requests the bank to submit a report inaccordance with Article 24 of the Banking Act and issues a business improvement order in accordancewith Article 26 of the same Act, if there is the need for even more certain improvement.
However, supervisory actions should not be taken in a mechanical or uniform fashion; these actions
should be taken with due regard to the details and effect of the measures taken by the bank in trying
to maintain the liquidity coverage ratio and the net stable funding ratio above the minimum
requirement level, and the potential impact on the financial system from the effects of such measures.
(i)

The report based on Article 24 of the Banking Act must include the following. In addition, the
FSA requests additional information as necessary.

(A) Factors that led the liquidity coverage ratio or the net stable funding ratio to fall below theminimum requirement level (such as a decrease in some of the eligible high quality liquid assetsthat can be included in the calculation or the available amount of stable funding, and/or an
increase in the amount of some specific outflow or the available amount of stable funding, etc.),
as well as their background(B) Prospect of the timeline of when the liquidity coverage ratio or the net stable funding ratio is
expected to rise above the minimum requirement level, and the expected trajectory of theindividual elements that constitute the numerator and denominator of the ratio

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(C) Regarding the liquidity coverage ratio, the amount and types, etc. of liquid assets that are notincluded in the eligible high quality liquid assets but that can be used to obtain funds inemergency situations.
Note:

If a report is submitted based on Article 24 of the Banking Act, the following points canbe analyzed, taking into consideration the information in such a report.

a.

Whether the fall in the liquidity coverage ratio or the net stable funding ratio is due totemporary causes or long-term, structural causesb. Possibility that measures to maintain the minimum requirement level of liquidity coverage
ratio or net stable funding ratio may cause a negative impact on the financial system as awhole and the channels by which such impact may be transmitted(ii) As regards the order based on Article 26 of the Banking Act, the FSA instructs the bank to submit
an improvement plan that is deemed reasonable and to ensure that such plan is implemented
properly. Such an improvement plan must include the items listed below. In addition, the FSA
instructs the bank to submit reports related to (A), (B), and (C) of the above (i) and other reports,
along with the improvement plan.
(A)

Measures that have already been implemented and those planned to be implemented and theplanned timing of their implementation(B)

Time required to implement the improvement plan

Note: III-2-3-4 mainly defines the liquidity coverage ratio and the net stable funding ratio on a solo basis,
and in cases where the consolidated liquidity coverage ratio provided in Article 2 of the Public Noticeon Liquidity Ratio or the consolidated net stable funding ratio provided in Article 74 of the Notice
is applied, the term “on a solo basis” shall be replaced with the term “on a consolidated basis” asneeded.
III-2-3-5
III-2-3-5-1

Points to Note Regarding Compensation Structure, etc.
Background

It is possible for Major Banks, which often engage in international financial activities, to design andoperate their compensation structure by giving consideration to international employment andcompensation practices. On the other hand, depending on that design and operation, incentives for officers
and employees to take risks could increase, and if this tendency were to become excessive, it could lead toserious problems, such as for the Group’s overall risk management.
Internationally as well, at the Financial Stability Board and other forums, discussion has been advancedon the design and operation of the compensation structures of financial institutions. The upshot is that
Major Banks need to ensure that compensation structures do not lead to officers and employees taking
excessive risks, while also giving consideration to these international trends. In light of this, supervisors

145

shall supervise the compensation structures of these banks with due consideration especially of the following
points while also taking into account international guidelines published by the Financial Stability Board(*).
In performing actual supervision, the FSA also takes into account the size of the Group, the complexity ofits business operations, and its establishment of overseas bases and be mindful of not applying theseguidelines in a mechanical and uniform fashion.
In addition to the risk of officers and employees being provoked into taking excessive risks with regard to
the compensation structure, the FSA also takes due care with regard to whether any similar risks are
noticeable with regard to employment practices, personnel evaluation systems, and the like. Also, in lightof the fact that senior managers are responsible for important duties includinggovernance and otherimportant responsibilities and that they receive compensation for this, it should be kept in mind that they
are duly required to conduct appropriate management.
Note:・ Financial Stability Forum “Principles for Sound Compensation Practices” (April 2009)
・ Financial Stability Board “Principles for Sound Compensation Practices̶Implementation
Standards” (September 2009)
・ Financial Stability Board “Supplementary Guidance to the FSB Principles and Standards on
Sound Compensation Practices̶The Use of Compensation Tools to Address Misconduct Risk”(March 2018)

III-2-3-5-2

Supervisory Viewpoints(1) Role of the compensation committee(i)With regard to the compensation structure for Group officers and employees, has an appropriate
control environment been developed, which includes a committee to monitor the condition
thereof and a body or other organization by which the necessary checks of the management teamcan be exercised to ensure the appropriate design and operation of the compensation structure(“compensation committee” )? Also, have the necessary authority, systems, and so forth been
secured so that the compensation committee can exercise the monitoring and checking function
independently from the operational departments (including officers in charge of operations)?

(ii) Has the compensation committee confirmed that the overall level of compensation is consistent
with the present state and future forecasts of financial soundness of the entire Group, and that it
will not have a material impact on the future adequacy of equity capital?
(iii) Does the compensation committee pay sufficient attention to the perspectives of risk
management, such as whether it cooperates closely with the risk management department
regarding the evaluation of the appropriateness of the design and operation of the compensation
structure?
(iv) Does the compensation committee, through monitoring how the compensation structure isoperated, check whether any problems have arisen, such as compensation being excessively linked
to short-term earnings or being overly reflective of performance?

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(2) Consistency between compensation structure and risk management, etc.
(i)

Is the compensation of employees in the risk management department and compliancedepartment determined independently from other business departments? Does suchcompensation appropriately reflect the importance of their responsibilities? Also, in addition to
the degree to which risk management and legal compliance goals are achieved, is compensationrelated performance for these employees measured in a way that primarily reflects the degree of
their contribution to the establishment of a control environment for risk management and acontrol environment for legal compliance?

(ii) Is the productivity-linked portion of compensation for officers and employees (as for employees,
those employees who have a significant influence on the overall risk-taking of the group; the same
applies hereinafter ) appropriate given their responsibilities and the actual scope of their work,
and in light of the policies concerning the financial soundness of the entire Group and the degreeof risk that the Group can face?
(iii) In cases where a considerable portion of the compensation for officers and employees is linked to
productivity, does the design take into account the response to financial risks (estimates of therequired equity capital and liquidity) that could arise before the compensation is finalized?
(iv) Has the productivity-linked portion of compensation for officers and employees been designed
to decrease to a significant degree in the event of poor business results?
(v)

Have methods of paying compensation that emphasize the creation of more long-term corporate
value (for example, payments in stock or the granting of stock options) or methods of paying
compensation that also take into account the period of time up until risks are actualized (forexample, setting fixed-period transfer restrictions in cases where payments are made in stock,setting exercise periods if stock options are granted, or redemptions in the event compensation
payments are carried over if business results are poor) been adopted according to the
responsibilities of officers and employees and the actual scope of their work?

(vi) With regard to a compensation structure that could adversely affect risk management (such as
guaranteed minimum bonuses paid across two or more years, or large lump sum payment of
retirement allowances), have appropriate improvement measures been examined andimplemented?
(vii) Even in cases where a compensation structure consistent with risk management has been
designed, has a control environment been developed for properly monitoring and checking therisk of acts being conducted by officers or employees which could compromise the intent of thatdesign (such as transactions which are likely to reduce risks superficially)?
III-2-3-5-3

Supervisory Method and Actions(1) With regard to compensation structures of Major Banks, the FSA holds interviews on a periodic and147

ongoing basis on such banks’ response to identified issues in light of international trends and otherfactors. Also, the FSA actively utilizes frameworks of cooperation with overseas authorities and holds
in-depth interviews on issues related to overseas bases that are identified through such cooperation.
(2) If off-site monitoring, inspection results, or the like mentioned in the above (1) reveal a problem, the
FSA requires the bank to submit a report based on Article 24 of the Banking Act, as necessary. If a
serious problem is found, the FSA issues a business improvement order or implement any othermeasures based on Article 26 of the Banking Act.
III-2-3-6

Supervisory Viewpoints for the Capability to Aggregate Data Relating to Risk Management
and Reporting to the Board of Directors, etc.

III-2-3-6-1

BackgroundEspecially for those banks, among Major Banks, that conduct large and complicated business, it isnecessary to develop management information systems and risk management practices relating to data
concerning the risk management of the entire Group (“risk data”), in order to accurately and promptly
aggregate risk data and report to the board of directors, etc. on risk management (“risk reporting”), fromthe perspective of reducing potential for loss and securing financial soundness. The improvement of suchrisk data aggregation capabilities and risk reporting practices of banks is important in ensuring financial
soundness. Solid risk data aggregation capabilities and risk reporting practices are also important, inparticular, for banks and supervisory authorities to forecast the future and examine countermeasures based
thereon in times of stress or crisis, and will lead to the improved feasibility of recovery and resolution offinancial institutions as well as profitability.
Internationally, based on the agreement of the Basel Committee on Banking Supervision(*), compliancewith the “Principles for Effective Risk Data Aggregation and Risk Reporting” to enhance risk data
aggregation capabilities and risk reporting practices is required of G-SIBs and D-SIBs as follows: banks
that were deemed as G-SIBs by the Financial Stability Board by 2012: by January 2016; banks that weredeemed as G-SIBs after 2012: within three years after being deemed by the Financial Stability Board; DSIBs: no later than three years after being deemed as D-SIB. In Japan, it is necessary to continue efforts
for the establishment of an IT infrastructure and process as well as the development and improvement ofpractices related to risk data aggregation and risk reporting in consideration of international moves, withthe aim of improving the risk management practices and decision-making processes of banks.
Note:

Basel Committee on Banking Supervision “Principles for Effective Risk Data Aggregation andRisk Reporting” (January 2013)

III-2-3-6-2

Viewpoints and Supervisory Method and Actions

148

Based on the agreement of the Basel Commission on Banking Supervision, banks are required to comply
with the “Principles for Effective Risk Data Aggregation and Risk Reporting” (for banks designated as GSIBs by the FSB by 2012: by the beginning of 2016; for banks designated as G-SIBs in subsequent updates
or banks designated as D-SIBs through the Public Notice on Standards for Banks' Capital Adequacy: nolater than three years from the announcement of their designation). Therefore, banks should implement
efforts toward the development and improvement of IT infrastructure and processes as well as practices
relating to risk data aggregation and risk reporting to promptly aggregate and report at the entire grouplevel the information that is necessary for reporting to the board of directors, etc. and authorities. The FSA
supervises their implementation status taking into consideration the following points in particular.
(1) Comprehensive governance framework and IT infrastructure(i)

Is a strong governance framework consistent with other viewpoints in the guidelines forsupervision or the principles and guidelines stipulated by the Basel Committee on Banking
Supervision introduced with regard to risk data aggregation capabilities and risk reporting
practices?

(ii) Are the data structure and IT infrastructure related to risk data aggregation capabilities and risk
reporting practices designed, established, and maintained in view of responses in times of stressor crisis as well as in normal times?
(2) Risk data aggregation capabilities(i)

Are risk data that satisfy the accuracy and integrity that are deemed necessary in reporting innormal times and in times of stress or crisis being prepared? In addition, are the majority of data
automatically aggregated in order to minimize the possibility of errors?

(ii) Are all major risk data captured and aggregated on a Group consolidated basis? In addition, does
the framework enable aggregation by business unit, group company, type of asset held, businesstype and region of exposure, and other important classification so that concentration andgeneration of exposure and risk can be identified and reported?
(iii) Are the latest risk data aggregated on a timely basis while satisfying the levels of accuracy, integrity,
coverage, and applicability that are deemed necessary? For reference, it is necessary to pay
attention that the specific timing of risk data aggregation should be decided based not only on theimportance of the risk data in the risk profile of the entire bank, etc., but also the nature andpotential volatility of the risk, and the reporting frequency in both normal times and in times ofstress or crisis in view of the foregoing.
(iv) Is a framework in place to enable aggregation of risk data that correspond to the various nonregular and as-necessary requests including responses in times of stress or crisis, changes ininternal control necessity, and requests from the supervisory authorities?
(3) Risk reporting

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(i)

Does the risk report accurately reflect the aggregated risk data? In addition, does the bank carryout the necessary validations concerning the reported contents?

(ii) Does the risk report cover all of the important risks of the bank? In addition, are the depth andscope of the report consistent with the size and complexity of operations, risk characteristics, andthe requests from the recipient of the risk report such as the board of directors, etc.?
(iii) Does the risk report comprehensively convey useful information in a clear and concise manneraccording to the needs of the recipient of the risk report?
(iv) Does the board of directors, etc. decide the frequency of preparation and distribution of the risk
report based on the necessity of the board of directors, etc., the nature and volatility of risks subject
to report, and importance from the perspective of effective and efficient decision-making andsound risk management? In addition, is the frequency of preparation and distribution in times ofstress or crisis greater than that in normal times?
(v)

Is the risk report appropriately distributed to the recipients of the risk report such as the board of
directors, etc., while ensuring confidentiality?

III-2-3-7
III-2-3-7-1

Operational Risk Management
Background

Operational risks refer to the risks that might be incurred either by the inappropriateness ormalfunctioning of operational procedures, activities of officers and employees or systems within financial
institutions, or by exogenous events. For example, operational risks include the risks that might incurbusiness administrative errors, system failures (including those incurred by cyberattacks), natural disasters,
retribution against fraud such as money laundering, and penalty charges. The sub-risk category ofoperational risks mainly consists of administrative risk (i.e., risk for financial institutions to suffer losses
that are incurred by officers and employees who fail to engage in administer accurately or cause accidents
or fraud, etc.) and system risk. It is important for financial institutions to properly manage operational risks
by developing appropriate operational risk management environments that include personnel managementof officers and employees related to these risks.
III-2-3-7-2

Major Supervisory Viewpoints(1) Operational risk management environments(i)

Do the board of directors and other relevant organs proactively get involved in establishingappropriate operational risk management environments and regularly check the progress andoutcomes? In particular, do they formulate strategy to identify, evaluate, understand, and manage
inherent operational risks in key products, operational processes and systems, as well as any
relevant strategy to reduce or shift such risks?

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(ii) Using frameworks such as a three lines of defense (for example, “three lines” refers to the operation
execution department, the risk management department, and the internal audit department), havethe board of directors, etc. developed any policies on operational risk management, reporting andmonitoring systems, incentive scheme for officers and employees, educational and training systems
for risk management and ethical norms so that any kind of conflicts of interests can be prevented
sufficiently? In addition, have rules relevant to administrative and operational risk management
environments been clearly stipulated?
(iii) Are important legal compliance issues such as checking at every transaction or in the reporting of
any suspicious transaction recognized as legal compliance issues across the bank and treated assuch, not being recognized and handled as mere clerical issues?
(2) Internal audit environments
Does the internal audit department appropriately conduct internal audits so as to audit operationalrisk management environments?
(3) Cross-organizational risk management environments(i)Have departments in charge of risk management developed cross-organizational risk management
environments that include checking operational risk management environments at operational
offices and managing the degree of dependence on important third parties, etc., including
outsourced contractors and service contacts?
(Note) “Third parties, etc.” refers to the outsourced contractors who are engaged in the outsourced
operations (including two- or more-tiered outsourcings) that are stipulated in III-3-3-4
and III-3-7-1-2(8), suppliers, and service contacts, etc. Among them, “important third
parties, etc.” refers to those essential to provide important functions at the levels oftolerance as stipulated in III-3-6-1.

(ii) Have operational risk management environments been developed consistently with frameworks
for other risks management, etc., including system risk management, change management(management relevant to the update of IT systems, etc.) and Business Continuity Management(BCM)?
(4) Administrative management relative to operational bases(i)Handling of employee dispatch
Dispatch means sending an employee or employees to a certain place within a specified facility
and having the employee(s) receive or disburse money on behalf of the operator of the said facility.
As long as such facilities are limited to public facilities such as public offices, public housing tracts,
and general hospitals, and as long as such employees’ administrative works are limited to receiving
or disbursing public money or the equivalents, such places are allowed not to be designated as thebank’s business offices as stipulated in the Banking Act. However, in cases where any acts151

equivalent to arrangement for deposits, etc. are conducted for an inevitable reason, does the bankconfine such acts to the minimum necessary with the following points in mind?
(A) Are such arrangements made exclusively for employees belonging to the dispatched facility
and users of the dispatched facility?
(B) When making such arrangements, have all possible measures, such as issuing certificates of
temporarily keeping money or passbooks, in order to prevent accidents been taken?
(ii) Handling of facilities where internal administrative works are conducted
As for the facilities and the like that are established for any bank’s employees engaged in businessactivities at customers’ places to conduct internal administrative works, etc., as long as theemployees are not permanently engaged in customer services, the facilities are allowed not to be
designated as the bank’s business offices as stipulated in the Banking Act. However, have any
measures been taken so that customers will not misidentify such facilities as business offices?
(iii) Regarding establishment of business offices and handling of the location change
In terms of filing a notification of the location change of a business office as stipulated in Article
8(1) of the Banking Act, it should be noted that the relevant bank will submit the location change
due to the change of the location of its business office. In addition, it should be noted that in cases
where a bank intends to separate any department from its existing business office (for example, its
dealing room that conducts part of the bank’s specific operations, or its corporate businessdepartment) and establish a new business office for this department (with its location change), thebank needs to file a notification of the establishment of the business office as stipulated in the same
Article 8(1).
III-2-3-7-3

Supervisory Method and Actions

In cases where the regulator recognizes that the bank’s operational risk management environments areproblematic as a result of the relevant investigation based on the filed notification of misconduct or the like,the regulator should, when necessary, require the bank to make a report based on Article 24 of the Banking
Act. If any serious problem is recognized, the regulator should issue a business improvement order or
implement any other measures based on Article 26 of the Banking Act.
III-3
III-3-1

Appropriateness of Business Operations, etc.
Legal Compliance (for Especially Important Matters)

It is important to recognize the public nature of the business of the banks, strictly comply with laws andregulations as well as various business rules, and maintain sound and appropriate business operations inorder to gain the trust of customers.
Although there are a wide range of laws and regulations to comply with, and there is no difference in152

importance between any of the laws and regulations, special attention should be given to the following forthe time being, based on various past experiences and recent policy developments.
III-3-1-1

Supervisory Actions in Response to Misconduct and Other Inappropriate Behavior

Business improvement orders or other supervisory actions should be strictly imposed on misconduct andother inappropriate behavior by officers and employees as follows.
(1) Initial report of misconduct and other inappropriate behavior
The FSA checks the following points when receiving an initial report of misconduct and otherinappropriate behavior in a bank.
(i)

Whether the bank has promptly reported to the administrative department of the headquarters,
etc. and the internal audit department, and has reported to the board of directors, etc. inaccordance with its compliance rules.

(ii) In cases where the conduct could constitute a criminal offense, whether the bank has reported tothe police and other relevant organizations.
(iii) Whether a division independent of the division involved in the incident investigates and resolves
the incident.
(2) Receipt of misconduct notification and other inappropriate behavior
According to Article 53 of the Banking Act, the bank submits misconduct notification and otherinappropriate behavior within 30 days from the date when the bank has become aware of the
misconduct. When receiving the notification, the FSA checks whether such reporting has been
properly done based on the provisions of the relevant laws and regulations.
It should be noted when a written notification is submitted without an initial report from the bank,points mentioned in (1) above must be checked also.
(3) Major supervisory viewpoints
The FSA examines the appropriateness of a bank’s business operations in relation to misconductand other inappropriate behavior, based on the following viewpoints:(i)

Whether an officer has been involved in the incident and whether there has been firm-wide
involvement.

(ii) What impacts the incident is expected to have on the management of the bank.
(iii) Whether the internal check-and-balance function is properly working.
(iv) Whether the bank has formulated improvement measures and is equipped with a sufficient selfrectification function.
(v) Whether the bank acted appropriately immediately after the incident came to light.

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(4) Supervisory measures
In cases in which a misconduct notification and other inappropriate behavior is submitted, the FSA
holds interviews regarding facts, the analysis of causes, improvement and corrective measures, andwhen necessary, requires the submission of reports based on Article 24 of the Banking Act. In cases
where a serious problem is found, the FSA issues a business improvement order based on Article of 26
of the Banking Act.
III-3-1-2

Handling of Violation of Laws and Regulations by Officers

III-3-1-2-1

Background(1) If an officer makes his organization violate any law or regulation in executing banking business
operations, it will be not only a problem related to the responsibility of the officer as an individual but
also a serious problem for which the bank should be responsible as a corporate entity. The bank shouldnote that any loss of trust and reputation damage would have a significant impact on the managementof the bank.
(2) Among the banks which have a public nature and play an important economic role, especially Major
Banks engaged in large-scale operations, if they fall in such a situation, shall impair the soundness ofthe financial system and significantly damage confidence from the public, the social effects of whichcannot be ignored.
III-3-1-2-2

Supervisory Method and Actions(1) In cases where inspection results, and misconduct notification and other inappropriate behavior showthat an officer is suspected of making his organization violate any law or regulation, the FSA requires
the bank to conduct a strict internal investigation and to submit reports based on Article 24 of the
Banking Act.
Especially in cases where an officer is suspected of committing a serious violation of any law or
regulation, the FSA requires a perfectly independent third party(*) such as a lawyer or an external
expert to conduct an objective and strict investigation, and to submit reports based on Article 24 of
the Banking Act.
Note:

It should be noted that, for example, a corporate attorney is not considered a perfect third
party.

(2) In light of the inspection results and the bank’s response, etc., the FSA considers taking strict
administrative measures in compliance with laws and regulations such as administrative actions basedon Article 27 of the Banking Act.

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III-3-1-3

Measures against Organized Crime

III-3-1-3-1

Verification at the Time of Transaction

III-3-1-3-1-1

Background(1) Outline
Banks that have a public nature and play an important economic role must not be involved or
exploited in organized crime activities, such as the provision of profits to “Sokaiya” racketeer groups,
so-called underground financing, terrorism financing, or money laundering. In order to prevent banksfrom being exploited by a crime organization and contributing to expanding profits gained from
criminal activities, it is necessary to establish a bank-wide and robust legal compliance system. Banks
are particularly required to establish an internal control environment of measures required by the
Banking Act for Prevention of Transfer of Criminal Proceeds (“Anti-Criminal Proceeds Act”),
including verification at the time of transaction, storage of transaction records, etc. and notification of
suspicious transactions (referred to as measures for verification at the time of transaction, etc.
provided in Article 11 of the Anti-Criminal Proceeds Act; hereinafter “measure for verification at thetime of transaction” ) .
(2) History, etc. of enactment and amendment of the “Anti-Criminal Proceeds Act”(i)

Looking back at the history of countermeasures against organized crimes such as interference byanti-social forces in Japan, the revised Commercial Code to prohibit offers of profits to “Sokaiya”
racketeer groups was enforced in 1982. Also, the Banking Act on Prevention of Unjust Acts by
Organized Crime Groups was enforced in 1991, and many other laws and regulations have beenenacted.

(ii) In addition, looking back at the history of international control on money laundering, the newagreement on narcotic drugs adopted by the United Nations in 1988 regulated drug offense
proceeds or the like for the first time, requiring financial institutions to perform identification
confirmation and to report suspicious transactions. Afterwards, coping with changes in theinternational situation since the end of the Cold War, the international community has expanded
its attention toward eradication of organized crimes, broadening the scope of the predicate
offences for money laundering from drug crimes to major crimes.
(iii) Under these circumstances, triggered by a series of financial scandals that revealed that Japan’s
leading banks and other companies offered profits to corporate extortionists, arrangements
regarding the “Key Points of Measures against so-called ‘Sokaiya’ Racketeer Groups” were madeat the meeting of relevant cabinet ministers in September 1997.
In the course of these actions, in addition to measures for the time being, “Considerations of155

Criminal Law for Measures against Organized Crime” were discussed and examined, and theLaw for Punishment of Organized Crimes, Control of Crime Proceeds and Other Matters (the''Organized Crime Punishment Law") was enforced in February 2000.
(iv) On the other hand, reflecting the international community’s harsh response to terrorism
financing since the multiple terrorist attacks against the U.S. in September 2001, transactions
suspected of terrorism financing were included in the suspicious transactions subject tonotification, stipulated in the Organized Crime Punishment Law, and the “Law concerning the
Identity Verification of Customers by Financial Institutions” ("Know-Your-Customers (KYC)
Policy Law”) was newly enforced in January 2003.
Note:

Afterwards, in light of the situation where bank accounts were illegally used for criminal acts
such as so-called “billing fraud”, the KYC Policy Law was amended in December 2004 (andrenamed the “Law concerning the Identity Verification of Customers, Etc. by Financial
Institutions, Etc. and Prevention of Improper Use of Bank Accounts, Etc.”), with penal
provisions provided for regarding the act of accepting the transfer of a deposit passbooks,
etc. According to the Banking Act on Payment of Damage Recovery Benefits from Funds in
Deposit Accounts Used for Crimes, financial institutions are required to take proper
measures to stop transactions related to those bank accounts (i.e. bank accounts used forcrime) that are suspected of being used as accounts to be transferred into regarding theoverall criminal acts including fraud and other crimes that damage other persons’ property,
irrespective of “billing fraud.”(v) And in light of domestic situations related to circulation of funds for terrorism and other criminal
proceeds in recent years and movements in strengthening international measures based on the
FATF Recommendation, the provisions of the Anti-Criminal Proceeds Act that were defined,
based on the KYC Policy Law and Chapter 5 of the Organized Crime Punishment Law, to expand
the target entities obliged to perform the identification confirmation and to report suspicioustransactions into other entities than financial institutions were newly enforced in March 2008.
(vi) Afterwards, in order to further strengthen measures against the crimes related to recent money
laundering, and measures based on the FATF Recommendation, the revised Anti-Criminal
Proceeds Act that stipulates the establishment of the system to properly perform added
confirmations for transactions as well as verification at the time of transaction and measures for
notification of suspicious transactions was enforced in April 2013, and the revised Anti-Criminal
Proceeds Act that stipulates the method for judging the notification of suspicious transactions
and enhancing the above-mentioned system was enacted in November 2014.
(3) Key points of organized crime control in Japan and its significance for financial institution compliance(i)Organized crime control in Japan consists of aggravation of penalties imposed on organizedcrimes, punishment on concealment and receipt of criminal proceeds (also applicable to financial
institutions), and provisions on confiscation and collection of criminal proceeds under the156

Organized Crime Punishment Law; and verification at the time of transaction to specified
business operators including financial institutions and mandatory notification of suspicioustransactions under the Anti-Criminal Proceeds Act. (It should be noted that a certain level ofidentification confirmation is obliged in the revised Foreign Exchange Act, which has been
enforced since January 2003. )(ii) The Organized Crime Punishment Law and the Anti-Criminal Proceeds Act are meaningful ascriminals law against organized crime, and as national legislation suitable for requirements ofinternational control on money laundering. For financial institutions, these Acts are of vitalsignificance for the following reasons:(A) Mandatory preparation and retention of verification at the time of transaction, verification
records, and transaction records facilitate the establishment of a system for the managementof customers by financial institutions to prevent provision of funds for terrorism throughfinancial institutions, and reposition “prevention of money laundering” from a simple issue inadministrative procedures related to verification at the time of transaction to a complianceissue (for establishment of a system for preventing exploitation of financial institutions by acrime organization to expand profits gained from criminal activities);(B) These Acts have made it necessary to establish a bank-wide compliance system for dealing
with interference by anti-social forces and organized crime, including dealing with so-called“Sokaiya” racketeer groups.
(iii) Financial institutions need to seriously take the Anti-Criminal Proceeds Act as a framework for
mandating strict measures for dealing broadly with organized crime in general and to establish athorough and comprehensive system.
(iv) Furthermore, the Banking Act on Payment of Damage Recovery Benefits from Funds in Deposit
Accounts Used for Crimes stipulates procedures for distributing to victims the money left in thebank accounts used for crime in order to help victims promptly recover from financial damage,but in terms of proper account management, this Act is of vital significance to financial
institutions in that they are legally required to take measures to stop transactions related to theaccounts they used to manage based on the provisions on deposit. Financial institutions need toposition measures to stop transactions related to illegally used accounts not as an issue inadministrative procedures, but as a compliance issue, and establish a system for taking suchmeasures promptly and properly.
(4) Significance to prevention of abuse of financial services
In order to prevent abuse of financial services through organized crimes, etc. and secure theconfidence in the financial systems of Japan, it is of vital significance to establish an internal control
environment that enables each financial institution to properly perform verification at the time oftransaction, etc. and reporting of suspicious transactions, both of which are required by the AntiCriminal Proceeds Act, and take proper measures to prevent unauthorized withdrawals of deposits by157

using stolen passbooks, counterfeit personal seals, etc. or to stop transactions related to bank accounts,
etc. when those accounts are suspected of being used for crime.
Especially, Major Banks doing business both internationally and nationwide need to meet the strict
requirements of the international community and note that they have a risk characteristic of being“easily exploited” for organized crimes such as “billing fraud”, because they operate mainly in urban
areas where there are many organized crimes.
III-3-1-3-1-2

Major supervisory viewpoints

With regards to banking operations, the FSA must check whether a bank has established the following
system in order to prevent its exploitation for organized crimes such as terrorism financing, money
laundering, and illegal use of bank accounts by properly taking measures for verification at the time oftransaction, etc. and measures listed in the "Guidelines on Measures for Anti-Money Laundering andCountering the Financing of Terrorism" ("AML/CFT Guidelines" ) including risk-based approaches.
Note 1:

In order to appropriately implement measures for verification at the time of transaction, etc.,
reference must be made to the “Points to Note Concerning the Banking Act on Prevention ofTransfer of Criminal Proceeds” (FSA, October 2012).
Risk-based approach means that banks are expected to identify and assess money launderingand financing of terrorism risks to which they are exposed and take appropriate AML/CFT
measures to mitigate the risks effectively.

Note 2:(1) Has the bank developed a centralized control environment for appropriately implementing themeasures for verification at the time of transaction and the measures listed in the AML/CFT
Guidelines? Is the environment properly functioning?
In particular, has the bank implemented the following measures in developing the centralized
control environment?
(i)Whether the bank has selected and appointed an appropriate person as supervisory manager, as
stipulated in Article 11(iii) of the Anti-Criminal Proceeds Act, such as a person at a managerial
level who is in charge of compliance on measures for terrorism financing and money laundering.

(ii)

Whether the bank has taken the following measures in order to research and analyze risks used
for terrorism financing, money laundering, etc. and take action based on the results.

(A)

Considering the details of the risk report related to transfer of criminal proceeds, which isprepared and published by the National Public Safety Commission based on Article 3(3) ofthe Anti-Criminal Proceeds Act, the bank properly researches and analyzes the risks in which
its own transactions are used for terrorism financing and money laundering, in terms oftransaction/commodity characteristics, forms of transactions, countries/regions associatedwith transactions, customer attributes, etc.; and prepares and regularly reviews documents
describing the results ("risk assessment by a specified business operator, etc." ).

(B)

Whether the bank collects and analyzes necessary information while considering the details

158

of the risk assessment by a specified business operator, etc., and continuously scrutinizes thepreserved verification records, transaction records, etc.
(C)

In conducting transactions for which strict customer management stipulated in the first
sentence of Article 4(2) of the Anti-Criminal Proceeds Act is deemed to be particularly
necessary, or transactions to which special attention must be given in performing thecustomer management stipulated in Article 5 of the Regulation for Enforcement of the
Banking Act on Prevention of Transfer of Criminal Proceeds (“Anti-Criminal Proceeds
Enforcement Regulations” ), or other transactions in which the risk level of terrorism
financing and money laundering is deemed to be high by giving considerations to the detailsof the risk report related to transfer of criminal proceeds (“high risk transactions” ), whether
the supervisory manager approves those transactions, and prepares documents describing
the results of collected and analyzed information, and preserves them together withverification records, transaction records, etc.

(iii) Whether the bank establishes proper policies for recruitment of employees and acceptance ofcustomers.
(iv)

Whether the bank conducts necessary audit.

(v)

Whether the bank prepares a manual of the customer management method including measuresfor verification at the time of transaction, disseminates it to employees, and in addition, conducts
proper and continuous training to employees so that they can use the manual properly.

(vi) Whether the bank establishes a proper system (policy, method, information management system,etc.) of reporting regarding matters related to the abuses of financial services through organizedcrimes which an employee has found, for example, during verification at the time of transaction
or by detecting suspicious transactions.
(2) Has the bank established a system for properly performing verification at the time of transaction, suchas confirmation of a substantial controller in a transaction with a corporate customer, confirmation ofeligibility of foreign PEPs(*), and proper treatment of identification documents including treatmentof personal identification numbers and basic pension numbers?
Note:

Foreign PEPs refer to heads of foreign countries and persons occupying an important
position in a foreign government, etc. listed in each item of Article 12(3) of the Order for
Enforcement of the Banking Act on Prevention of Transfer of Criminal Proceeds (the “AntiCriminal Proceeds Act Enforcement Order”) and in each item of Article 15 of the AntiCriminal Proceeds Act Enforcement Regulations.

In particular, when conducting transactions for which there is an especially strong necessity for
conducting rigid customer management as mentioned in the below (A) through (D), based on the first
sentence of Article 4(2) of the Anti-Criminal Proceeds Act and each paragraph of Article 12 of theAnti-Criminal Proceeds Act Enforcement Order, has the bank established an environment in which(re-)verification at the time of transaction is made in a proper manner (for example, a customer’s

159

identification matters are confirmed not only in a normal way but also in a more rigid way in whichcustomer identification documents or supplementary documents are additionally received)? In
addition, when confirmation of the conditions of assets and revenues is obligated, has the bankestablished an environment in which such confirmation is done in a proper matter?
(A)

A transaction in the case where a counterparty to the transaction is suspected ofimpersonating a customer, etc., or representative, etc., for whom related verification at thetime of the transaction is conducted.

(B)

A transaction with customer, etc., who is suspected of having falsified matters subject torelated verification at the time of transaction when such verification has been conducted.

(C)

A specified transaction, etc., with a customer, etc., who resides or is located in a country or
region in which the establishment of a system to prevent the transfer of criminal proceeds(as specified in Article 12(2) of the Anti-Criminal Proceeds Act Enforcement Order) is notconsidered sufficient.

(D)

A specified transaction with a customer, etc. who is a foreign PEP.

Does the bank properly perform verification at the time of transaction by regarding as specified
transactions those into which one transaction is apparently divided in order to reduce the amount ofmoney per transaction below the threshold (the transactions are limited to those listed in each itemof Article 7(3) of the Anti-Criminal Proceeds Act Enforcement Order.)?
(3) When reporting suspicious transactions, has the bank established an environment for appropriate
examination and judgment based on Article 8(2) of the Anti-Criminal Proceeds Act and Articles 26 &27 of the Anti-Criminal Proceeds Enforcement Regulations? Such examination and judgment should
be made after comprehensively considering the customer attributes, the status at the time oftransaction, and other specific information held by the bank and related to the transaction.
Does the bank pay full attention especially to the following points in establishing the environment?
(i)Whether the bank, according to its operations and business profile, has established an environment
for detecting, monitoring, and analyzing suspicious customers and transactions by using the system
and manuals, etc.

(ii)

After considering the details of the risk report related to transfer of criminal proceeds, whether thebank fully considers the following aspects: the customer’s nationality (whether the customer’s homecountry falls within the FATF’s list of non-cooperative countries and territories), eligibility of foreign
PEPs, the customer attributes of the business in which the customer is engaging, whether it is aforeign exchange transaction or domestic transaction, the value and number of transactions in lightof the customer attributes, and others. Whether the bank conducts proper confirmation andjudgment based on transaction categories such as continuous transactions with existing customers
and high risk transactions.

(4) With regard to the correspondent bank agreement, has the bank established the following control
environment based on Articles 9 and 11 of the Anti-Criminal Proceeds Act, Articles 28 and 32 of the160Anti-Criminal Proceeds Enforcement Regulations and the AML/CFT Guidelines?
Note:“Agreement under which the bank conducts continuous and repetitive foreign exchangetransactions with a forex transaction service provider located in the foreign country” in
Article 9 of the Anti-Criminal Proceeds Act refers to the forex transactions forinternational settlement through the consignment/trust agreement (Correspondent Bank
Agreement) with the forex transaction service provider (Correspondent Bank Agreement
Counterparty) as to forex business including electric money transfer, collection of bills,
arrangement for letter of credit, and clearing, etc.; and banking business such as fundmanagement.

(A)

Whether the bank appropriately conducts screening and makes decisions on whether to
execute/renew the correspondent bank agreement via the decision-making process involving
the supervisory manager after appropriately evaluating the counterparty of the agreement
through efforts to collect information on the counterparty’s customer base and businesses
and the status of development of the system to prevent terrorism financing/money
laundering; and the status of supervision by the authority in the relevant jurisdiction.

(B)

Whether the bank clarifies the allocation of responsibility in relation to the prevention ofterrorism financing/money laundering when transacting with the counterparty of thecorrespondent bank agreement, by means of documenting such responsibility, etc.

(C)

Whether the bank requires review to ensure that the counterparty of the correspondent bankagreement is not a bank that does not operate any business (a so-called shell bank), and thatthe counterparty will not permit a shell bank to use a bank account owned by the counterparty.
Additionally, if, as a result of review, it is found that the counterparty is a shell bank, or it
has been permitting a shell bank to use the counterparty’s bank account, whether the banksystematically stops executing or discontinues the correspondent bank agreement.

(5) In order to prevent illegal use of bank accounts, has the bank established an internal control
environment for performing proper bank account management by conducting verification at the timeof transaction and confirming the purpose of use of bank accounts as needed in deposit payment andaccount opening? Has the bank taken necessary measures by considering how to prevent the damage
caused by illegal use of bank accounts?
Especially underground money lenders illegally collect money through bank accounts, and send a
false bill to request money transfer to their own bank account. These malicious cases in which bankaccounts are illegally used have become a serious social problem. In addition, paying out criminal
money makes it difficult for the victims to recover from financial damage. Based on the above, in
addition to establishing a system for promptly receiving information on illegal use of bank accounts,
such as reports from victimized customers, has the bank, by using the information etc., established acontrol environment for promptly and properly taking measures to suspend deposit transaction andclose bank accounts, etc. stipulated in the provisions on deposit and the Banking Act on Payment of161

Damage Recovery Benefits from Funds in Deposit Accounts Used for Crimes? At the same time, isthe bank supposed to take necessary measures, for example, to examine the status of transactions
regarding bank accounts with the same name as those that are suspected of being used illegally?
(6) In order to help victims promptly recover from financial damage caused by the criminal act performedby using money transfer, has the bank established a control environment for smoothly and rapidly
performing, as clearly defined in the internal rules, the procedures such as those for extinction of
liabilities including deposits related to the bank accounts used for crimes, provided in the Banking Act
on Payment of Damage Recovery Benefits from Funds in Deposit Accounts Used for Crimes, andthose for payment of damage recovery benefit to victims of criminal acts performed by using moneytransfer? At the same time, whether is the bank supposed to take proper measures to improve
convenience of application for payment for applicants reporting damage during the period of theprocedure for extinction of liabilities, or to offer necessary information, etc. to inform a person who issuspected of being a victim, of implementation of procedures for payment?
(7) With regard to the commission of examination issued by a court of illegal use of bank accounts andinquiries based on the Attorney Act, etc., has the bank established a control environment for making
proper judgment of each individual specific case, in line with the purpose of these rules, whileconsidering the confidentiality obligation imposed on the bank?
(8) In order to prevent unauthorized withdrawals of deposits by using stolen passbooks, counterfeit
personal seals, etc., has the bank established a control environment for performing verification at thetime of transaction as needed when paying back deposits at a counter, etc.? Has the bank taken ameasure to prevent counterfeiting of personal seals using the seal imprints in passbooks ?
Has the bank established a control environment for promptly receiving reports from customers
victimized by unauthorized withdrawals? Based on the purpose of the Banking Act on Protection of
Depositors from Unauthorized ATM Withdrawals Using Counterfeit or Stolen Cards, etc. (the“Depositor Protection Act” ) regarding compensation for losses, has the bank established a control
environment for serving customers sincerely, in addition to specifying consistent customer service
in general conditions and customer service guidelines, etc. in terms of thorough customer
protection?
Is the bank supposed to properly preserve the records of unauthorized withdrawals, and tocooperate sincerely with customers and investigative authorities when asked by them to offer therecorded materials, etc.?
Note: Make sure that measures to prevent the occurrence of unauthorized withdrawals do not greatly
impair the convenience for customers.
(9) In cases where a bank entrusts an electronic payment handling service provider with administrative

162

works that are necessary to perform some of its duties pursuant to the Anti-Criminal Proceeds Act
such as preparing/storing transaction records and monitoring transactions, has the bank developed
the following environments?
(i)

The bank must supervise the electronic payment handling service provider in a proper mannerso as to make sure that the entrusted administrative works are conducted.

(Note) Examples of such required proper supervision include clarifying the department that is
responsible for managing the entrusted electronic payment handling service provider,monitoring the implementation status of the works by the entrusted electronic payment
handling service provider regularly or as needed, and confirming the entrusted electronic
payment handling service provider properly manages information on customers, etc.
(ii) The entrustment contract or the like with the electronic payment handling service provider muststipulate that the entrustee send necessary records and documents to the bank within a certain
period after the request from the bank.
(iii) In cases where the bank entrusts the electronic payment handling service provider withtransaction monitoring and the like, the bank must share the relevant transaction analysis resultsby the electronic payment handling service provider on a regular basis, confirm and store such
results, while also developing environments where the bank will file a notification of any
suspicious transaction in a proper manner based on such analysis results.
(iv) The entrustment contract or the like with the electronic payment handling service provider muststipulate the content and method of analysis to be conducted by the electronic payment handlingservice provider, as well as the extent of analysis results for the bank to share and such frequency,
etc.
(Note)
III-3-1-3-1-3

In addition to the above, see “III-3-3-4 Outsourcing”.
Supervisory Method and Actions

In cases where inspection results, misconduct notification and other inappropriate behavior, reports ofcrime occurrence related to stolen passbooks, etc. show that, in light of the viewpoints of the above (1)through (8) and the AML/CFT Guidelines, etc., some problem is found in the internal control environment
for properly implementing measures such as those to securely perform verification at the time oftransaction; those described in the AML/CFT Guidelines; those to prevent unauthorized withdrawals of
deposits by using stolen passbooks, counterfeit personal seals, etc.; and those to stop transactions related
to bank accounts, etc. when those accounts are suspected of being used for crime, the FSA requires thebank to submit reports (including additional reports ) based on Article 24 of the Banking Act as needed. If
a serious problem is found, the FSA issues a business improvement order pursuant to Article 26 of the
Banking Act.
When the bank’s internal control environment is deemed to be extremely vulnerable and likely tocontinue being exploited for organized crimes by anti-social forces and terrorists, etc., the FSA orders a163

partial suspension of business, based on Article 26 of the Banking Act, for a limited period of time needed
for business improvement.
Moreover, if a bank is deemed to have committed serious illegal acts, or more specifically, if a bankviolates obligation for verification at the time of transaction and obligation for reporting of suspicioustransactions, or neglects to take measures to suspend transactions when there is probable cause to suspectthat the bank account is exploited for crimes, and the bank is deemed to have significantly harmed public
interest, the FSA issues a partial suspension of business based on Article 27 of the Banking Act.
(Reference)・ On response to unauthorized withdrawals of deposits, etc. (Japanese Bankers Association, February
19, 2008)
III-3-1-3-2

Counterfeit Bank Notes and Coins, etc.

In light of the purpose of Article 152 of the Penal Code being to stop the circulation of counterfeit oraltered currency, is the bank making the following efforts, for example, to develop a proper internal control
system?
(1) Has the bank a system for promptly submitting the reports to the police or the reports of suspicioustransactions when a note or coin presented by a customer proves counterfeit or altered?
(2) Has the bank developed proper provisions and guidelines for what the bank should do in order not torecirculate counterfeit or altered notes and coins, and has made these provisions and guidelines known
to every officer and employee?
(Note) With regard to measures against organized crime, besides the above-mentioned, refer to
Measures to Cope with Forged or Stolen Cash Cards (III-3-7-2 Security Measures for the ATM
System), and Anti-Phishing for Internet Banking (III-3-8 Internet Banking).
III-3-1-4
III-3-1-4-1

Prevention of Damage that May be Inflicted by Anti-Social Forces
Background

Eliminating anti-social forces from society is a task critical to ensuring the order and safety of society, so
it is necessary and important for corporations to promote efforts to ban any relations with anti-social forcesfrom the viewpoint of fulfilling their social responsibility. In particular, as financial institutions have apublic nature and play an important economic role, they need to exclude anti-social forces from financial
instruments transactions in order to prevent infliction of damage not only on their officers and employees
but also on their customers and other stakeholders.

164

Needless to say, if financial institutions are to retain public confidence and maintain the soundness andappropriateness of their business operations, it is essential that they deal with anti-social forces inaccordance with laws and regulations without bowing to pressure from them. Therefore, financial
institutions must strive, on a daily basis, to develop a control system for banning any relations with antisocial forces in accordance with the purpose of the “Guideline for How Companies Prevent Damage from
Anti-Social Forces” (agreed upon at a meeting on June 19, 2007 of cabinet ministers responsible for anticrime measures).
In particular, anti-social forces in recent times have become increasingly sophisticated in their efforts toobtain funds, disguising their dealings as legitimate economic transactions through the use of affiliatedcompanies in order to develop business relations with ordinary companies. In some cases, the relations thus
developed eventually lead to problems. In order to deal with such cases properly, the management teams
of financial institutions need to take a resolute stance and implement specific countermeasures.
It should be noted that if a financial institution delays specific actions to resolve a problem involving
anti-social forces on the grounds that unexpected situations, such as threats to the safety of officers andemployees, could otherwise arise, the delay could increase the extent of the damage that may be ultimately
inflicted on the financial institution and its officers and employees.
(Reference)“Guideline for How Companies Prevent Damage from Anti-Social Forces” (agreed upon

at a meeting on June 19, 2007 of cabinet ministers responsible for anti-crime measures)(i)

Basic principles on prevention of damage that may be inflicted by anti-social forces
Firm-wide response
Cooperation with external expert organizations
Ban on any relations, including transactions, with anti-social forces
Legal responses, both civil and criminal, in the event of an emergency
Prohibition of engagement in secret transactions with and provision of funds to anti-social
forces(ii) Identification of anti-social forces
In judging whether specific groups or individuals constitute “anti-social forces,” which aredefined as groups or individuals that pursue economic profits through the use of violence, threats,
and fraud, it is necessary not only to pay attention to whether they fit the definition in terms of
their affiliation, such as whether they constitute or belong to “Boryokudan” crime syndicates,“Boryokudan” affiliated companies, “Sokaiya” racketeer groups, groups engaging in criminal
activities under the pretext of conducting social campaigns or political activities, and crime groups
specialized in intellectual crimes, but also to whether they fit the definition in terms of the natureof their conduct, such as whether they are committing violent acts of demand, or making
unreasonable demands that go beyond the limits of legal liability (refer to the “Key Points of
Measures against Organized Crime,” a directive issued in the name of the Deputy CommissionerGeneral of the National Police Agency on December 22, 2011.).

165

III-3-1-4-2

Major Supervisory Viewpoints

The bank should not have any relations with anti-social forces and, in cases where it has established arelationship with an anti-social force unwittingly, the FSA while also giving consideration to thecharacteristics of specific transactions, pays attention to the following points, among others, in order toexamine its control environment for banning any relations with anti-social forces as soon as possible after
the counterparty has been found to be an anti-social force, as well as its control environment for dealing
with unreasonable demands by anti-social forces appropriately.
(1) Firm-wide response
In light of the need and importance of an action to ban any relationship with anti-social forces
organically, is the responsibility of responding to the situation is not left solely to the relevant
individuals or divisions but the management including directors are appropriately involved? Is there apolicy calling for firm-wide response? In addition, is there a policy calling for the corporate group as awhole, not just the involved bank alone, to take on an effort to prevent any relationship with anti-social
forces? Moreover, is there a policy to exclude anti-social forces when having transactions such asproviding financial services with cooperation of other companies outside the group (credit companies,etc.).?
(2) Development of a centralized control environment through anti-social forces response division
Has the bank established a division in charge of supervising responses to ban any relationship with
anti-social forces (“anti-social forces response division”) so as to develop a centralized control
environment for preventing infliction of damage by anti-social forces? Is this division properly
functioning?
In particular, whether the bank pays sufficient attention to the following points in developing thecentralized control environment must be checked.
(i) Whether the anti-social forces response division is actively collecting and analyzing information
on anti-social forces and has developed a database to manage such information in a centralizedmanner and has a system to appropriately update it (i.e. addition, deletion or change of
information in the database). Further, whether the division is making efforts to share information
within the group in the process of collecting and analyzing such information, while making active
use of information provided by industry associations. In addition, whether the anti-social forces
response division has a system to take advantage of information on anti-social forces forscreening counterparties of transactions and evaluating the attributes of shareholders of thefinancial institution.
(ii) Whether the bank makes sure to maintain the effectiveness of measures to ban any relations with
anti-social forces by, for example, having the anti-social forces response division develop a166manual for dealing with anti-social forces, provide on-going training, and foster cooperative
relationships with external expert organizations such as the police, the National Center for
Removal of Criminal Organizations, and lawyers on an ongoing basis. In particular, whether thebank is prepared to report to the police immediately when it faces the imminent prospect of being
threatened or becoming the target of an act of violence, by maintaining close communications
with the police on a daily basis so as to develop a systematic reporting system and build a
relationship that facilitates cooperation in the event of a problem.
(iii) Whether the bank has a structure in which relevant information is swiftly and appropriately
conveyed to the anti-social forces response division for consultation when transactions with antisocial forces are found or such forces have made unreasonable demands. Further, whether theanti-social forces response division has a structure to swiftly and appropriately report relevant
information to management. In addition, whether the anti-social forces response division has astructure to ensure the safety of individuals encountering anti-social forces in person and tosupport divisions involved in dealing with them.
(3) Execution of appropriate advance screening
Does the bank take measures to ban allowing anti-social forces to become a counterparty to atransaction, by conducting appropriate advance screening using information on such forces in orderto prevent transactions with anti-social forces, and making sure provisions regarding the exclusion oforganized crime group are introduced in all contracts and terms of transactions?
For affiliated loans (quadrilateral type) (*), is there a structure for conducting advance screening by
the bank itself, as well as the implementation of a clause to exclude organized crime groups (i.e.
organized crime group), and for reviewing the development of a database about anti-social forces andthe implementation of clauses to exclude anti-social forces at the cooperating credit company?
Note: Affiliated loans (of quadrilateral type) refer to loans where a credit company that received
application from the customer through the affiliated store reviews/approves and a financial
institution lends money to the customer on the condition of guarantee by the credit company.
(4) Execution of appropriate follow-up review
Whether, for the purpose of making sure any relationships with anti-social forces are eliminated,
there is a structure for conducting an appropriate follow-up review on existing claims and contracts.
(5) Efforts to terminate transactions with anti-social forces(i)

Does the bank have a system under which information confirming the existence of a transaction
with anti-social forces is swiftly and appropriately reported to management, including directors,
etc., via the anti-social forces response division, and response to the situation is made underappropriate directions and involvement by management?

(ii) Is the bank making efforts to terminate transactions with anti-social forces by considering the167utilization of DICJ’s purchasing system for specified difficult recovery claims and utilizing the
Resolution and Collection Corporation’s service function for the companies within the group thatis not covered by the DICJ’s system, while maintaining cooperative relationships with external
expert organizations such as the police, the National Center for Removal of Criminal
Organizations, and lawyers on an ongoing basis?
(iii) Does the bank, when it has learned through a follow-up review after initiating a transaction thatthe counterparty is a member of an anti-social force, take care to prevent the provision of benefits
to anti-social forces, such as collecting claims as soon as possible?
(iv) Does the bank have a structure to prevent providing funds or engaging in inappropriate or
unusual transactions for whatever reason if the counterparty has been found to be an anti-social
force?
(6) Dealing with unreasonable demands by anti-social forces(i)

Does the bank have a system under which the information that anti-social forces have madeunreasonable demands is swiftly and appropriately reported to management, including directors,
etc., via the anti-social forces response division, and response to the situation is made underappropriate directions and involvement by management?

(ii) Does the bank actively consult external expert organizations such as the police, the National
Center for Removal of Criminal Organizations, and lawyers, when anti-social forces makeunreasonable demands, and respond to such unreasonable demands based on guidelines set by
the National Center for Removal of Criminal Organizations and other organizations? In
particular, does the bank have a structure to report to the police immediately when there is an
imminent prospect of a threat being made or an act of violence being committed?
(iii) Does the bank have, in response to unreasonable demands by anti-social forces, a policy to takeevery possible civil legal action and to avoid hesitating to seek the initiation of a criminal legal
action, by proactively reporting damage to the authorities?
(iv) Does the bank ensure that the division in charge of handling problematic conduct promptly
conducts a fact-finding investigation upon request from the anti-social forces response division,in cases where unreasonable demands from anti-social forces are based on problematic conduct
related to business activity or involving an officer or employee?
(7) Management of shareholder information
Does the bank manage shareholder information properly, through means such as regularly checking
the transaction status of its own shares and examining information regarding the attributes of its
shareholders?
III-3-1-4-3

Supervisory Method and Actions

168

In cases where a problem is found in the bank’s structure to ban any relations with anti-social forces
through inspection results and misconduct notification and other inappropriate behavior, the FSA requires
the bank to submit reports based on Article 24 of the Banking Act when necessary, and in cases where
inspection of the reports reveals a serious problem in the soundness and appropriateness of the bank’sbusiness, the FSA considers issuing a business improvement order based on Article 26 of the Banking Act.
At the same time, when the bank’s internal control environment is extremely fragile, as shown by, forexample, a failure to take appropriate steps toward dissolving relations with anti-social forces despite
recognizing the provision of funds thereto and the presence of inappropriate business relations therewith,and it is deemed necessary to make the bank commit to improvement of its internal control environment,
the FSA considers issuing a partial suspension of business for a limited period of time needed for business
improvement based on Article 26 of the Banking Act.
In addition, in cases where the bank, while recognizing the counterparty as an anti-social force, violates
laws and regulations and harms public interest, which are deemed serious and malicious, such asorganizationally providing funds thereto and repeating and continuing inappropriate business relations
therewith, the FSA considers taking strict actions based on Article 27 of the Banking Act.
III-3-1-5
III-3-1-5-1Compliance with Third-Party Allotment
Background(1) Forms of capital increases of a bank include public offerings and third-party allotment of new shares(common shares and preferred shares). When the capital increase is conducted in the manner in which
financial instruments business operators act as their underwriters, as in the case of public offerings,
etc., reasonable checking functions appear to operate from the standpoint of legal compliance. (*1)
Note 1:

For rules concerning underwriting by financial instruments business operator, see“Regulations Concerning Underwriting of Securities (Fair Business Practice Regulations No.
14, Japan Securities Dealers Association)”, etc.

(2) However, when capital increases of a bank engaged in deposit-taking and lending, etc. are conductedin the form of third-party allotment of new shares allotted directly to business partners, greater
management efforts are needed from the viewpoint of ensuring soundness and faithfulness withrespect to the establishment of an internal control environment concerning compliance with laws andregulations in connection with the “principles of capital adequacy” and the prevention of the “abuseof superior position.”
In addition, capital increases are not to be made constantly, so a bank-wide control environment
for legal compliance concerning such capital increases should be established and thoroughlymanaged on each occasion of capital increases under the responsibility of the board of directors;
provided, however, that this does not apply to the third-party allotment in which the bank holding169

company that owns the bank, which is to conduct a capital increase, as a subsidiary company, acts as
a party to whom new shares are to be allotted.
(3) As the Banking Act stipulates that capital increases are to be reported, compliance at the time of third
party allotment should be treated as follows.
(4) It should be noted that the following administrative procedures stipulate supervisory business flows
based on schedule (*2) of general third party allotment, and in cases where a different response isnecessary depending on the situation, or the third party allotment is made by a bank holding company,
the terms should be replaced accordingly.
Note 2:

Schedule of general third party allotment(i)

Resolution of the board of directors concerning the policy to conduct third party allotment(ii) Preparation of a list of parties to whom new shares are to be allotted(iii) Resolution of the board of directors concerning (terms and conditions of) issuance of newshares(iv) Submission of securities registration statement(v)

Solicitation of application for acquisition, application, and payment(5) Instruments eligible for inclusion in Additional Tier 1 capital or Tier 2 capital issued by internationallyactive banks or special purpose companies, etc. as stipulated in Article 6(4) or 7(4) of the Public
Notice on Standards for Banks' Capital Adequacy, etc. should be replaced accordingly, depending on
the specific circumstances (*3).
Note 3:

The FSA implements necessary inspections in order to require at least the following reports
in terms of compliance with the principles of capital substantiation, etc.

(A)

Status of establishment of internal control environment(B)

Actual status of transactions with subscribers of such instruments eligible for inclusion in
Additional Tier 1 capital or Tier 2 capital (including follow-up inspections for six months
after issuance)

III-3-1-5-2

Viewpoints and Supervisory Method and Actions(1) How to handle the case where a bank has decided to conduct a capital increase through third-party
allotment
When the board of directors of the bank has resolved to conduct a capital increase through thirdparty allotment, the FSA will promptly require the bank to submit the notification (in the Form 4-7-1
described in the Forms and Reference Information) provided in Article 53(1)(iv)(*1) of the Banking
Act, and require the bank to attach the materials concerning the overall internal control
environment(*2) related to legal compliance for properly conducting the capital increase in accordance

170with applicable laws and regulations such as the Companies Act, the Law concerning Prohibition ofPrivate Monopoly and Maintenance of Fair Trade (hereinafter referred to as the “Anti-Monopoly
Law” ) and the Financial Instruments and Exchange Act.
Note 1:

Notification provided in Article 35(1)(xxxii) of the Banking Act Enforcement Regulation
with regard to instruments eligible for inclusion in Additional Tier 1 capital or Tier 2 capitalin the form of debt liabilities.

Note 2:(i) Basic management philosophy(ii) Compliance with principles of capital adequacy, etc.
(iii) Prevention of unfair transactions through the abuse of superior position, etc.
(iv) Securing appropriate disclosure(v) Appropriate explanation of the nature of products(vi) Establishment of a follow-up inspection system of compliance status(2) The FSA inspects the overall internal control environment as stated in the notification. When any
doubts on its appropriateness are found, the FSA will require the bank, as necessary, to submit a reportbased on Article 24 of the Banking Act, or when a serious problem is found, the FSA it will issue abusiness improvement order based on Article 26 of the Banking Act.
The following categorizes and exemplifies the viewpoints at the time of inspection.
(i)

Basic management philosophy(A)

Does the board of directors understand the importance of compliance with laws andregulations concerning capital increases through third-party allotment and develops a bankwide control environment?

・ For example, are the administrative operations categorized properly and the authority to makedecisions and the allocation of responsibilities (including identification of officers in charge
and of the controlling division) are clearly defined for each of those categories?
(B)

Does the board of directors not only establish internal rules and issues notices, but also
makes sure that all employees understand the rules and notices? In addition, does the boardof directors make internal monitoring/checking functions effective?

(C)

Does the board of directors take thorough measures for compliance as necessary, for example,
by requesting written opinions of lawyers and auditing firms concerning laws and regulations
such as the Companies Act, the Anti-Monopoly Law, and the Financial Instruments andExchange Act?

(D)

In cases where a bank holding company conducts a capital increase through third-party
allotment, does the board of directors deal appropriately with the involvement of its
subsidiary banks?

(ii) Points of special attention
Does the bank ensure adequate compliance with all laws and regulations which need to be171

observed in connection with capital increases?
In particular, has the bank established an adequate compliance system regarding the following
points?
(A)

Complying with the “principles of capital adequacy” Provided in the Companies Act andSecuring the “soundness (stability and eligibility) of the bank’s equity capital”

a. Whether the policies on the preparation of a list of parties to whom new shares are to be
allotted and on the solicitation of application for acquisition are adequately specified inaccordance with the “principles of capital adequacy” and the policy of ensuring the soundnessof equity capital. Whether the bank deals, as necessary, with capital allotment to borrowers
based on written opinions of lawyers, etc. concerning the legality of the allotment.
b. At least, whether the treatment of questionable cases as follows is clarified.
i)Cases where, in light of actual financial conditions, the bank extends direct or indirectloans or other form of credit to parties who are incapable of making repayment or
unwilling to make repayment, and has them make payment for subscription of new shareswith the funds provided by such loans or other form of credit.

ii)

Cases where the bank or the bank group is shouldering the share-holding risks ofsubscribers of new shares in some way or another.

Note:

It should be noted that in terms of credit risk management, the bank must fully investigate
the business and financial conditions of borrowers so that the borrowers, for which thebank should provide business improvement support, will not make payment for
subscription of new shares. It should be noted that, for example, having borrowers whoare classified as “need special attention” or below make payment for subscription of newshares is problematic in terms of appropriate credit risk management.

(B)

Prevention of unfair transactions (under the Anti-Monopoly Law, the Financial Instruments
and Exchange Act, etc.)

a. Anti-Monopoly Law
How the bank is trying to prevent the occurrence of actions which fall under the unfair tradepractice prohibited by the Anti-Monopoly Law, including the occurrence of “abuse of superior
position.”b. Financial Instruments and Exchange Act
How the bank is trying to prevent the occurrence of actions which fall under the unfair
transactions (insider trading, prohibition of representing favorable purchases, etc.) prohibitedby the Financial Instruments and Exchange Act.
(C)

Securing appropriate disclosure (under the Financial Instruments and Exchange Act, etc.)

a. In order to conduct capital increases, whether the bank takes measures for observance of theprocedures (filing of the securities registration statement and solicitation, preparation anddelivery of the prospectus, taking effect of the securities registration statement) provided in
the Financial Instruments and Exchange Act.

172

・ For example, whether the bank makes sure that all employees understand basic points ofattention, for example, by informing them that the bank must internally prepare a list ofparties to whom new shares are to be allotted before the submission of the securities
registration statement, and that the bank cannot conduct solicitation of application for
acquisition without the submission of the securities registration statement.
b. Above all, when preparing the securities registration statement and the prospectus, whether
the bank takes thorough measures for ensuring the protection of investors, based on
regulations specific to banks, such as equity capital ratio regulation, and implementation offinancial inspections by the authorities. In addition, whether the bank discloses truly
important “risk information” in a readily understandable and succinct manner.
・ For example, even in cases of preparing the securities registration statement and theprospectus in accordance with the “incorporation method” or “reference method,” whether
the bank understands that the “risk information” as of the date of filing the securities
registration statement needs to be described, and the bank takes measures to cope with suchrequirement.
・ For example, in the event that any signiﬁcant events in terms of investors protection occur
even after the filing of the securities registration statement, whether the bank deals with theevents, understanding that the filing of a revised registration is required.
c. Prevention of representations which may give misleading information concerning financial
conditions and other matters・ When the information other than the prospectus (and the securities registration statement)
is used for the solicitation of subscriptions to capital increases, whether the content of suchinformation is not different from that of the prospectus.
・ Actually, representations concerning the bank (especially its ﬁnancial conditions), including
revised earnings forecasts(*1), quarterly disclosure(*2), IR materials, and press conferences
by officers are often used as materials for solicitation.
Under these circumstances, whether the bank scheduled to make capital increases takes
thorough measures for preventing these representations from misleading parties to whom
new shares are to be allotted with regard to the bank’s financial conditions.
Note 1:

Whether the bank revises and announces its current earnings forecasts whennecessary due to significant changes in economic conditions or findings of financial
inspections by the authorities.

Note 2:For example, though the quarterly disclosures for the first quarter (April to June) andthe third quarter (October to December) show the expected values concerning
projected equity capital ratios as of the end of September and the end of March
respectively, whether the values are speculative ones without clear rationale orwithout consideration of possibilities.

(D)

Appropriate explanation, etc. of the nature of products (consumer compliance)173

a. Whether the explanation method and content for solicitation of subscriptions to capitalincreases is appropriate from the standpoints of the Civil Code and the Act on Provision of
Financial Services and the Development of the Accessible Environment Thereto (hereinafterreferred to as the “Financial Service Provision Act.”)
Note:

Whether the bank, based on opinions of lawyers, etc., deals with the possibility that if
the bank conducts a capital increase through third-party allotment, it will correspond to
the “financial instruments provider, etc.” prescribed in the Financial Instruments Sales
Act, and have the obligation of explanation prescribed in the same Act.

b. Since it is especially important for the bank to prevent misunderstanding that those allotment
are equivalent to deposits, whether the bank takes adequate measures for such prevention.
・ Whether explanations for the prevention of misunderstanding that those allotment areequivalent to deposits are given by the delivery of documents or in another appropriatemanner, in light of the knowledge, experience, and asset positions of the parties to whom
new shares are to be allotted.
Note: At least for individual persons, whether the bank takes measures for giving face-to-face
explanations through delivery of written documents, obtaining confirmation about the
explanation by both parties, recording and preserving the documents for a certain period oftime, etc.
・ Whether the explanations for the prevention of misunderstanding are suﬃcient in that they
include the explanations that they are not deposits, are not covered by deposit insurance,and principals are not guaranteed.
(iii) Establishment of a follow-up inspection system of compliance status
Whether the bank has established a system for conducting a bank-wide follow-up inspection ofcompliance status in accordance with the progress of capital increase procedures.
(3) Treatment at the time when the bank resolves issuance (conditions) of new shares(i)

The FSA will promptly require the bank to submit the notification (in the Form 4-7-2 describedin the Forms and Reference Information) provided in Article 53(1)(iv) of the Banking Act andalso require the bank to attach the materials concerning inspection results of the overall internal
control environment.

(ii) In case of any doubts on the appropriateness of the bank’s response in the notifications, etc., the
FSA will, as necessary, take actions, including:(A)requiring the bank to submit a report based on Article 24 of the Banking Act, or(B)issuing a business improvement order based on Article 26 of the Banking Act if a serious
problem is found(C)and reporting to the regulatory divisions responsible for auditing securities if the situation
apparently falls under any of the cases where the statements on important matters to be
described in the securities registration statement are insufficient, or where the statements174

on important matters to be described and on important facts necessary to prevent
misunderstandings are missing, etc.
(4) Notification of increase in the amount of stated capital
The FSA will require the bank to submit, on the payment date, the notification (in the Form 4-7-3
described in the Forms and Reference Information) provided in Article 53(1)(iv) of the Banking Act.
(5) Treatment after completion of capital increase through third-party allotment(i)

The FSA will require the bank to conduct a follow-up inspection of its internal control
environment concerning compliance with laws and regulations for six months after completionof capital increase through third-party allotment and to submit an additional report on theinspection results as an attached document to the notification provided in Article 53(1)(iv) of
the Banking Act.

(ii) In case of any doubts on the appropriateness of the bank’s response in the notifications, etc., the
FSA will require the bank, as necessary, to submit a report based on Article 24 of the Banking
Act, or if a serious problem is found, will issue a business improvement order based on Article 26of the Banking Act.
III-3-1-6

Inappropriate Transactions, etc.

III-3-1-6-1

Performance Guarantee

In cases where a bank implements so-called performance bonds, or performance guarantees forconstruction work, etc., whether the contract stipulates that, during the performance of the guarantee
specified in the contract, the bank will not be required to do the operations that cannot be done by the bankitself in light of Article 12 of the Banking Act, such as completing the construction work.
III-3-1-6-2

Prevention of the Occurrence of Inappropriate Transactions Contrary to Normal
Transaction Practices

How the bank prevents the occurrence of inappropriate transactions contrary to normal transaction
practices, including the occurrence of accepting excessive cooperative deposits and excessive “BuzumiRyodate” deposits (compulsory deposits), etc.; excessively introducing deposits to other financial
institutions; introducing and mediating products not included in the scope of banking business; collecting
personal seals from customers; abusing superior positions, which is deemed to be problematic according to
the Anti-Monopoly Law, such as forcing transactions with affiliated companies; and asking customers toengage in credit transactions for a short period of time but across multiple accounting periods, not basedon the customers’ actual demand for funds.

175III-3-2

Appropriateness and Sufficiency of DisclosureIII-3-2-1

Background

It is important for banks to enhance disclosure in order to improve transparency of their management,
to place market discipline on them, and to provide a base for establishing the principle of self-responsibility
among depositors, etc. As the prerequisite for disclosure properly serving these expected functions, banks
must prepare financial statements that correctly reflect their business and operations. In this connection,a proper disclosure scheme needs to be designed in consideration of change, etc. in recent economic andsocial environments.
III-3-2-2

Internal Control for Financial ReportingFor disclosure, it is critical to establish an internal control system enabling banks to properly prepare
financial statements, to ensure that the senior management of the banks checks and reviews, by itself, how
the system functions, on a continuous basis, and to increase their operational governance.
Major banks, etc. are required to have their representative confirm that matters mentioned in the annual
securities report are correct and to attach a document stating to that effect (a so-called representative’s
confirmation letter) to the annual securities report from the fiscal year ending March 2003. In preparing
this document, it is necessary for banks to check the validity of their internal control system. In addition,in conjunction with the enforcement of the Financial Instruments and Exchange Act, major banks, etc. thatare listed or OTC companies have to submit a confirmation letter stating that the content of a relevant
securities report is correct, together with the annual or semiannual securities report. They are also required
to submit a report describing the results, etc. of the validity evaluation of the internal control for financial
reporting (internal control report) together with the annual securities report, etc. prepared every fiscal year.
(Reference) On the Setting of the Standards and Practice Standards for Management Assessment andAudit concerning Internal Control Over Financial Reporting (Council Opinions) (BusinessAccounting Council, February 15, 2007)
Internal Control-Integrated Framework (the Committee of Sponsoring Organization of theTreadway Commission, 1992)
Concerning Clarification of Management’s Responsibility for Correctness of Financial
Statements and Validity of Internal Control (Request) (October 7, 2005)
III-3-2-3

Type of Disclosure Required for Banks(1) Disclosure based on the Banking Act
Disclosure requirements under the Banking Act are composed of two schemes; one is “Public Notice176

of Balance Sheets” based on Article 20 of the Banking Act and the other is “Making Explanatory
Documents about the Business and Financial Condition of a Bank Available for Public Inspection(Disclosure Report)” based on Article 21 of the Banking Act.
The public notice under Article 20 of the Banking Act is considered a special provision of themandatory publication of financial statements imposed on companies based on the Companies Act,and risk management loans must be mentioned as a footnote.
Information and matters to be disclosed in the explanatory documents for the interim period of thebusiness year and those for the entire business year prepared based on Article 21 of the Banking Act
are clearly provided for by the Cabinet Office Order (Articles 19-2 and 19-3 of the Enforcement
Regulation)(A person who has made a false statement relating to such information and made itavailable for public inspection shall be punished based on Article 63 of the Banking Act.) In addition,
Article 21(7) of the Banking Act stipulates that “a bank must endeavor to disclose information thatshould serve as a reference in allowing depositors or other customers to learn of the business andfinancial condition of the bank and its subsidiary companies, etc.,” although there is no penal provision
for it.
(2) Disclosure based on the Banking Act on Emergency Measures for Revitalizing the Financial Functions(Act No. 132 of 1998, hereinafter referred to as the “Financial Reconstruction Act”)
Results of the asset assessment based on Article 6 of the Financial Reconstruction Act shall bereported to the Prime Minister as well as be made available to the public pursuant to Article 7 of the
Financial Reconstruction Act. In addition, Articles 78 and 86 of the Banking Act apply penalties tothose who have made a false statement in the report submitted to the Prime Minister.
Pursuant to Article 3(2)(i) of the “Act on Emergency Measures for Early Strengthening of Financial
Functions (Act No. 143 of 1998),” financial institutions required to assess their assets based on thecriteria provided for in Article 6(2) of the Financial Reconstruction Act are banks, trust banks, longterm credit banks, shinkin banks, credit cooperatives, labor credit unions, Shinkin Central Bank, theShinkumi Federation Bank, Rokinren Banks, The Norinchukin Bank, Credit Federation of Agricultural
Cooperatives, Credit Federation of Fishery Cooperatives, bank holding companies, etc.
(3) Disclosure based on the Financial Instruments and Exchange Act
Major banks, etc. whose stocks are publicly traded are required to make a proper disclosure inaccordance with relevant laws and regulations in order not to mislead investors’ decisions.
Therefore, in addition to the correctness of figures in financial statements, attention should be paidto (i) the appropriateness of disclosure of information relating to “Status of Corporate Governance,”“Risk of Business, etc.” and “Analysis of Financial Position and Operating Results,” which has been
introduced from the fiscal year ending in March 2004, as well as to (ii) the appropriateness of
disclosure relating to “Status of Corporate Governance,” which has been strengthened from the fiscal
year ending in March 2005.

177

(4) Voluntary Disclosure
For the present, announcement of forecast business performance or revision thereof that may havesignificant impact on investment decisions, etc. is a voluntary disclosure not required by laws. IRrelated activities or advertisements, which are also voluntary disclosures, are important factors forinvestors and depositors to make judgment.
(5) Accounting Standards
It should be remarked that a corporation, etc. subject to special business accounting standards, etc.,
is treated differently, in part, with regard to the points to consider mentioned in III-3-2-4.
III-3-2-4

Points to Consider for DisclosureIII-3-2-4-1

Application of Principle of Materiality(1) It should be noted that the principle of materiality relating to the scope of consolidation and the scopeof application of equity method will apply not only to consolidated financial statements prepared basedon the Financial Instruments and Exchange Act but also to banks’ interim and annual consolidated
financial statements (Article 19(2) of the Banking Act and Article 18(3) and (4) of the Enforcement
Regulation), banks’ interim and annual consolidated balance sheets, etc. (Article 20(2) of the Banking
Act), bank holding companies’ interim and annual consolidated financial statements (Article 52-27(1)and Article 34-24(1) and (2) of the Enforcement Regulation), and bank holding companies’ interim
and annual consolidated balance sheets, etc. (Article 52-28(1))(*)

Explanatory documents for interim and annual consolidated business report shall be clearlyprovided for in the Enforcement Regulation (Article 19-3 and Article 34-26 of the Enforcement
Regulation).

(2) Whether the content thereof complies with Article 5(2) of the Regulation on Terminology, Forms,
and Preparation Methods of Consolidated Financial Statements and the "Audit Treatment relating toApplication of Principle of Materiality to Scope of Consolidation and Equity Method” (Audit
Committee Report No. 52, the Japanese Institute of Certified Public Accountants dated July 21, 1993).
Whether the materiality is judged in parallel in both quantitative and qualitative sides from theviewpoint to ensure that the financial position and operating results of bank groups are properly
represented and whether the characteristics of each subsidiary company, etc. doing financial business
are well considered.
III-3-2-4-2

Information to be Described in Disclosure Report (concerning Articles 19.2 and 19.3of the Enforcement Regulation)178

(1) General Points to Consider(i)

Whether all required information is shown in a proper and easy-to-understand manner as
provided for in these Guidelines and as referenced in the Cabinet Office Ordinance on
Disclosure of Corporate Affairs, etc., and the Regulation on Terminology, Forms, andPreparation Methods of Consolidated Financial Statements, etc.

(ii) In the case where a bank has no applicable information or where additional explanation isnecessary, whether such fact is properly shown.
(iii) Note that voluntary and active information disclosure other than mandatory items required by
the Enforcement Regulation causes no problem, so long as the information is correct andappropriate. In particular, with respect to exposure in fields in which the market is stronglyinterested, it is preferable that banks actively disclose useful information in line with their own
risk characteristics based on the international best practices.
(2) Points to Consider for Individual Items to be Described(i)

For “Organization of business management,” whether it is explained in a systematic and easy-tounderstand manner by using an organization chart, etc.

(ii) For “Content of principle business of the bank,” whether the content of the bank’s businesses
and services, such as deposit, borrowing, transaction of securities-related products, securitiesrelated investment, domestic exchange business, foreign exchange business, corporate bondbusiness, derivatives transaction, or foreign transaction of financial products, is described by eachcategory.
(iii) For “Summary of its business in the latest interim period of its business year or in the latest
business year,” whether the bank’s general business conditions, performance, profit/loss status,and challenges that it should address are described.
(iv) For “Risk management system,” whether the content of the bank’s risk, its basic policy for risk
management, its risk management systems such as assessment, inspection, and ALM
management systems, etc. are described.
(v) For “Compliance system,” whether the bank’s basic policy and operation system on complianceare described.
(vi) For “Status of its efforts for the improvement of management of small and medium-sizedenterprises and for regional revitalization,” whether the content of the following items is
described in a concrete and easy-to-understand manner that draws interest and attention of users,
etc.
(A)

Approach to support the management of SMEs (including small enterprises; the same will
apply in this (vi).)(B)

Development of a scheme to support management at SMEs (including coordination withexternal experts and institutions, etc.)

179

(C)

Efforts to support management at SMEs (content of support, coordination with external
experts and institutions, case examples, etc.)a.

Support in establishing and developing a new business at SMEs

b. Support in growing phases of SMEsc.

Support in improving management, business revitalization, and change of business type, etc.
at SMEs(D) Efforts for regional revitalization(*1)

For efforts in c) or d) above, check whether the bank endeavors to describe specific cases
and achievements.

(*2)

For efforts in c) or d) above, check whether the bank describes its efforts resulting incontribution to growth or revitalization of the local economy.

(*3)“External experts” mean certified public tax accountants, lawyers, certified public
accountants, SME management consultants, business advisors, etc.

(*4)

“External institutions” mean local governments, the Bureau of Economy, Trade andIndustry, chambers of commerce and industry, commercial and industrial associations, theFederation of Small Business Associations, Yorozu Support Centers, JETRO, JBIC,
Regional Economy Vitalization Corporation of Japan, Corporation for Revitalizing
Earthquake Affected Businesses, SME Revitalization Support Council, Organization for
Small & Medium Enterprises and Regional Innovation, certified agencies supporting SME
business innovation, business revitalization funds, regional revitalization funds, etc.

*

The above mentioned matters do not preclude each financial institution from adding more items
to the section of “Status of its efforts for the improvement of management of small and mediumsized enterprises and for regional revitalization” based on its own judgment.

(vii) Whether the tradename, name, or point of contact of a designated ADR organization which
serves as a party of a Basic Contract for Implementation of Dispute Resolution Procedure is
described. If there is no designated ADR organization, whether the content of the complaint
processing measures and dispute resolution measures is properly described based on the realsituation (for example, if the bank uses an external institution, the name and point of contact,etc. thereof.)(viii) Whether “Condition of adequacy of equity capital (including details relating to Tier 1 Capital)”relating to the bank or bank group contains description equivalent to that in “Condition of equity
capital ratio” in the closing status table.
(ix) For “Allowance for doubtful accounts,” whether each item in the breakdown by individual
allowance for doubtful accounts, general allowance for doubtful accounts, and reserve for specificoverseas loans (including reserve for overseas investment loss under Article 55-2 of the Banking
Act on Special Measures concerning Taxation) is also described.
(x) For “Content of principal business and organizational structure of the bank and its subsidiarycompany, etc.,” whether the content of principal business of the bank group, and the position of180

each group-company constituting such business, etc. are described in a systematic and easy-tounderstand manner and are shown in a business chart, etc.
III-3-2-4-3

Disclosure of Risk Management Loans based on the Banking Act and the Financial
Reconstruction Act

Risk management loans to be disclosed as in the following categories pursuant to Article 19-2(1)(v)(B)of the Regulation for Enforcement of the Banking Act and Article 4 of the Regulation for Enforcement of
the Financial Reconstruction Act should also conform to Article 19-2(1)(v)(B) of the Regulation for
Enforcement of the Banking Act and Article 4 of the Regulation for Enforcement of the Financial
Reconstruction Act. Temporary payments may be treated as quasi-loans (temporary payments related to
the right of reimbursement after subrogation performance based on the payment acceptance and therelevant loans). On such an occasion, rather than mechanically and uniformly applying the criteria listed
below, it is appropriate for the bank to consider each debtor’s repayment ability based on the debtor’s true
state of financial standings, cash management, and earning power, etc., check the lending terms andrelevant performance status, comprehensively take into consideration various factors, including thebusiness sector’s characteristics, prospects for the debtor’s business continuity and profitability, the debt
redemption ability on the strength of cashflow, appropriateness of the debtor’s business improvement plans
and the ongoing support from financial institutions, and ultimately categorize the relevant loans and quasiloans in light of the true state of the borrowing company’s business management. In particular, in the casewhere a debtor is an SME, it is appropriate that judgment should be made based on the company’s real
management situation by comprehensively considering not only its financial position, but also its
technology, sales capacity and growth potential, payment of remuneration to its representative and officers,
content of the income and assets of the representative, its guarantee status and ability, etc.
(1)

Bankrupt and Substantially Bankrupt Loans
Bankrupt and Substantially Bankrupt Loans mean “loans extended to debtors in bankruptcy as thestart of bankruptcy procedures, reorganization procedures, or rehabilitation procedures, etc. have been
claimed, and such de facto loans.” These loans are extended to debtors in bankruptcy due to bankruptcy,
liquidation, corporate reorganization, civil rehabilitation, or suspended transactions at any clearing house,
as well as debtors practically in bankruptcy, such as being recognized as being in serious financial trouble
without any prospect for business reconstruction. In this regard, however, claims for specific mediation
pursuant to the Act on Special Conciliation for Expediting Arrangement of Specified Debts shall notconstitute the basis for identifying the debtor as being in bankruptcy. The category should be decided inlight of the true state of the debtor’s business.
Specifically, Bankrupt and Substantially Bankrupt Loans include loans extended to a debtor whose
repayment of the principal or interest thereon has been practically deferred for a long period (in principle,
being deferred for six or more months, and the deferral cannot be considered as temporary) under the181situation where the debtor formally continues business but has a huge amount of bad debts in the balance
sheet or has been borrowing excessive loans beyond the debtor’s repayment ability, and thus has
substantially larger debts than assets for a considerable period without any prospect for businessturnaround, or under the situation where the debtor has been suffering huge losses due to a natural
disaster, an accident, or rapid changes in economy, etc. (or being amid any other similar incident) without
any prospect for business reconstruction. This category also includes loans to a debtor who is considered
as not being in business such as voluntarily going out of business and closing the relevant business office.
In addition, in cases where the progress status has been substantially behind the relevant business
improvement plan, rapid business recovery is not expected, and the business improvement plan has notbeen revised, or in cases where some financial institutions have not agreed on financial support based on
the business improvement plan, and when the debtor is considered as being most likely to be inbankruptcy, the loans can fall under the Bankrupt and Substantially Bankrupt Loans category since “thedebtor is in serious financial trouble without any prospect for business reconstruction.”(2) Doubtful Loans
Doubtful Loans mean “loans extended to debtors who have not yet become bankrupt, but collection of
the principal and receipt of the interests thereon in accordance with the relevant contracts are mostunlikely owing to its worsening financial standing and deteriorating business performance.” In otherwords, loans in this category refer to loans extended to debtors in financial trouble rather than inbankruptcy, who are considered as being highly likely to become bankrupt since the progress in carryingout the business improvement plans have been deteriorating. (Such debtors include those who have been
supported by their financial institutions, etc.)
Specifically, Doubtful Loans are loans extended to debtors who are highly likely to become bankrupt
because they are practically insolvent despite continuing their business, and there are serious concerns
about the final collection of the principal and interests thereon under the situation where theirbusiness performance is extremely deteriorating and the loans are deferred and the like, thus they arehighly likely to incur losses.
Loans extended to a debtor for whom a reorganization plan, etc. has been approved pursuant to the
Corporate Reorganization Act, and the Civil Rehabilitation Act, etc. may be judged to fall under Doubtful
Loans. Moreover, with regard to a debtor for whom a reorganization plan, etc. has been approved, as longas either of the following requirements are met, loans to the debtor may be judged to fall under
Substandard Loans or Normal Claims, since the reorganization plan, etc. can be judged as reasonable
and highly feasible.
(i) The reorganization plan, etc. assumes that business conditions will improve and there will be nolonger any particular financial problems roughly within five years, in principle, after the approval of
the reorganization plan, etc. for the debtor, and the reorganization plan, etc. can be considered as
being implemented in line with its schedule. (In cases where the debtor will no longer need thereconstruction support from financial institutions and will become capable of ensuring business

182

continuity by its self-supporting efforts, the debtor even under the following situations is eligible forthis categorization: there are some problems in the lending terms, such as a reduction or waiver ofinterests; there are some problems in the repayment performance such as practically deferred
repayment of the principal or interest thereon; and special attention will need to be paid to thedebtor as its business performance is deteriorating or unstable, or there are some financial
problems.)(ii) The reorganization plan, etc. assumes that business conditions will improve and there will be nolonger any particular financial problems in more than five years, roughly within ten years after theapproval of the reorganization plan, etc. for the debtor, and the reorganization plan, etc. can beconsidered, in a certain period after the approval of the reconstruction plan, etc., as being
implemented at least in line with its schedule and is expected to be carried out in line with itsschedule in the future as well. (In cases where the debtor will no longer need the reconstruction
support from financial institutions and will become capable to ensure the business continuity by its
self-supporting efforts, the debtor even under the following situations is eligible for thiscategorization: there are some problems in the lending terms, such as reduction or waiver ofinterests; there are some problems in the repayment performance such as deferred repaymentof the principal or interests thereon; and special attention will need to be paid to the debtor as
its business performance is deteriorating or unstable, or there are some financial problems.)(3) Restructured Loans
Restructured Loans are “loans with agreement of a reduction of money rate, postponement of payment
of interest, postponement of payment of principal, waiver of claim, or other agreement which becomes
advantageous to a debtor, for the purpose of promoting reorganization or support of the debtor.”(i)

Whether “it is for the purpose of promoting reorganization or support of the debtor” under
Article 19-2(1)(v)(b)(4) of the Enforcement Regulation should be judged based on the debtor’s management situation, the bank’s intention, etc. Note that if such purpose is not recognized,
the loan is not considered a Restructured Loan even if an “ agreement which becomes
advantageous to a debtor” has been made for it.

(Note)

It is necessary to judge whether there is the purpose of promoting reorganization or supportof the debtor not solely depending on the form of lending but also by comprehensively
considering the debtor’s conditions, fund characteristics, etc. For example, even if a loan
on bill to be used for an ordinary operating funds has been continuously renewed or
extended, note that it is not considered a Restructured Loan, because such extension oflending period is not for the purpose of supporting the debtor.

(ii) It should be noted that “agreement which becomes advantageous to a debtor” under Article
19-2(1)(v)(b)(5) of the Enforcement Regulation may be based on an agreement between thecreditor and the debtor, by laws, or by court judgment. As specific examples, the following
loans or combinations thereof are given whose lending terms have changed and from which

183

substantially the same return is not secured compared to the case where the bank’s base rate(meaning the interest rate that the bank usually offers to a borrower who has the same credit
risk as the debtor when lending a new loan) would be applied, taking into accountcomprehensive profitability of the transaction with such debtor including, but not limited to,
the rates or charges of the debtor’s other loans, earnings such as dividends, etc., change ofcredit risk, etc. including its collateral, guarantee, or competitiveness, etc. Note, however, thatregardless of these examples, any and all loans falling under the definition in the Enforcement
Regulation are subject to disclosure.
A. Loans with reduced interest rate: Loans whose interest rate is reduced
B. Loans with deferred interest payment: Loans whose interest payment is deferred
C. Loans to debtor requiring management support: Loans to a debtor whom the bank has
provided with financial support such as waiver of claim and DES (debt equity swap) and who
has a high probability to need additional support in implementing its reorganization plan in
the future
D. Loans with deferred principal payment: Loans whose principal payment is deferred
E. Loans with partial waiver of claim: Outstanding debts of the loans of which a part of principal
or interest claim is waived as a result of an agreement between stakeholders in voluntaryliquidation or an approval or decision under corporate rehabilitation or civil rehabilitation
proceedings
F. Loans with substitute performance: Outstanding debts of the loans for which the debtor has
transferred its assets such as real estate or accounts receivable to the creditor as a partial
repayment of its debts “including transfer of assets due to exercise of security right”
G. Loans partially repaid by debtor’s shares: Outstanding debts of the loans for which thecreditor has received shares issued by the debtor as a partial repayment thereof; except where
the loan has been converted to shares issued by the debtor in accordance with the original
lending terms.
(Note) In judging the above-mentioned cases, pay attention to the following points, for example;i)

Even in the case where the applicable interest rate of the loan is lower than the baserate, such loan is not considered a Restructured Loan if the loan is not subject to changeof the lending conditions such as the interest rate reduction, deferred principal payment,
etc.

ii)

However, even in the case where the loan is not subject to change of the lending
conditions such as the interest rate reduction, deferred principal payment, etc., the loan
will fall under the scope of Restructured Loans if it is clear that such loan has been
executed for the purpose of substantially relaxing the lending terms of the existing loanor repaying such relaxed-terms loan in consideration of the business conditions of the
debtor, the purpose of use of the funds, lending terms and conditions, etc. set at thetime of entering the loan contract.

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iii)

The base rate should be set in line with economic rationality.

Specifically,
・ In setting the base rate, banks should provide proper and precise categories and adopt
the average contracted interest rate on new loans according to such categories as thebase rate.
・ However, if the average contracted interest rate on new loans is signiﬁcantly lower thanan interest rate calculated in the manner where it is reasonably and objectively proventhat the returns corresponding to the credit risk of a relevant category are secured, suchcalculated interest should be the base rate.
iv)

In the case of “C. Loans to debtor requiring management support,” judgment on
disclosure should be made for each debtor. In addition, in the cases of “E. Loans withpartial waiver of claim,” “F. Loans with substitute performance,” and “G. Loanspartially repaid by debtor’s shares” of the same debtor, which are recognized to beintentionally divided for the purpose of avoiding disclosure, it is necessary to disclose
the outstanding debts of the original loan to such debtor before it is divided. Except forthese cases, banks should make a decision on disclosure of each loan, on a one-by-one
basis.

v)

In particular, in the case where a debtor is an SME, judgment should be made based on
the company’s real management situation by comprehensively considering not only its
financial position, but also its technology, sales capacity and growth potential, paymentof remuneration to its representative and officers, content of the income and assets of
the representative, its guarantee status and ability, etc.

vi)

Even for a loan whose lending terms has changed, its credit risk itself should be
mitigated if there is a high probability that the debtor can sell its assets and gain
financial resources to repay the loan, etc.

(iii) Note that, even in the case of a loan to a debtor whose past loan was subject to an interest rate
reduction, deferred payment of interest, deferred payment of principal, waiver of claims,
substitute performance, or partial repayment with the debtor’s shares for the purpose of
facilitating reorganization of the debtor's management or support of the debtor, the current
loan is not considered a Restructured Loan if substantially the same return is expected to be
secured as compared to the case where the base rate would apply to such loan as a result of
decreased lending rate on a new loan due to change of financial and economic situations or
due to mitigated credit risk of the debtor by its improved management situation or if the
debtor is recognized as achieving good business performance and having no particular
problem in its financial situation.
Specifically, if the debtor has commenced management reorganization throughimplementation of the financial support in line with a highly feasible (Note 1) radical (Note1852) management reorganization plan (Note 3)(Note 4), a loan based on such management
reorganization plan may be judged not to fall under Restructured Loans. Even in the casewhere the debtor has not formulated a highly feasible radical management reorganization
plan, if the debtor is an SME who is expected to formulate such management reorganization
plan within one year from the date when the lending terms changed (Note 5), the loan tosuch debtor may be judged not to fall under Restructured Loans for the period up to one year
from the date when the lending terms changed.
(Note 1) A “highly feasible” plan means a plan satisfying all the requirements below, provided thatwhen the debtor is an SME and the plan has been smoothly progressing for more thanapproximately one year, such plan may be judged to be a “highly feasible” plan.
i)Consent is obtained from all the persons concerned required to implement the plan.

ii)

The amount of financial support through the plan such as waiver of claim is fixed andthere is no prospect of needing additional support beyond the plan.

iii)

The assumption of prospective sales, expenses, and profits in the plan is sufficiently
severe.

(Note 2) “Radical” means that at the point of three years later (this will not preclude reasonable
extension of the period considering the size or business characteristics of the debtor), thedebtor becomes recognized as achieving good business performance and has no specificconcern in its financial position. In the case where the debtor is an SME, if the debtor has
already formulated a “reasonable and highly feasible management reorganization plan”
under III-3-2-4-3(ⅳ), such plan may be considered a highly feasible radical management
reorganization plan because it often takes more time for an SME than a large company toimprove its business condition.
(Note 3) A revitalization plan formulated and supported by an SME Revitalization Support Council orthe Resolution and Collection Corporation, a revitalization plan formulated in accordance withrevitalization-type private liquidation procedures pursuant to Part 3 of Guidelines for Business
Revitalization, etc. of Small- and Medium-sized Enterprises (excluding any plan that does notinclude a waiver of claim, etc. for a small enterprise and only meets Part 3-4(4)(ii)B and C of
the same Guidelines), a business plan supported by Industrial Recovery Consultation Centersin their purchasing fund support business, a corporate rehabilitation plan adopted according
to the corporate rehabilitation ADR procedures (meaning Specified Certified Dispute
Resolution Procedures under Article 2(16) of the Banking Act on Strengthening Industrial
Competitiveness), a business rehabilitation plan (Article 25(1) of the Banking Act on Regional
Economy Vitalization Corporation of Japan) of an entrepreneur from whom the Regional
Economy Vitalization Corporation has decided to purchase loans, etc. (Article 31(1) of thesame Act), and a business rehabilitation plan (Article 19(2)(i) of the Banking Act on
Corporation for Revitalizing Earthquake affected Business) of an entrepreneur from whom
the Corporation for Revitalizing Earthquake Affected Business has decided to purchase loans,186etc. (Article 25(1) of the same Act) may be judged as a “highly feasible radical management
reorganization plan” only if such plan is recognized to satisfy the requirements under (*1) and(*2).
(Note 4) The case where a debtor’s business reorganization based on its existing plan satisfies all
the requirements under (*1) and (*2) should be treated the same as “the case where thedebtor has commenced management reorganization through implementation of thefinancial support in line with a highly feasible radical management reorganization plan.”For example, in the case where a financial institution changes lending terms of a certain
debtor and such debtor has formulated a management reorganization plan, etc.,(including case where such debtor has formulated a management reorganization plan, etc.
in connection with change of lending terms by other financial institutions (including
government-run financial institutions, etc.) or in the case where such debtor has prepareda management reorganization plan, etc. in connection with change of the existingguarantee terms by Credit Guarantee Corporations), loans to such debtor for which thefinancial institution changes lending terms may be judged not to fall under Restructured
Loans if such plan is deemed to satisfy the requirements under (*1) and (*2).
Note that, even in the case where the plan had initially satisfied all the requirements under(*1) and (*2) including the case under (*3), if it becomes recognized that substantially thesame return is not expected to be secured in such loan as compared to the case where thebase rate would apply to such loan, the loan based on such plan falls under Restructured
Loans.
(Note 5) “(A debtor) is expected to prepare such management reorganization plan” means asituation where although the bank and the debtor have not yet reached an agreement, thebank has confirmed that the debtor has resources, etc. to rehabilitate its management (e.g.
liquidable assets, reducible cost, development plan of a new product, prospect to expand
its sales channel) and the debtor has an intention to formulate the management
reorganization plan.
(4) Substandard Loans
Substandard Loans mean “Loans past due three months or more and Restructured Loans”
among loans to debtors who require special attention to their management in the future including,but not limited to those who have problems with lending terms (i.e., waivers, reductions, or deferrals
of interest); who have problems with fulfillment (i.e., de facto arrears on principal or interest
payments); who have poor or unstable business performance; who have problems with theirfinancial position, etc.
Loans for which no deferred payment has occurred formally, but for which repayment has been
substantially deferred for more than 3 months fall under Substandard Loans. Whether a loan issubstantially deferred should be judged based on whether funds of a loan executed soon before the187due date of the existing loan are used for repayment thereof, etc.
With respect to a debtor who has formulated a reorganization plan, etc. as a precondition toreceive support from financial institutions, etc., if the reorganization plan, etc. satisfies any of thefollowing requirements, such reorganization plan, etc. may be considered reasonable and highly
feasible and judged to fall under Substandard Loans or Normal Claims (Such plan is referred to asa “reasonable and highly feasible management reorganization plan”.)
When a debtor is an SME, it is often the case that it cannot formulate such a precise management
reorganization plan as that by a large company, considering the size of the company and number of
employees involved. Even when the debtor has not formulated a management reorganization plan,
it is necessary to judge the category of the loans based on, for example, its future property sale plan,scheduled reduction of directors’ remuneration and various expenses, new product development
plan or income improvement plan, and other materials prepared and analyzed by relevant financial
institutions in line with the actual conditions of the debtor.
With regard to an SME debtor, as it cannot always formulate a precise management
reorganization plan, it is often the case where the progress of the plan is below the target (the sales,
etc. and current profits generally did not reach 80% of the reorganization plan.) Even in such case,judgment should not be mechanically and uniformly made merely based on the progress of the
management reorganization plan, and it is necessary to analyze the factors causing nonachievement as well as to review the future prospects of management improvement, etc. (provided
that if the plan goes significantly below the target, such plan should not be treated as a “reasonable
and highly feasible management reorganization plan ” .) In considering the progress of the
management reorganization plan or future prospects, it is proper to put more emphasis on checking
cash flow forecast rather than reviewing factors in the balance sheet, although the latter is also
important.
Additionally, when a debtor is using government funding to formulate a management
reorganization plan, etc. and such management reorganization plan, etc. has been approved by thenational or prefectural government, judgment should be made by comprehensively taking into
account the involvement of the national or prefectural government and its appropriateness in lightof conditions at the debtor.
These criteria are only a guide to verify the rationality and feasibility of the management
reorganization plan and should not be applied merely mechanically and uniformly.
(i)

The period for the management reorganization plan, etc. is in principle no more than about
five years and the plan is highly feasible.
However, this may include the case where the debtor has formulated management
reorganization plans, etc. within the period between approximately five and ten years, and after
the plan is formulated, the plan has progressed as planned (the sales, etc. and current profits
have reached at least about 80% of the reorganization plan), and it is considered to progress
almost as planned thereafter, as well.

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(ii)

The reorganization plan is designed to enable the debtor to recover to the state where thedebtor is recognized as achieving good business performance and having no particular
problem in its financial situation (if the debtor becomes able to continue its business on its
own without needing reconstruction support from financial institutions, etc., it includes thestate where the debtor becomes recognized as one who requires special attention to its
management in the future including, but not limited to those who have problems withlending terms (i.e., waivers, reductions, or deferrals of interest); who have problems withfulfillment (i.e., de facto arrears on principal or interest payments); who has poor or unstablebusiness performance; or who has problems with its financial position, etc.) when the plan iscompleted.

(iii)

All the financial institutions with which the debtor does business have agreed to provide thedebtor with support based on the management reorganization plan;
However, in the case in which it is possible to reconstruct the debtor with support only fromthe relevant financial institution, or in the case in which it is possible to reconstruct the debtor
with support from only some of the financial institutions, etc. with which the debtor does
business, it should be judged that it is sufficient for the relevant financial institution to havereached an agreement on support.
(iv)

Support from financial institutions, etc. must be limited to waivers and reductions of interest,
maintenance of lending balances, and the like and may not include the waiver of claim, cash
gifts, or other provisions of funds to the debtor.
However, this includes cases in which the financial institution has already provided funds
to the debtor (waiver of claim, cash gifts) after the initiation of the management
reorganization plan but is not expected to do so thereafter, and cases in which the business
improvement plan requires the provision of cash to the debtor (waiver of claim, cash gifts)
but full reserves have already been allocated for the losses forecast from this support andthere are no forecasts for further losses in the future.
Note that when the debtor is making use of government funding, interest subsidies andthe like made by prefectural governments with subsidies from the national government asprovided for in government funding programs are not included in relinquishment of credits,etc.

(5) Normal Claims
Normal Claims mean “loans classified as other than Substandard Loans, Doubtful Loans, orBankrupt and Substantially Bankrupt Loans since the debtor has no particular problem in its
financial position and operating results.”
Loans to the national government, local governments, and controlled financial institutions fallunder Normal Claims.

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III-3-2-4-4Disclosure of Condition of Capital Adequacy (concerning Article 19-2(1)(v)(d),Article 19-3(1)(iii)(c), Article 19-5, Article 34-26(1)(iv)(c), and Article 34-27-2 of the
Banking Act Enforcement Regulation)

The purpose of the disclosure of condition, etc. of capital adequacy based on Pillar 3 (market
discipline) of the capital adequacy ratio and leverage ratio requirements is to supplement Pillar 1(minimum capital adequacy ratio and leverage ratio requirements) and Pillar 2 (self-management byfinancial institutions and supervisory review process) and to secure sound management of financial
institutions by market-driven independent assessment; i.e., market-based discipline. Financial
institutions need to properly disclose the condition, etc. of capital adequacy in accordance with the
Public Notice on Disclosure by paying attention to the following points. Additionally, financial
institutions need to consider what is useful and practical disclosure to users in light of the importanceof information subject to disclosure. Note that, in particular, attention is required to avoiding theomission of disclosure of information that might lead users thereof to change their economic decisionmaking so that it will be properly disclosed.
However, with regard to disclosure of proprietary or confidential information that may causesignificant damage to the status of a disclosing bank, the bank may limit their disclosure to moregeneral information relating to such information and disclose the fact that such information is notdisclosed and the reason of non-disclosure.
Note:

III-3-2-4-4 mainly sets forth disclosure requirements for banks to calculate capital
adequacy ratio and leverage ratio on a solo basis. This may apply to cases where banks
calculate capital adequacy ratio and consolidated leverage ratio on a consolidated basis orwhere bank holding companies calculate capital adequacy ratio and leverage ratio on aconsolidated basis mutatis mutandis by replacing relevant terms, on a case-by-case basis.

(1)

Qualitative disclosure items (for internationally active banks and bank holding companies)(i)“The following matters relating to the scope of consolidation”(A)“Differences and reasons for such differences between companies belonging to the corporategroup that are required to be included in the calculation of the equity capital ratio on aconsolidated basis (“Consolidated Group”) and those companies included within the scopeof consolidation (“Scope of Accounting Consolidation”) based on Article 5 of the Ordinanceon Terminology, Forms, and Preparation Methods of Consolidated Financial Statements(“Regulations for Preparation of Consolidated Financial Statements”).

・ Diﬀerences in the scope of consolidation and the calculation method between the case under
Article 3 of the Public Notice on Standards for Banks' Capital Adequacy or Article 3 of the
Public Notice on Standards for Bank Holding Companies' Capital Adequacy and that basedon the Regulations for Preparation of Consolidated Financial Statements (for example,
normal consolidation, equity method, proportional consolidation)

190

・ Reasons for diﬀerences in the scope of consolidation and the calculation method(B)

For “Name, total assets, and net assets as shown on the balance sheet, and principal businessactivities of companies belonging to the Consolidated Group but not included in the Scopeof the Accounting Consolidation or of companies not belonging to the Consolidated Groupbut included in the Scope of the Accounting Consolidation,” the name, total assets, and net
assets as shown on the balance sheet, and principal business activities of these companies by
each category of companies that are treated in the same manner by listing them, etc.

(ii) “Overview of the risk characteristics, and the risk management policies, procedures, andstructures of the entire bank”(A)

Description on how the bank’s business model determines and interacts with the overall risk
profile (e.g. the key risks related to the business model and how each of these risks is reflected
and described in the risk disclosures) and how the risk profile of the bank interacts with therisk tolerance approved by the board of directors.

(B)

Risk governance structure: For example, responsibilities attributed throughout the bank (e.g.
oversight and delegation of authority; breakdown of responsibilities by type of risk, business
unit, etc.); relationship between the structures involved in risk management processes (e.g.
board of directors, senior management, separate risk committee, risk management
department, compliance department, internal audit department, etc.)(C)

Channel to communicate and enforce the risk-sensitive culture within the bank (e.g. code of
conduct; manuals containing operating limits or procedures to treat violations or breaches ofrisk thresholds; procedures to raise and share risk issues between business lines and riskfunctions)(D)

Scope and main features of risk measurement systems(E)

Process of risk information reporting provided to the board of directors and senior
management; in particular, the scope and main content of reporting on risk exposure.

(F)

Qualitative information on stress testing (for example, portfolios subject to stress testing,scenarios adopted and methodologies used, and use of stress testing in risk management,
etc.)

(G)

Strategies and processes to manage, hedge, and mitigate risks that arise from the bank’sbusiness model and the processes for monitoring the continuing effectiveness of hedges andmitigants(iii) “The following matters relating to credit risk”(A)“Overview of the risk characteristics, and the risk management policies, procedures, andstructures”

・ Description on credit risk proﬁle based on business model・ Criteria and methods to determine the credit risk management policy and credit risk limit
・ Structures and organizations relating to credit risk management and control
・ Relationship between credit risk management department, credit management department,

191

compliance department, and internal audit department
・

Scope and main content of reporting on credit risk exposure and management functionof credit risk
(B)

”Overview of the criteria for loan loss provisions and write-offs under the accounting
standards”

・ Policies and methods for loan loss provisions and write-oﬀs (including overview of credit
rating, debtor classification, loan classification, and asset classification (including description
on definition of category, method to classify, and the scope of assets to be classified) andcalculation method for loan loss provisions and write-offs.)
・ Number of allowable delayed days in which a “loans in arrears by 3 months or more” is stillclassified as is and is not downgraded as “doubtful or below” (or not downgraded as a loan toa potentially bankrupt debtor or below) and the reason thereof.
・Deﬁnition of restructured loans (excluding those classiﬁed as “loans in arrears by 3 months
or more, and doubtful loans or below”) (including description on conditions not to classify
these loans as “loans in arrears by 3 months or more, doubtful loans or below” and conditions
to increase loan loss reserves in connection with relaxed loans)・ Major diﬀerences in credit risk parameters used to calculate loan loss provisions and theequity capital ratio, respectively (including definition of default and differences in parameter
calculation methods. If there is no difference, describe so.)(C)

For “name of qualified rating agency, etc. used to determine the risk weight of the exposure
by each category for banks adopting the standardized approach,” in the case where the bankclassifies a certain debtor’s loan without separate credit rating by applying such debtor’sother loan credit rating to it pursuant to Article 51(1) of the Public Notice on Standards for
Banks' Capital Adequacy or Article 29(1) of the Public Notice on Standards for Bank Holding
Companies' Capital Adequacy, description of the scheme of such application process andhow the process is operated.

(D)“For banks adopting the internal ratings-based (IRB) approach, the following matters”; ofwhich “the overview of the IRB approach and the overview of the following matters relating
to such system”

a. For “rating procedures by each asset category,” number of major models used in eachportfolio and description on major differences between models included in the same portfolio
b. “Parameter estimation and validation scheme thereof”
・

PD：Description on deﬁnition, methodologies, and data for PD estimation and validation(estimation methodology of Low Default Portfolio, application of the regulatory floor, andkey factors for differences between estimated PD and actual default rates for at least past 3
terms)

・

LGD: Description on estimation methodologies for downturn LGD and for LGD in the
LDP, and the period between date of default and final liquidation of the exposure

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・

EAD: Prerequisites and assumptions, etc. to be used in calculating EAD

c. “Operating structures relating to the IRB approach, development of models used, andmanagement thereof”
・Role of the departments involved in the development, approval, and subsequent changes of
the credit risk models.

・

Relation between risk management department and internal audit department andprocedure to ensure the independence of the department in charge of validating the models
from the department responsible for developing the models.

・

Scope and main content of reporting on models(iv) “Overview of the risk characteristics, and the risk management policies, procedures, andstructures relating to the credit risk mitigation techniques”(A)Core features of policies and processes for, and an indication of the extent to which the bankmakes use of, on- and off-balance sheet netting.

(B)

Core features of policies and processes for collateral evaluation and management.

(C)

Information about market or credit risk concentrations under the credit risk mitigation
techniques used (for example, exposure concentration to specific class or category when
computing exposure by guarantor type, by type of collateral, or by credit derivative protection
providers).

(v)“Overview of the risk characteristics, and the risk management policies, procedures, andstructures relating to the counterparty credit risk of derivative transactions and repo-styletransactions”(A)

Policies for the allocation method of risk capital and credit ceiling concerning exposures tocounterparties and CCPs

(B)

Assessment on collateral, guarantee, netting, and other credit risk mitigation (CRM)
techniques and overview of management policies and disposal procedures for collateral, etc.

(C)

Policies for identification, monitoring, and management of wrong-way risk exposures(D)

Description on impact in terms of the amount of collateral that the bank would be required
to provide given a credit rating downgrade(vi) “The following matters relating to securitization risk”(A)

For “overview of the risk characteristics, and the risk management policies, procedures, andstructures,” the bank’s policy on the securitization transactions (including degree of risk
transfer by securitization and types of risk.)(Exposures must be segregated between banking
book and trading book. Re-securitization exposure, if any, must be segregated fromsecuritization exposure. The same shall apply hereinafter in (vi))(B)

For “overview of development of system and operation status thereof,” if the bank has resecuritization exposures, difference from securitization exposure(C)

For “name of a special purpose vehicle for securitization and whether the bank has
securitization risk relating to such transaction,” at least content of the securitization193

transactions executed by the bank during the current business year and whether the bankincludes the special purpose vehicle in the scope of consolidation in computing the equity
capital ratio(D)

For “among subsidiaries and affiliate companies, etc. within the corporate group that are
required to be included in the calculation of the equity capital ratio on a consolidated basis(“Consolidated Group”), names of companies that have securitization exposures relating tosecuritization transactions executed by Consolidated Group and in whose management
Consolidated Group is involved or to which Consolidated Group provides advice,”securitization transactions executed at least during the current business year

(E)

“Overview of the internal assessment approach if the bank uses the approach”

・ Internal assessment process and the structure to control it (including independency andaccountability of those who are in charge of control and assessment results, etc. of the internal
assessment process.)
・ Relation between internal assessment and external ratings provided by external qualiﬁed
rating agencies (including information on such qualified rating agencies.)
・ Use of the internal assessment approach for purposes other than calculation of required
equity capital
・ Types of securitization exposure to which internal assessment approach is applied and thestress factors to determine the level of credit enhancement by each type of exposure(vii) “The following matters relating to market risk” {Except for the financial institutions that haveapplied the new regulations – financial institutions that have applied the new regulations shouldrefer to the Public Notice after the revision (i.e., item (xxiv) of the FSA Public Notice, 2022;
hereinafter the same applies.).}(A)“Overview of the risk characteristics, and the risk management policies, procedures, andstructures”・ Strategic goal of bank’s trading activities and market risk control process
・ Structure and role of market risk management function
・ Scope and main content of reporting on risk exposures and measurement system thereof(B)“Overview and the scope of application of models when the bank is using internal model
approach”

a. Value at risk (VaR) and stressed value at risk (SVaR)i)

Scope of application of internal model approach (by risk category or by location; or byindividual risk or by general market risk)ii)

When multiple models are used in different locations in the Group, description onmodels used by each location

iii)

Overview of models

iv)

If there is any difference between internal models and regulatory models, description
on such difference

194

v)

The following matters relating to VaR・ Update frequency of historical data
・ Observation period of historical data
・ Methodology for weighting historical data
・ Conversion calculation for the holding period regarding VaR calculated based on theholding period of less than 10 business days
・ Aggregation approach of VaR across asset classes (e.g. aggregation across speciﬁc
and general risks, aggregation across risk factors)
・ Price reevaluation method (e.g. full valuation approach, sensitivity approach, etc.)
・ Capture of risk factor variation (e.g. absolute return, relative return, etc.)

vi)

The following matters relating to SVaR・ Approach to choose stress period (for SVaR) and reason why
・ Price reevaluation method (e.g. full valuation approach, sensitivity approach, etc.)
・ Conversion calculation for the holding period regarding SVaR calculated based on
the holding period of less than 10 business daysvii)

Description on Stress Testingviii)

Description on Back testingix)

Structure for parameter validation used for internal modelsx)Additional description relating to model validation techniqueb. Incremental riski)

Overview of models

ii)

How to reflect changes in default risk and credit ratingsiii)

How to determine various parameters (PD, LGD, transition probability, correlation,
etc.)

iv)

Explanation on how to assign a liquidity horizonv)

Model validation techniquec. Comprehensive riski)

Overview of models

ii)

How to reflect changes in default risk and credit ratingsiii)

How to determine various parameters (PD, LGD, transition probability, correlation,
etc.)

iv)

Explanation on how to assign a liquidity horizonv)

Model validation technique(viii) For “overview of the risk management policies and procedures” mentioned in “the following
matters relating to operational risk,” structures to ensure risk is identified, assessed, measured,and reported. {Except for the financial institutions that have applied the new regulations –financial institutions that have applied the new regulations should refer to the Public Notice after
the revision.}

195

(ix) “Overview of the risk characteristics, and the risk management policies, procedures, andstructures relating to exposures to the equivalents of shares or exposures to shares, etc.”{Confined to the financial institutions that have applied the new regulations – financial
institutions that have not yet applied the new regulations follow the previous cases.}(A)

Scheme to ensure risk is identified, assessed, measured, and reported.

(B)

Policy on risk management relating to other securities, subsidiary’s shares, and affiliate’s
shares by class(C)

Key accounting policies including assessment of stock exposure, etc. (If the accounting policy
is changed, matters corresponding to Article 8-3 of the Regulations for Preparation of
Financial Statements should be included. )(x)“The following matters relating to interest rate risk”(A)“Overview of the risk management policies and procedures”

・ Description on concept and scope of interest rate risk subject to risk management andmeasurement
・ Description on risk management and mitigation policy
・ Frequency in measuring interest rate risk・ Description on interest rate risk mitigation technique such as hedging, etc. (including
accounting treatment of hedging instruments.)(B)“Overview of interest rate risk measurement method”

・ ΔEVE and ΔNII that are subject to quantitative disclosure based on the Public Notice on
Disclosure (of interest rate risk contained in the banking book, those measured as decreased
amount of interest income for a period from the base date for calculating interest rate shock
to twelve months later, and which is calculated based on the interest rate shock specified in
the Public Notice on Disclosure; the same applies in this item) and the following mattersregarding interest rate risk to be additionally disclosed by the bank
- Average maturity in interest-rate change assigned to liquid deposits- Longest maturity in interest-rate change assigned to liquid deposits- Method to estimate maturity of liquid deposits (core deposit model, etc.) and prerequisites
thereof- Assumptions for early repayment of fixed-rate loans and early termination of time deposits- Aggregation method of multiple currencies and prerequisites thereof- Conditions for spreads (whether it is included in discount rate or cashflow in calculating,etc.)- Other conditions that may have significant impact on ΔEVE and/or ΔNII such as use ofinternal model approach, etc.
- Explanation relating to change in disclosure from the preceding business year
- Other explanation relating to interpretation and materiality of measured values
・ In the case where the bank calculates interest rate risk other than mandatory ΔEVE and ΔNII

196

that are subject to the quantitative disclosure based on the Public Notice on Disclosure, forthe purposes of assessment of the capital adequacy, stress test, risk management, profit andloss management, operational judgment or any others, the following matters relating to suchinterest rate risk should be considered.
- Description on interest rate shock scenarios- Prerequisites of the interest rate risk measurement and meanings thereof (in particular,large difference with ΔEVE value or ΔNII value subject to the quantitative disclosure
based on the Public Notice on Disclosure)(xi) “Explanation of which items on the balance sheet correspond to the items listed in Appendix
Form No. 1"
This item shall be described in accordance with Appendix Form No. 13 (for banks calculating
capital adequacy ratio on a consolidated basis, Appendix Form No. 14) of the Public Notice on
Disclosure .
(xii) “Explanation of the difference between the amount of exposure under the capital adequacy ratio
regulation and the amount recorded on the balance sheet and its factors"(A)

Qualitative explanation of accounts across multiple risk categories or accounts that are
difficult to link to risk categories on Appendix Form No. 2, sheet 2 of the Public Notice on
Disclosure(B)

Regarding the difference between the amount of exposure under the capital adequacy ratio
regulation and the amount recorded on the balance sheet, an explanation of the maindifference items shown in Appendix Form No.2, sheet 3 of the Public Notice on Disclosure(2)

Qualitative disclosure items (for domestically active banks and bank holding companies)(i)“The following matters relating to the scope of consolidation”(A)

Whether the following elements are described in “differences and reasons for suchdifferences between companies belonging to the corporate group that are required to be
included in the calculation of the consolidated equity capital ratio (‘Consolidated Group’)
and those companies included within the Scope of Accounting Consolidation”.

・ Diﬀerences in the scope of consolidation and the calculation method between the case under
Article 26 of the Public Notice on Standards for Banks' Capital Adequacy or Article 15 of the
Public Notice on Standards for Bank Holding Companies' Capital Adequacy and that basedon the Regulations for Preparation of Consolidated Financial Statements (for example,
normal consolidation, equity method, proportional consolidation, etc.)
・ Reasons for diﬀerences in the scope of consolidation and the calculation method(B)

For “name, total assets and net assets as shown on the balance sheet, and principal businessactivities of companies belonging to the Consolidated Group but not included in the Scopeof the Accounting Consolidation or of companies not belonging to the Consolidated Groupbut included in the Scope of the Accounting Consolidation,” are the name, total assets, and197

net assets as shown on the balance sheet, and principal business activities of these companies
by each category of companies that are treated in the same manner properly described bylisting them, etc.?
(ii) The “summary of capital raising means” includes all or part of the issued capital in “amount of
capital” in the formula in Article 25 or Article 37 of the Public Notice on Standards for Banks'
Capital Adequacy or Article 14 of the Public Notice on Standards for Bank Holding Companies'
Capital Adequacy. Whether the following information on capital raising means (including
qualifying old non-cumulative perpetual preferred shares and qualifying old capital raising means
included in the amount of capital as a result of transitional measures) is provided.
・ Issuer・ Types of capital-raising instruments
・ Amount inserted in the basic items relating to Core Capital(Provide the below if applicable)
・ Dividend rate or interest rate (if published)・ If there is a redemption deadline, the fact of the date・ Outline of special agreements that allow redemption, etc. in the event of certain reasons (initial
redemption date, redemption amount, applicable reasons, etc.)
・ If there is any special conditions relating to conversion to other capital raising instruments,
provide an overview thereof.
・ Outline of any special contracts for reduction of principal
・ If there is a clause for suspension of payment of dividends, etc., whether there is any
accumulation of suspended unpaid dividends or interest
・ If there are special agreements related to step-up interest rates or other special agreements that
increase the probability of redemption, etc., outline them.
(iii) “The following matters relating to credit risk”(A)

Whether the following elements are described in “overview of the risk management policies
and procedures”・ Structures to ensure risk is identiﬁed, assessed, measured, and reported.
・ Accounting standards for allowance for doubtful accounts
・ When calculating the credit risk, if the bank has adopted the basic or advanced IRB approach
but partially applied the method that the bank has not adopted, each method is applied adescription of the nature of the exposures to be exposed and the plans for a full transition of
the exposures to the appropriate approach(B)

For “name of qualified rating agency, etc. used to determine the risk weight of the exposure
by each category,” if 100% risk weight is assigned to all corporate exposures (excluding SME
exposures), does the bank disclose it? {Except for the financial institutions that have applied
the new regulations.}

198

(C)

“Portfolio to which the IRB approach is applied, the following matters”

a. For “type of IRB approaches used,” if the IRB approach is applied stepwise, is the transition
period described?
b. Whether or not the following elements are described in “overview of the IRB approach”
・Mechanism of the IRB approach (including description on the relation of IRB and externalratings when an external rating is used as a major factor in assigning an internal rating)・

Usage of various estimates for purposes other than the calculation of equity capital ratios

・Control and validation procedures for IRB approach(D)

Whether or not the following elements are described in "overview of rating procedures foreach portfolio listed below"

・ Types of exposure included in each portfolio
・ Deﬁnition, methods and data (including assumptions used to derive the parameters) used toestimate and verify PD (also LGD and EAD if the advanced IRB approach is applied )・ If there is any diﬀerence from the deﬁnition of default set forth in the Public Notice onStandards for Banks' Capital Adequacy and the Public Notice on Standards for Bank Holding
Companies' Capital Adequacy that is deemed important, an explanation on the content ofsuch difference (including an explanation on types of portfolios on which such difference may
have impact)(iv) For “overview of the risk management policies and procedures relating to the credit risk
mitigation techniques,” whether the following elements are described・ Overview of the policies and procedures for set-oﬀ between loans and deposits as well as types
and the scope, etc. of transactions using this scheme
・ Overview of the policies and procedures for entering a legally valid bilateral netting contract
relating to derivative transactions as well as repo-style transactions and credit transactions andthese kinds of overseas transactions, and types and the scope, etc. of transactions using thiscontract {Confined to financial institutions that have applied the new regulations - financial
institutions that have not yet applied the new regulations follow the previous cases.}・ Overview of policy and procedures for collateral assessment and management
・ Main types of collateral・ Types of guarantors and major counterparties of credit derivative and their credibility・ Information on concentration of credit risk and market risk in association with the applicationof the credit risk mitigation techniques(v)

For “overview of the risk management policies and procedures relating to the counterparties risk
in derivative transactions and transactions with long settlement periods,” whether the following
elements are described・ Policies for the allocation methods of risk capital and credit ceiling・ Policies on protection by collateral and calculation of reserves
・ Explanation on impact in terms of the amount of collateral that the bank would be required to199

provide given a credit rating downgrade(vi) “The following matters relating to securitization exposure”(A)

Whether or not the following elements are described in “overview of risk management policy
and risk characteristics”

・ Structures to ensure risk is identiﬁed, assessed, measured, and reported.
・ Bank’s policy on the securitization transactions (including degree of risk transfer by
securitization and types of risk. Re-securitization exposure, if any, must be separately
mentioned.)・ Bank’s role in the securitization transactions (originator, investor, credit provider, provider
of credit enhancement, sponsor of ABCP, liquidity provider, swap provider, etc.) and theextent of the bank’s involvement in each of them・ Nature of risk other than the credit risk and the market risk, if any, in securitization exposures(for example, liquidity risk)(B)

For “overview of development of the system and operation status thereof,” if the bank has resecuritization exposures, whether its difference from securitization exposure is described(C)

For “type of such special purpose vehicle for securitization and whether the bank has
securitization exposure relating to such transaction,” whether, at least, content of the
securitization transactions executed by the bank during the current business period is
described. Additionally, whether the description includes whether the securitization
exposure is held as on-balance sheet transactions or off-balance sheet transactions(D)For “name of the bank’s subsidiaries (excluding the consolidated subsidiaries ) and affiliates,etc. that hold the securitization exposures relating to the securitization transactions executedby the bank (including securitization transaction executed by the bank by using a special
purpose vehicle for securitization ),” whether, at least, content of the securitizationtransactions executed by the bank during the current business period is described(E)

For “accounting policies for the securitization transactions,” whether the following elements
are described・ How the securitization transactions are recognized in accounting, for example, as sale ofassets or raising of funds.
・ At what point is sale of assets recognized.
・ Prerequisites, etc. for evaluation of the retained interest in securitization exposures. Overview
and impact of change, if any
・ If there is any diﬀerence between the accounting policies for the synthetic securitization andother accounting policies such as for derivatives, an explanation thereof・ Methods of evaluating assets held for the purpose of securitization and whether such assets
are recorded as banking book or trading book・ Policies for recognizing liquidity enhancement, credit enhancement, or other credit oﬀering
without advance payment of funds granted to securitization exposures as liabilities in the200balance sheet(F)

For “overview of the internal assessment approach if the bank uses the approach,” whether
the following elements are described・ Internal assessment process and the structures to control it (including independence andaccountability of those who are in charge of control and assessment results, etc. of the internal
assessment process)・ Relation between internal assessment and external ratings provided by qualiﬁed rating
agencies (including information on such qualified rating agencies.)
・ Use of the internal assessment approach for purposes other than calculation of required
equity capital
・ Types of securitization exposure to which the internal assessment approach is applied and thestress factors to determine the level of credit enhancement by each type of exposure(G)

As examples of “content of important change in the quantitative information, if any” a casewhere an important change occurred in the amount of assets held for the purpose of
securitization or a case where there is a transfer between the banking book and trading book,
etc. may be given.

(vii) “The following matters relating to market risk” {Except for the financial institutions that haveapplied the new regulations - financial institutions that have applied the new regulations shouldrefer to the Public Notice after the revision.}(A)

For “overview of the risk management policies and procedures,” whether structures to ensurerisk is identified, assessed, measured, and reported are described.

(B)

For “if the incremental risk is measured by using the internal models, overview of suchinternal models,” whether the definition of the defaults for which the incremental risk ismeasured, the overview of rating classification, methods of determining a liquidity horizon,
and methods of verifying the incremental risk calculation models are described(C)

For “if the comprehensive risk is measured by using the internal models, overview of suchinternal models,” whether the types of risk for which the comprehensive risk is measured, theassessment methods thereof, and methods of verifying the comprehensive risk calculation
models (including methods of using stress test) are described(viii) For “overview of the risk management policies and procedures” mentioned in “the following
matters relating to operational risk,” whether structures to ensure risk is identified, assessed,
measured, and reported are described. {Except for the financial institutions that have applied the
new regulations - financial institutions that have applied the new regulations should refer to the
Public Notice after the revision.}(ix) For “overview of the risk management policies and procedures for investment or stock exposure,”
whether the following elements are described・ Structures to ensure risk is identiﬁed, assessed, measured, and reported.
・ Policy on risk management relating to other securities, subsidiary’s shares, and aﬃliate’s shares201

by class・ Key accounting policies including assessment of stock exposure (If the accounting policy ischanged, matters corresponding to Article 8-3 of the Regulations for Preparation of Financial
Statements should be included. )(x)“The following matters relating to interest rate risk”(A)“Overview of the risk management policies and procedures”

・ Description on concept and scope of interest rate risk subject to risk management andmeasurement
・ Description on risk management and mitigation policy
・ Frequency in measuring interest rate risk・ Description on interest rate risk mitigation technique such as hedging, etc. (including
accounting treatment of hedging instruments.)(B)“Overview of interest rate risk measurement method”

・ ΔEVE and ΔNII that are subject to quantitative disclosure based on the Public Notice on
Disclosure (of interest rate risk contained in the banking book, those measured as decreased
amount of interest income for a period from the base date for calculating interest rate shock
to twelve months later, and which is calculated based on the interest rate shock specified in
the Public Notice on Disclosure; the same applies in this item) and the following mattersregarding interest rate risk to be additionally disclosed by the bank-

Average maturity in interest-rate change assigned to liquid deposits-

Longest maturity in interest-rate change assigned to liquid deposits-

Method to estimate maturity of liquid deposits (core deposit model, etc.) and prerequisites
thereof-

Assumptions for early repayment of fixed-rate loans and early termination of time deposits-

Aggregation method of multiple currencies and prerequisites thereof-

Conditions for spreads (whether it is included in discount rate or cashflow in calculating,
etc.)

-

Other conditions that may have significant impact on ΔEVE and/or ΔNII such as use ofinternal model approach, etc.

-

Explanation relating to change in disclosure from the preceding business year-

Other explanation relating to interpretation and materiality of measured values

・ In the case where the bank calculates interest rate risk other than mandatory ΔEVE and ΔNIIthat are subject to the quantitative disclosure based on the Public Notice on Disclosure, forthe purposes of assessment of the capital adequacy, stress test, risk management, profit andloss management, operational judgment or any others, the following matters relating to suchinterest rate risk should be considered.
-Interest rate shock scenarios-

Prerequisites of the interest rate risk measurement and meanings thereof (in particular,202large difference with ΔEVE value or ΔNII value subject to the quantitative disclosure
based on the Public Notice on Disclosure)(3)

Quantitative disclosure Items (for internationally active banks and bank holding companies)
If a significant change occurs in the quantitative disclosure items from the preceding period, an
explanation relating to the reasons why(i)For “following matters relating to credit risk,” the purpose of complementing the quantitative
disclosure items relating to the credit quality of assets held by the bank should be considered.
(A)

As examples of “breakdown by major types,” the two types such as (a) off-balance sheet
exposure other than loans, commitments or other derivatives, and (b) bonds, etc. may be
given.

(B)

For “by area,” at least exposures should be classified into domestic and overseas.

(C)

The term-end balance of the exposures by deferred periods (excluding doubtful claims andbelow, deferred periods should be classified into such as “less than 1 month,” “1 month toless than 2 months,” “3 month and over”, etc.)(ii) With regard to the quantitative disclosure items relating to G-SIBs indicators in sheet 32 ofAppendix Form No.2 of the Public Notice on Disclosure among those as set forth in Article 2(5)of the Public Notice on Disclosure, proper disclosure in accordance with the G-SIBs indicators
published by the Basel Committee on Banking Supervision(4)

Quantitative disclosure items (for domestically active banks and bank holding companies)(i)“The following matters relating to capital adequacy”(A)

For “portfolios to which the IRB approach is applied and, of which, the breakdown by thefollowing portfolios,” whether a bank using both the basic IRB approach and the advanced
IRB approach describes the breakdown by each approach(B)

For “amount of the required equity capital to the credit risk relating to stock exposures in
portfolio to which the IRB approach is applied and, of which, the amount by each category
listed below,” whether the amount of the required equity capital by each stock portfolio inline with the category in calculation of the required equity capital is mentioned. {Confined
to financial institutions that have applied the new regulations - financial institutions thathave not yet applied the new regulations follow the previous cases.}(ii) “The following matters relating to credit risk”(A)

For “term-end balance of credit risk exposures (if the term-end balance is significantly far
from the risk position of such term, the average balance during the period should be disclosed,
as well) and the breakdown of exposures by major category,” whether the following elements
are described・ If the bank does not use the daily average in calculating the average balance during the period,
the calculation method used203

・ If the bank uses multiple techniques in calculating the credit risk, the term-end balance of
exposures by each technique(B)

As examples of “breakdown of exposures by major types,” the three types such as (a) loans,
commitments and off-balance sheet exposure other than derivatives, (b) bonds, and (c) OTC
derivatives, etc. may be given.

(C)

For “by area,” whether exposures are classified, at least, into domestic and overseas(D)

For “change” in “general allowance for doubtful accounts, individual allowance for doubtful
accounts and reserve for specific overseas loans,” whether the breakdown of the change ismentioned(E)

For “balance after the effects of the credit risk mitigation techniques by risk weight category
are considered with respect to exposures to which the standardized approach is applied,”
whether the balance of exposures by risk weight category is classified in terms of whether
rated or not. {Except for the financial institutions that have applied the new regulations.}(F)“Portfolio to which the IRB approach is applied, the following matters”

a. In the event that exposures are disclosed with an integrated rating or pool of debtors, whether
such integration is designed to enable users to understand debtors’ rating and theirdistribution in the pool used in the IRB approachb. For “analysis of exposures in pool unit by setting proper number of EL categories,” when thebank uses EL classification in its disclosure, whether such EL categories are proper in termsof decomposition of credit risk, which is meaningful for users of the disclosure(G)

For “actual loss by exposure applying the IRB approach in the immediately preceding period,
comparison with the past actual results and the analysis of factors thereof” whether the
analysis on PD, LGD, and EAD levels is mentioned(H)

For “comparison between estimated loss for long term by exposure applying the IRB
approach and actual value thereof” whether the comparison period is long enough to evaluate
the accuracy of the IRB approach and the estimated value(iii) For “the following matters relating to the credit risk mitigation techniques,” whether credit
derivatives that are treated as part of synthetic securitization are excluded from the disclosure forthe credit risk mitigation techniques and included in that for the securitization exposure(iv) “The following matters relating to securitization exposure”(A)

As examples of “breakdown of categories of major underlying assets,” credit cards, housing
loans, automobile loans, etc. are given.

(B)

For “if the bank is an originator, the following matters relating to the securitization exposures
for which the assets with credit risk must be calculated” and “if the bank is an originator, thefollowing matters relating to the securitization exposures for which the amountcorresponding to the market risk must be calculated”

・ Whether, among the securitization transactions executed by the bank as an originator during
the current business period, transactions for which the bank have no securitization exposures204are separately mentioned
・ If the bank has two types of securitization exposures (those arising from its service as asponsor and those other than that), whether the two types of exposures are separately
mentioned(C)

For “loss in the current period,” whether loan loss provisions and write-offs, and write-downsof I/O strips are included(D)

For “amount of securitization exposures held and the breakdown of the underlying assets by
category,” whether the on-balance sheet transactions and the off-balance sheet transactions
are separately mentioned(E)

For “balance of securitization exposures by proper number of risk weight category andrequired equity capital,” whether the on-balance sheet transactions and the off-balance sheettransactions are separately mentioned(F)

Whether the I/O strips that have the credit enhancement function are included in“securitization exposures deducted from the equity capital”(v)

For “amount recorded on the balance sheet and the market value” of “the following mattersrelating to the investment or stock exposures,” if the prices of listed securities are far from thefair value, whether the comparison is disclosed(5)

Disclosure items concerning leverage ratio on consolidated basis or leverage ratio on a solo basis (forinternationally active banks and bank holding companies)
For “reasons causing a significant difference with the leverage ratio on consolidated basis of thepreceding consolidated accounting period” or “reasons causing a significant difference with theleverage ratio on a solo basis of the preceding accounting period,” whether key factors causing suchdifference are disclosed, for example, in cases where there is an increase or decrease more than 0.5%
from the leverage ratio on a solo or consolidated basis as of the end of the preceding accounting
period or where the leverage ratio on consolidated basis increased or decreased due to change in the
major consolidated subsidiary companies, whether such variation is caused by change in the
numerator (amount of capital) of the leverage ratio on consolidated basis or in the dominator(amount of total exposure) thereof(6)

Quarterly disclosure items (for internationally active banks and bank holding companies)(i)

These banks must properly disclose the matters set forth in Articles 6 and 9 of the Public Noticeon Disclosure on a quarterly basis pursuant to the purpose of the Basel Accords. It is proper topost these disclosure items (including past data) on the website in such a manner that depositors,
investors, and other users have easy access to specific information they want to know.
Additionally, when banks disclose quarterly disclosure items set forth in Article 6(1)(ii), (iii)and (v) as well as Article 6(2)(ii) to (iv), and Article 6(2)(vi) to(xi) of the Public Notice on
Disclosure, or when bank holding companies disclose quarterly disclosure items set forth in

205Article 9(1)(ii), (iii) and (v) to (x) of the Public Notice on Disclosure, it is proper that suchdisclosure is made promptly after the publication of the annual securities report under Article
24(1) or (3) of the Financial Instruments and Exchange Act, the semiannual securities reportunder Article 24-5(1) of the Financial Instruments and Exchange Act, or the quarterly financial
results under the relevant regulations of a financial instruments exchange, the base date of whichis the end day of the relevant quarter.
If matters set forth in Articles 6 and 9 of the Public Notice on Disclosure are disclosed inaccordance with sheets 2 and 3 of the Appendix Form No. 8 thereof, it is preferable that suchdisclosure is made promptly after the publication of the relevant quarterly financial results while
the time required to analyze the variation factors should be taken into account.
On the other hand, it is desirable that other disclosure items are made promptly upon
publication of the relevant quarterly financial results.
(ii) For “details of contracts relating to capital-raising instruments” under Article 6(1)(iv) or Article
9(1)(iv) of the Public Notice on Disclosure, it is proper to mention particulars of the contracts
relating to capital-raising instruments in addition to the “overview of contracts relating to equity
capital-raising instruments” under Article 6(1)(iii) and Article 9(1)(iii) of the Public Notice on
Disclosure so that depositors, investors, and other users are able to check them easily.
It is preferable that financial institutions update disclosure information on their capital-raising
instruments upon issuance, redemption, or change of the content of the instruments so thatusers are able to check the latest information.
(iii) For “reasons causing a significant difference with the leverage ratio on consolidated basis of thepreceding quarter” or “reasons causing a significant difference with the leverage ratio on a solobasis of the preceding quarter,” key factors causing such difference should be mentioned; forexample, in cases where there is an increase or decrease more than 0.5% from the leverage ratio
on a solo or consolidated basis as of the end of the preceding quarter or where the leverage ratio
on a consolidated basis increased or decreased due to change in the major consolidated subsidiarycompanies, whether such variation is caused by change in the numerator (amount of capital) of
the leverage ratio on a consolidated basis or in the dominator (amount of total exposure) thereof.
(7)

Quarterly Disclosure Items (for domestically active banks and bank holding companies)
Domestically active banks adopting the IRB approach must properly disclose the matters set forthin Articles 14 and 17 of the Public Notice on Disclosure on a quarterly basis. It is preferable that otherdomestically active banks also disclose information useful for depositors, investors, and other users
every quarter.

III-3-2-4-5Disclosure on compensation system (concerning Article 19-2(1)(vi), Article 19-3(iv)and Article 34-26(1)(v) of the Banking Act Enforcement Regulation)

206

(1) General points to consider
Disclosure of the compensation system needs to be properly performed with respect to the mattersset forth in the “Notice on the matters separately determined by the Commissioner of the FSA as those
may have significant impact on the conditions of banks’ business operations or properties among items
relating to compensation, etc. in accordance with Article 19-2(1)(vi) of the Banking Act Enforcement
Regulation, etc.” (hereinafter referred to as the “Public Notice on Compensation”) fully considering
the purpose of ensuring that the compensation system will not cause excessive risk-taking by the bank’s
senior management through introduction of the market-based discipline of external assessment by themarket and depositors and thereby maintain the sound management of the bank.
However, with regard to information disclosure which may cause significant damage to thecompeting status of a disclosing bank, information that may identify an individual and unduly harm
the rights and interest of such individual or information subject to confidentiality obligation, etc., thebank may only disclose more general information relating to such information and the fact that andreason why such information is not disclosed. If there is no applicable matters to be disclosed under
the Public Notice on Compensation, the bank may only mention to that effect.
(Reference)・ “Pillar 3 Disclosure Requirements for Remuneration” the Basel Committee on Banking
Supervision (July 2011)
・ “Pillar 3 Disclosure Requirements – Consolidated and Enhanced Framework – the 2nd Phase”
the Basel Committee on Banking Supervision (March, 2017)
Additionally, in the case where Major Banks form a group (meaning banks or bank holding
companies and their major consolidated subsidiaries, etc.; the same applies in (1) and (2) hereof),
when the content of the disclosure items set forth in the Public Notice on Compensation are
overlapped in the companies within the group, it should be noted whether the group makes efforts
to make understandable disclosure such as explaining the content by summarizing key points, etc.
(2) Points to Consider for Individual Matters(i) For officers and employees, etc. subject to compensation disclosure as defined in the Public
Notice on Compensation (hereinafter referred to as “officers and employees, etc. subject todisclosure” in this (2)), for example, whether the following matters are properly described(A) “Scope of officers subject to disclosure”
・ Whether a proper explanation is given in the case where external directors and auditors are
excluded from the “scope of officers subject to disclosure”
・ Whether oﬃcers who retired in the relevant business period are included(B) For “Scope of employees, etc. subject to disclosure”
a.

“Scope of major consolidated subsidiaries, etc.”
・ For “scope of major consolidated subsidiaries, etc.,” whether major consolidated
subsidiaries are selected while considering importance of impact on the group’s financial

207

position and operation results without impairing the purpose of disclosure for thecompensation structure nor preventing reasonable judgment of depositor, etc. In addition,
whether a proper explanation is given with regard to the scope of major consolidated
subsidiaries, etc. For example, an explanation using specific criteria may be acceptablesuch as “consolidated subsidiaries, etc. whose total assets do not exceed 2% of the total
consolidated assets of the bank or the bank holding company do not fall in the scope ofmajor consolidated subsidiaries, etc.” However, an operationally key consolidated
subsidiary, etc. should be included in the major consolidated subsidiary, etc. even if it issmall in size.
b. For scope of “highly compensated persons”
・ Whether, in selecting “highly compensated persons,” the bank sets proper and reasonable
criteria in line with its or the group’s actual status by making the average compensation
paid to officers subject to disclosure as base and, when necessary, while considering thepast trends of fluctuation of business performance, etc. And whether the grounds forsetting such criteria and the rationality thereof are properly described. For example, when
the amount of compensation paid to officers subject to disclosure decreased due to poor
business results, etc., the bank may adjust the criteria of “highly compensated persons”
while considering the past trends of fluctuation of business results, etc. In this case,whether a proper explanation is given with regard to the rationality of such criteria. Also,in case of referring to a group common criteria, whether the rationality thereof is properly
described
・ For the scope of “compensation, etc.,” whether it includes any and all proprietary beneﬁts
received by an officer as the consideration for execution of his or her duties of whatever
name including, but not limited to, compensation, salary, wage, pay, allowance, bonus; forexample, in the case where an officer works and receives a salary as an employee also, whensuch salary includes an important part of his/her compensation, this should be included.
c.

For the scope of “those who have a material influence on business management or assets ofthe bank, the bank holding company or major consolidated subsidiary, etc. thereof”
・ Whether those who have a material inﬂuence on business management or assets of thegroup are properly selected among from employees, etc. subject to disclosure by being
checked for their risk takings status, etc. In addition, whether a proper explanation is given
with regard to the selection method(ii) For “name, structure, and responsibilities of a committee or other major organization, etc. thatsupervises the duties relating to compensation, etc. such as determination and payment ofcompensation to officers and employees, etc. subject to disclosure” set forth in the Public Noticeon Compensation, whether, for example, the following elements are described(A) How to develop and maintain the compensation committee, etc. (name, members, authority,and duties of the compensation committee, etc., measures enabling the compensation

208

committee, etc. to exercise the monitoring and checking departments independently from thebusiness promotion departments, etc. (including officers in charge thereof) (the scope ofregion, business area, or the officers and employees, etc. subject to disclosure to be monitored
and checked by the compensation committee, etc.))(B) In the case where the compensation committee, etc. requests external consultant to give
advice on the compensation, etc., the name of such external consultant and purpose andoverview of such request(C) With regard to the assessment of the appropriateness of design and operation of thecompensation structure, if the compensation committee, etc. and the risk management
department cooperate with each other, how their cooperation is going.
(D) Total amount of the compensation, etc. paid to members of the compensation committee, etc.
(if it is difficult to separate the compensation only for the duty at the compensation committee
from total compensation, it is not necessary to mention) and the number of times thecompensation committee meetings were held(iii) For “matters relating to assessment of the appropriateness of design and operation of thecompensation structures for officers and employees, etc. subject to disclosure” set forth in the
Public Notice on Compensation, whether, for example, the following elements are described(A) Overview of the policies on determination of the compensation, etc. to officers and employees,
etc. subject to disclosure (including policies on types and payment methods of thecompensation, etc.), if any, and the scope of application thereof (applicable region, businessarea, and eligible officers and employees, etc. subject to disclosure), and the purpose andbackground of adopting such policy(B) Explanation on categories of those included in officers and employees, etc. subject todisclosure and numbers of persons belonging to each category (for example, breakdown ofofficers and employees, etc. subject to disclosure by each category, and explanation on eachcategory)(C) If a significant change occurs in design and operation of the compensation structure, reasonsand overview thereof and impact that such change will have on the compensation, etc.
(D) In the case where it is confirmed that the overall level of compensation, etc. is consistent withthe present state and future forecasts of financial soundness of each bank or the group, andthat it will not have a material impact on the future adequacy of equity capital, an explanation
to that effect(E) In the case where it is confirmed that, through monitoring how the compensation structure isoperated, any problems have not arisen, such as the amount of compensation being
excessively linked to short-term earnings or being overly reflective of performance, an
explanation to that effect(iv) For “matters relating to the consistency between the compensation structure for officers andemployees, etc. subject to disclosure and the risk management” set forth in the Public Notice on

209Compensation, whether, for example, the following elements are described(A) If the design and operation of the compensation structure for employees in the risk
management department and the compliance department is independent from otherdepartments that are managed or supervised by these departments, an explanation to that
effect (in particular, an explanation whether measurement of performance for thecompensation of employees in the risk management department and the compliancedepartment properly reflects the importance of their duties, the degree of achievement in risk
management and compliance with laws and regulations, and the contribution to the risk
management system and the compliance system)(B) If the compensation, etc. to officers and employees, etc. subject to disclosure are evaluateddepending on risk, overview of measurement and evaluation methods for such risk and how
to consider it (if there is any change from the preceding business period, an overview thereof
should be included.)(v) For “matters relating to link between the compensation, etc. to officers and employees, etc.
subject to disclosure and the bank’s performance,” whether the following elements are described(A) In the case where considerable portion of the amount of the compensation, etc. to officers andemployees, etc. subject to disclosure is performance-based compensation
・ If, in determining the ratio of the performance-based portion among the total amount of thecompensation to officers and employees, etc. subject to disclosure, the bank takes into
account their responsibilities and actual duties, the group’s financial soundness or degree ofrisk tolerance, an overview of how these factors are taken into account・ Overview of the method of reﬂecting performance of the group, bank, business departmentsor relevant officers and employees, etc. subject to disclosure on the compensation, etc. or the
method of measuring the performance
・ In cases where the payment of the performance-based portion of the compensation, etc. isdeferred, an explanation that the design takes into account the response to financial risks that
could arise before the compensation is finalized (covering the required equity capital andliquidity requirements)
・ Overview of measures, etc. to decrease such performance-based portion of the compensationin the event of poor business results (in particular, an explanation on the criteria to judge theapplicability of poor business results)
・ Overview of the control environment to properly monitor and check the risk of acts being
conducted by officers or employees, etc. subject to disclosure that could compromise theintent of the design of the compensation structure consistent with the risk management by,for example, applying risk-adjusted profits to the calculation of the compensation, etc. (suchas transactions that are likely to reduce risks superficially)(B) If a compensation structure that could adversely affect risk management (such as guaranteed
minimum bonuses paid across two or more years, or disproportionately large retirement210allowances with the status of business performance and risk) is provided, an overview ofappropriate improvement measures and responses therefor(C) If the bank adopts a method of paying compensation that emphasizes the creation of more
long-term corporate value (for example, payments in stock or the granting of stock options)and a method of paying compensation that also takes into account the period of time up until
risks are actualized (for example, setting fixed-period transfer restrictions in cases where
payments are made in stock, setting exercise periods if stock options are granted, or reduction
or redemption in the event compensation payments are deferred if business results are poor)according to the responsibilities of officers and employees, etc. subject to disclosure, thepolicies and overview thereof (if the percentage of deferred payments varies depending on
the departments of officers and employees, etc. subject to disclosure, such percentage andfactors determining the percentage should be included.)(vi) For internationally active banks and bank holding companies, whether the bank discloses“quantitative disclosure items” set forth in the Public Notice on Compensation in a form
consistent with the Appendix thereof(vii) For domestically active banks and bank holding companies, with regard to “matters relating totypes, total amount paid and methods of paying the compensation, etc. for officer and employees,
etc. subject to disclosure” set forth in the Public Notice on Compensation, whether, for example,
the following elements are described(A) Overview of types of compensation, etc. (base compensation, shares, stock options, bonus,
retirement allowance, salary, wage, pays, etc.), overview of methods of paying compensation(setting fixed-period transfer restrictions in cases where payments are made in stock, setting
exercise periods if stock options are granted, or deferred payment of compensation, orredemption of compensation paid if business results are poor), the purpose and backgroundto apply these types and methods, etc.
(B) For all the officers subject to disclosure and for all the employees, etc. subject to disclosure,respectively, the total amount of the compensation, number of persons paid, the total amountof the fixed compensation and that of the variable compensation and number of person paid,
as well as the total amount of the compensation and number of persons paid by eachcompensation category and payment method(C) If any of the following matters applies, such matter・ Total amount by type of compensation, such as guaranteed bonus, lump sum payment upontaking office, premium retirement allowance, or other similar compensation, respectively, andnumber of persons paid・ Balance of the deferred compensation, total amount thereof by type and by payment method,
and the amount of the deferred compensation paid in the immediately preceding businessperiod(viii)

Other than the above, if there are any important matters relating to the compensation

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structure, whether such matters are properly mentioned as “matters that should be referred
relating to the compensation structure” set forth in the Public Notice on Compensation
III-3-2-4-6

Disclosure of Condition, etc. of Sound Business Operations concerning Liquidity(concerning Article 19-2(1)(v)(e), Article 19-3(1)(iii)(d), Article 19-5, Article 3426(1)(iv)(d)andArticle34-27-2oftheBanking

Act

Enforcement

Regulation)(Internationally Active Banks)(1) General points to consider
The purpose of the disclosure of condition of sound business operations concerning liquidity is tocomplement minimum requirements of the liquidity coverage ratio and the net stable funding ratio,
the self-management by banks and the supervisory review, and to secure sound management of banks
by market-driven independent assessment; i.e., market-based discipline. Banks are required toproperly make such disclosure in accordance with the purpose of the Public Notice concerning“Matters separately determined by the Commissioner of the FSA relating to the conditions of banks’business operations concerning liquidity in accordance with Article 19-2(1)(v)(e), etc. of the Banking
Act Enforcement Regulation” (hereinafter referred to as the “Public Notice on Liquidity Ratio
Disclosure”).
In addition, banks need to consider what is useful and practical disclosure to users in light of theimportance of information subject to disclosure. In particular, attention is required for information
which might lead users to change their economic decision-making if it is omitted, so that it will beproperly disclosed.
However, with regard to disclosure of proprietary or confidential information that may causesignificant damage to the status of a disclosing bank, the bank may limit their disclosure to moregeneral information relating to such information and disclose the fact that such information is notdisclosed and the reason of non-disclosure.
(2) Qualitative disclosure items relating to liquidity coverage ratio on a solo basis(i)

For “matters relating to time-series change of liquidity coverage ratio on a solo basis,” whether aqualitative explanation is given with regard to major change of the liquidity coverage ratio in thepast two years and the reasons why. In such explanation, whether “quantitative disclosure items
relating to liquidity coverage ratio on a solo basis (of the latest quarter that are prepared in theform of Appendix Form of the Public Notice on Liquidity Ratio Disclosure)” are used(ii) For “matters relating to the evaluation of the level of liquidity coverage ratio on a solo basis,”whether the following elements are described:(A) The bank’s evaluation of the liquidity coverage ratio level(B) If the bank evaluates that there is a challenge in (A) above, a practical countermeasure against
the challenge

212

(C) If the bank’s forecast on its future liquidity coverage ratio is expected to be far from thedisclosed ratio, a qualitative explanation on such forecast(D) If the actual result of (C) above is far different from the original forecast, an additional
explanation on reasons why(iii) For “matters relating to the content of total amount of the high-quality liquidity assets (HQLA),”
whether, for example, the following elements are described as necessary:(A) If there is a significant change in the composition of the HQLA, such as currency or type, etc.
or the location thereof, an explanation on such change(B) If there is a significant currency mismatch between the total of the HQLA and the net cash
outflow in a major currency (meaning, for example, a currency which occupies 5% or more of
the bank’s total liabilities), an explanation on the evaluation of such mismatch and practicalcountermeasures against it(iv) For “other matters relating to the liquidity coverage ratio on a solo basis,” whether, for example,
the following elements are described as necessary. And whether important matters are described,
regardless of the matters below.
(A) If the “special provision relating to qualifying operational deposits” set forth in Article 29 of
the Public Notice on Liquidity Ratio is applied, an explanation on the following:a.

Scope of application of the “special provision relating to qualifying operational deposits”

b. Method of estimating the amount of qualifying operational deposits(B) If “additional collateral required upon change of market value based on the scenario approach”
set forth in Article 38 of the Public Notice on Liquidity Ratio is applied, an explanation on themethod of estimating the amount of additional collateral required upon change of market
value based on the scenario approach(C) If there is any important item in “other cash outflow relating to contingencies” in Article 53of the Public Notice on Liquidity Ratio, “other contractual cash outflow” in Article 60 of thesame Public Notice or “other contractual case inflow” in Article 73 of the same Public Notice,a qualitative explanation on such item.
Note:

If, among the items constituting the liquidity coverage ratios (daily average values ), there areitems for which the daily average value is not used because of less importance and practical aspect(accounting restriction, etc.), the bank should describe why a daily average value is not used withregard to items that are deemed useful for users. Items for which the dairy average value is not
used should be regularly reviewed. In the case where these items are reviewed, an explanation tothat effect and on reasons why these items were reviewed should be provided.

(3) Qualitative disclosure items relating to net stable funding ratio on a solo basis(i)

For "Matters relating to time-series change of net stable funding ratio on a solo basis,” whether
a qualitative explanation is given with regard to major change of the net stable funding ratio in

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the past five years and the reasons why. In such explanation, whether "quantitative disclosure
items relating to net stable funding ratio on a solo basis (of the latest and previous quarter thatare prepared in the form of Appendix Form of the “Public Notice on Liquidity Ratio
Disclosure”).
(ii) With regard to "when the requirements listed in each item of Article 101 of the Public Noticeon Liquidity Ratio are satisfied,” whether the following matter is stated:(A) In cases where the "special provisions on interrelated assets and liabilities" set forth in Article
101 of the Public Notice on Liquidity Ratio is applied, a description of the scope of applicationand the interrelationship(iii)

With regard to "other matters related to net stable funding ratio on a solo basis," whether thefollowing matters are stated:(A) Evaluation of the level of net stable funding ratio by the bank(B) In the case where an issue is assessed in (a) above, practical measures to address the issue(C) In cases where the forecast for the net stable funding ratio in the future by the bank is expected
to be significantly different from the disclosed ratio, a qualitative explanation of such forecast(D) In cases where the actual results are significantly different from the initial forecast, an
additional explanation of the reason for the difference(4)Disclosure items relating to management of liquidity risk on a solo basis(i)

For “matters relating to the overview of the liquidity risk management policies and procedures,”whether structures to ensure that the bank’s liquidity risk is identified, assessed, measured, andreported are described.

(ii) For “matters relating to indicators for the liquidity risk management,” with respect to the idea
and use of the major indicators measures evaluated in (i) above, whether, for example, thefollowing indicators, etc. are included:(A) Bank’s liquid assets for its internal control(B) Gap between inflows and outflows by maturity in on-balance sheet items and off-balance
sheet items(C) Other key indicators, etc. monitored for the internal control(D) Use of limit values to the indicators, etc. of (A) to (C) above(E) Overview of the stress test and how to make use of it(iii) For “other matters relating to the liquidity risk,” whether, for example, the following elements
are described as necessary. And whether important matters are described, regardless of thematters below.
(A) Efforts to mitigate the liquidity risk(B) Measures to handle the liquidity during stress situation (contingency funding plan (CFP))(5) Quarterly disclosure items

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Banks need to properly make the quarterly disclosure with regard to the “quantitative disclosure
items relating to the liquidity coverage ratio on a solo basis” and the “quantitative disclosure items
relating to the net stable funding ratio on a solo basis” set forth in Articles 6 of the Public Notice on
Liquidity Ratio Disclosure based on the purpose of the Basel Accords.
It is proper to post these disclosure items (including past data) on the website in such a manner that
depositors, investors, and other users have easy access to specific information they want to know.
In addition, it is desirable that disclosure is made promptly upon publication of the annual securities
report under Article 24(1) or (3) of the Financial Instruments and Exchange Act, the semiannual
securities report under Article 24-5(1) of the same Act, the quarterly financial results under the
relevant regulations of a financial instruments exchange, the base date of which can be either the final
day or final business day of the relevant quarter (See Note in III-2-3-4-4-3-1(1)).
Note: The foregoing sets forth, among disclosure items under the Public Notice on Liquidity Ratio
Disclosure, matters relating to the disclosure of condition, etc. of sound business operations
concerning liquidity in “matters separately prescribed by the Commissioner of the FSA relating to theconditions of banks’ sound business operations” set forth in Article 19-2(1)(v)(e) of the Banking Act
Enforcement Regulation, etc. This may apply to cases under Article 19-3(iii)(d), Article 19-5, Article
34-26(1)(iv)(d), and Article 34-27-2 of the Banking Act Enforcement Regulation mutatis mutandis
by replacing relevant terms on a case-by-case basis.
III-3-2-4-7

Disclosure of Condition, etc. of Sound Business Operations concerning TLAC
(concerning Article 19-3(iii)(d), Article 19-5, Article 34-26(1)(iv)(d) and Article 3427-2 of the Banking Act Enforcement Regulation)(Banks subject to TLAC)(1) General points to consider
The purpose of the disclosure of condition of sound business operations concerning Total LossAbsorbing Capacity (TLAC) is to complement the minimum TLAC ratio requirement, the selfmanagement by banks, and the supervisory review, and to secure sound management of banks in termsof the total loss-absorbing capacity to rebuild capital by market-driven independent assessment; i.e.,market-based discipline. Banks are required to properly make such disclosure in accordance with the
Public Notice on Disclosure while paying attention to the following.
In addition, financial institutions subject to TLAC need to consider what is useful and practical
disclosure to users in light of the importance of information subject to disclosure. Note that, inparticular, attention is required to avoiding the omission of disclosure of information that might lead
users thereof to change their economic decision-making so that it will be properly disclosed.
However, with regard to disclosure of proprietary or confidential information that may causesignificant damage to the status of a disclosing bank, the bank may limit their disclosure to moregeneral information relating to such information and disclose the fact that such information is not215

disclosed and the reason of non-disclosure.
(Reference)・ “Pillar 3 Disclosure Requirements – Consolidated and Enhanced Framework – the 2nd Phase” theBasel Committee on Banking Supervision (March, 2017)(2) Points to Consider for Individual Matters
TLAC disclosure requirements are the matters under Article 4(7) (including cases where appliedmutatis mutandis pursuant to Article 5(6)) and under Article 6(3)(xii) to (xiv) of the Public Noticeon Disclosure). In particular, attention should be paid to the following points.
・ If a signiﬁcant change occurs in the quantitative disclosure items from the preceding period, an
explanation should be made relating to the reasons why.
・ Matters subject to quarterly disclosure(i) In addition to the conditions, etc. of the capital adequacy (see III-3-2-4-4), banks need toproperly make the quarterly disclosure with regard to the matters set forth in Article 6 of the
Public Notice on Disclosure based on the purpose of the Basel Accords. It is proper to post these
disclosure items (including past data) on the website in such a manner that depositors, investors,
and other users have easy access to specific information they want to know. In the case of
disclosure of TLAC requirements under Article 6 of the Public Notice on Disclosure pursuant toAppendix Form No. 7 or No. 16 thereof, it is preferable that such disclosure is made promptly
after the publication of the annual securities report under Article 24(1) or (3) of the Financial
Instruments and Exchange Act, the semiannual securities report under Article 24-5(1) of thesame Act, or the quarterly financial results under the relevant regulations of a financial
instruments exchange, the base date of which is the end day of the relevant quarter.
(ii) For “details of contracts relating to other external TLAC instruments” under Article 6(3)(xiv) of
the Public Notice on Disclosure, it is proper to mention particulars of the contracts relating toother external TLAC instruments in addition to the “overview of contracts relating to otherexternal TLAC instruments” under Article 6(3)(xiii) of the Public Notice on Disclosure so that
depositors, investors, and other users are able to check them easily.
It is preferable that financial institutions update disclosure information on their other external
TLAC instruments upon issuance, redemption, or change of the content of the instruments sothat users are able to check the latest information.
Note: The foregoing sets forth, among disclosure items under the Public Notice on Disclosure, mattersrelating to the disclosure of condition of sound business operations concerning TLAC in “mattersseparately determined by the Commissioner of the FSA relating to the conditions of banks’business operations” in accordance with Article 19-3(iii)(d) of the Banking Act Enforcement
Regulation. This may apply to cases under Article 19-5, Article 34-26(1)(iv)(d), and Article 3427-2 of the Banking Act Enforcement Regulation mutatis mutandis by replacing relevant terms

216on a case-by-case basis.
III-3-2-5

Major Supervisory Viewpoints(1) Attitude of management
Whether the management of the bank fully recognizes that its disclosure has more importantmeaning than that of ordinary companies from the viewpoint of maintaining the bank’s soundmanagement and maintaining the credibility, and endeavors to promote environments to ensure active
and correct disclosure and enhancement thereof(2) Formulation of disclosure policy (for internationally active banks and bank holding companies)(i)

Formulation and dissemination in the entire bank of the disclosure policy determining disclosure
procedures and structure by the board of directors(ii) Publication of key content of said disclosure policies in the Disclosure Report(iii) Development of systems to make proper disclosure in accordance with said disclosure policies by
the board of directors and senior management(iv) Description in the Disclosure Report, etc. that the management, etc., has recognized proper
disclosure is made in accordance with said disclosure policies(3) Internal control system for financial reporting(i)

Whether the management endeavors to develop the internal management structures to ensure
the appropriateness and correctness of the disclosure made by the bank(ii) As prerequisites of proper disclosure, whether, for example, the financial reporting process isproperly documented(iii) Whether systems to identify, assess, control, and monitor all the risk relating to the items in thefinancial statements, etc. are built(iv) Whether the internal management system (including internal audit) to verify the rationality andeffect of the internal control system functions(4) Easy-to-understand disclosure for users and investors(i)

Whether the bank uses accurate expressions and plain language in disclosing mandatory
disclosure items so that depositors, business partners, and other users are able to properly checkthe business activities and financial positions of the bank(ii) In particular, whether disclosure of risk management loans is properly made(iii) Whether the bank endeavors to disclose reference matters based on the purpose of Article 21(4)of the Banking Act. For example, whether the bank makes efforts to disclose the profitability by
key business or by customer segment(iv) In particular, whether the bank maintains a system to make a management decision with217

sufficiently prudent assumptions, especially, in disclosing future information and prospects, etc.
(v)

With respect to exposure in fields in which the market is strongly interested, whether the bankactively discloses useful information in line with their own risk characteristics based on theinternational best practices.

III-3-2-6

Supervisory Methods and Measures(1) Confirm the appropriateness of disclosure of financial results at interviews on the occasion of
settlement and financial reporting, etc. In addition, confirm with the bank how it checked the validityof the internal control system for preparing the representative’s confirmation letter.
(2) With regard to risk management loans and loans required to be disclosed under the Financial
Reconstruction Act, the reliability of the calculation data thereof is very critical. In this connection,
the FSA will request a report under Article 24 of the Banking Act after receiving the notice of theinspection results (II-1-2(2)(ii)(D)). In cases where the bank is deemed to have difficulty indeveloping its risk management system, etc., with voluntary improvement efforts left to the bank,including cases where the gap between the bank’s self-assessment and the inspection results bysupervisors is critical, without justifiable reasons, the FSA will issue a business improvement order
based on Article 26 of the Banking Act.
(3) Other than this, in light of the points of attention above, the FSA will encourage the bank that isjudged necessary to improve to make a report in accordance with Article 24 of the Banking Act whennecessary. If it is found that the bank has a serious problem, the FSA will issue a business improvement
order based on Article 26 of the Banking Act.
(4) In addition, when, as a result of the supervision and off-site monitoring, etc., it is clear that the bankmade a false statement in its annual securities report, the FSA will notify the Securities Surveillance
Division to that effect.
III-3-3
III-3-3-1

Provision of Information and Consultation Function, etc. for Protection of Users
Customer Explanation Concerning Credit Transactions, etc. (loan contracts, and related
collateral and guarantee contracts and derivative transactions)III-3-3-1-1

Purpose and Significance(1) Article 12-2(2) of the Banking Act and Article 13-7 of the Banking Act Enforcement Regulation
obligate a bank to, in accordance with the content and method of its business, stipulate internal218

regulations, etc. (which means internal regulations and those equivalent) concerning measures inorder to provide customers with explanations of material matters in consideration of the customers'
knowledge, experience, status of assets, and purposes of transaction, and other measures in order tosecure sound and appropriate business management (including explanation of financial instruments,
transactions, and their risks by delivery of documents and other appropriate methods, and measures
to prevent crime) and develop a sufficient system to manage its business based on training for
employees and the abovementioned internal regulations, etc.
In addition, a bank is prohibited from carrying out acts of providing false information to a customer,
acts of providing a customer with any conclusive judgment with respect to an uncertain matter, or
acts of giving information that is likely to have a customer mistakenly believe an uncertain matter tobe certain, etc. with respect to its business (Article 13-3 of the Banking Act and Article 14-11-3 ofthe Banking Act Enforcement Regulation). These acts are prohibited as acts violating measures tosecure sound and appropriate business management of a bank provided for in Article 12-2(2) of the
Banking Act.
(2) The following categorizes and exemplifies the viewpoints when the FSA inspects relevant internal
control environments of banks with respect to customer explanation for credit transactions, etc. (loancontracts, and related collateral and guarantee contracts and derivative transactions) and theconsultation and complaint handling function to supplement it by focusing on their transactions withSMEs, loans to individuals (including housing loans), and personal guarantees.
(Note 1) The following will apply to a broad range of banks’ customer relations covering their efforts inpromoting accountability as well as those in expanding information sharing and improving
mutual understanding with customers.
(Note 2) The sufficient system for customer explanation mentioned in (1) hereof must be developed for
all the businesses operated by banks, while a specific environment in accordance withrequirements under the Banking Act on Sales, etc. of Financial Instruments needs to beprepared in connection with sales of asset management products (See III-3-3-2).
III-3-3-1-2

Major Supervisory Viewpoints(1) Establishment of bank-wide internal control environment(i)

Has the board of directors exercised its functions properly with regard to the establishment of
the bank-wide internal control environment relating to customer explanation and theconsultation and complaint processing function?

(ii) Formulation of internal regulations based on the purposes of applicable laws and regulations(A)

Whether internal regulations, etc. clearly stipulate the control environment for customer219

explanation according to the content and manner of each business.
There are various types of credit transactions, including discounting of bills and notes, loans(loans on bills, loans on deeds, overdraft), loan guarantee, and foreign exchange, and there
are also several types of guarantee contracts, including guarantee instruments and bill
guarantees. Whether the bank has developed a control environment suitable to each typethereof.
In addition, whether the control environment is designed to cope with various transaction
types including internet transactions, etc.
(B) Whether the internal regulations, etc. clearly provide for the control environment forcustomer explanation according to the customers’ knowledge, experience, status of assets,
and purpose of transaction. In particular, whether it is designed to handle SMEs andindividual customers according to their actual status.
(iii) Establishment of implementation system based on the purposes of laws and regulations(A) Whether training and other measures (including the distribution of manuals and so forth) are inplace to ensure the businesses are being operated based on the internal regulations, etc.
(B) Whether the internal check-and-balance functions such as inspection, audit, etc. areproperly working to ensure the effectiveness of customer explanation, etc.
(iv) Collaboration between the management consultation function and customer explanation
When a bank offers loans to customers assuming a long-term trade relationship with them,whether the bank has developed customer explanation for information sharing after granting loans
as the environment to enhance and strengthen management consultation functions therefor (SeeIII-3-3-1-2(5)).
(2) Explanation when entering a contract
The FSA will inspect whether, with respect to the following, the bank has formulated appropriate
internal regulations, etc. and has established a system sufficient to operate its businesses based
thereon including holding training for its employees, etc.;(i) Explanation of the content and risks of products and/or transactions
Whether the bank provides a customer with necessary information to obtain his/her adequate
understanding to make a decision for a contract.
For this validation, in particular, the points listed below need to be noted.
(A) When the loan transaction involves derivative transactions such as options and swaps, etc.
(including the case where only derivatives transactions are conducted), whether the bankpays attention to the following, according to the content and risk thereof based on thecustomer's knowledge, experience, status of assets, and purpose of transaction, so that thetransaction will not violate the provisions of the respective items of Article 13-3 of the
Banking Act and the respective items of Articles 38 and 40 of the Financial Instruments andExchange Act.

220

a.

Whether the bank provides appropriate and sufficient explanations about the descriptions
and risks of said derivative transactions by issuing a written document explaining them withdiagrams and examples in an easy-to-understand manner.
For example,
・ With regard to the maximum anticipated loss assuming the worst-case scenario (based onreasonable assumptions such as data from previous times of stress; the same shall apply
hereinafter) regarding the levels of financial indices, etc. that cover said derivatives
transaction (including, as necessary, levels of volatility; the same shall apply hereinafter),whether the bank provides explanations to customers in a way that they can sufficiently
understand the risk, including the possibility of the loss becoming even greater if
circumstances turn out to be different from those assumed.
・ Whether the bank conﬁrmed the amount of losses that are acceptable to a customer as far
as said derivative transactions are concerned. Furthermore, when there is the possibility
that the customer may suffer loss greater than the acceptable level even in the case where
the abovementioned worst-case scenario does not occur, whether the bank has explainedsuch risk to the customer in an easy-to-understand manner?
・ Whether the bank has explained to customers, in an easy-to-understand manner, about
how the financial indices or other circumstances would have to be for occurrence of sucha situation in which the derivative transaction may have a material impact on thecustomer’s management or financial position.
・ When the bank uses diﬀerent examples or illustrations that are unavoidably diﬀerent fromthe actual derivative transactions for the sake of explanation, whether the bank explainsthat the mentioned examples or illustrations are different from the actual transactions.

b.

Whether the bank provides appropriate and sufficient explanations about premature
cancellation of derivative transactions and the resultant settlement money on cancellation
by issuing a document that gives specific and easy-to-understand explanations.
For example,
・ In cases where said derivative transactions are, in principle, unable to be canceledprematurely, whether the bank explains this to customers in an easy-to-understandmanner.
・ In cases where settlement monies arise if said derivative transactions are prematurely
canceled, whether the bank provides explanations to customers, in an easy-to-understandmanner, about this fact and about the details of the settlement money on cancellation(including the tentatively calculated amount of the settlement money on cancellation
assuming the worst-case scenario regarding the levels of financial indices and so forth, andif there is a possibility that the amount could be greater than said tentatively calculated
amount, an explanation to this effect)?
・ If there is a possibility that occurrence of any event provided for in the acceleration clause221

of the bank’s transaction contract, etc. would also cause acceleration of the derivatives
transactions and customers would be required to pay the settlement monies oncancellation, whether the bank provides explanations to customers, in an easy-tounderstand manner, about it.
・ Whether the bank has conﬁrmed the amount of settlement money on cancellation that is
acceptable to a customer as far as said derivative transactions are concerned. Furthermore,when there is the possibility that the customer may suffer loss greater than acceptable leveleven in the case where the abovementioned worst-case scenario does not occur, whether
the bank has explained such fact to the customer in an easy-to-understand manner.
c.

In cases where the derivative transactions are provided for the purpose of hedging, has thebank confirmed the following? Also, whether the bank provides appropriate and sufficient
explanations to a customer in a specific and easy-to-understand manner.
・ Whether the bank has conﬁrmed that the derivative transactions serve as an eﬀective
hedging tool for the customer to operate its business continuously even taking into accountthe customer’s business situation (environments surrounding its purchase, sales andfinancial transactions, etc.) and its competitiveness in the market (price-setting practicewith suppliers or buyers). (*1)
・ Whether the bank has conﬁrmed that the abovementioned scenario that the derivativetransactions serve effectively as a hedging tool is expected to continue until the end of thecontract period. (*2)
・ Whether the bank has conﬁrmed that the customer would not end up suﬀering diﬃculties
in terms of its future operation due to said derivative transactions. (*3)(Note 1) It should be kept in mind that, for example, the bank should comprehensively
determine, even if exchange rates or interest rates fluctuate, whether the customer
has the capability of price bargaining or price setting to reduce the impact of thesefluctuations.
(Note 2) Note that, for example, even in cases where losses have not arisen due to the hedging
instrument itself, there may be cases where the customer’s hedging needs might beswayed or the effects of the hedge might stop functioning effectively for such needs
before the end of the contract period due to changes in the customer’s businesssituation or competitiveness in the market, such as shrinking of the assumed businessscale.
(Note 3) Note that fixing purchase price via hedging instruments could affect the customer’s
price competitiveness.
d.

Whether the bank has confirmed with customers that they have received an explanation
based on the matters listed in a. through c. above. Are the records thereof kept in written
form (confirmation letter, etc.)?

e.

With regard to uncertain matters, whether the control environment is designed to prevent

222

any representation or explanation that would mislead customers to believe it to be anaffirmative decision.
f.

With regard to solicitation of persons deemed to be excluded from the ban on uninvited
solicitation for derivative transactions, based on the applicable law(*), whether the bank has
confirmed the customer’s hedging needs by using past customer transaction histories, etc.
Whether the bank solicits for contracts that are within the scope of those needs.

(Note) It should be kept in mind that “corporations engaging in foreign trade or any otherforeign exchange transactions” (Article 116 (ii) of the Cabinet Office Order concerning
the Financial Instruments Business Operators, etc.) that are deemed to be excluded
from the ban on uninvited solicitation include cases where, for example, a domestic
building contractor, who imports lumber from overseas, in reality, imports and exports
through a domestic trading firm rather than transacting directly with overseas exporters,
but does not include cases where it simply purchases imported lumber from a domestic
trader.
g.

A customer may have concerns that execution of a contract of the derivatives transactions
offered by the bank would have effect on loan transactions with the bank (*1). Based onsuch assumption, whether the bank provides the customer with explanations to eliminate
such concerns. (*2)

(Note 1) For example, depending on the situation where the bank solicits for or explains thederivative transactions (cases where the bank does this during the consultation for aloan or where the bank solicits several times, etc.), there is a possibility that thecustomer would see such sales activities as abuse of the bank’s superior position.
Whether the bank develops its sales activities taking into consideration suchpossibilities must be checked.
(Note 2) For example, whether the bank explains that non-acceptance of solicitation of thederivative transaction, etc. would not have any effect on future loan transactions, andwhether measures have been taken in order to confirm that the customer has received
an explanation that there is no abuse of superior position must be checked.
h.

Whether the bank has developed a control environment to follow up with a customer,
regularly and as needed, after conclusion of the derivative contract. For example, does thebank confirm the effectivity and sustainability of hedge instruments according to thecontinuance of the needs based on the customer’s business situation and financial position
and response to inquiries from the customer in an easy-to-understand and appropriatemanner, etc.?
If requested by the customer, does the bank provide in a timely and appropriate manner
information that is needed for the customer to settle its accounts or make decisions on
canceling transactions? For example, whether the bank provides the customer with market
price information on their position or notifies the customer of the amount of settlement223money on cancellation at a particular time on a periodic or as-needed basis.
(B)

With regard to housing loan contracts, whether the bank provides customers withappropriate information and explanations about associated risk thereof. In particular,
whether the bank provides customers with sufficient explanations about the risk of interest
rate fluctuation, etc. relating to housing loans with variable-interest-rates and housing loans
with a fixed-interest-rate for a prescribed limited period of time.
In providing explanations, for example, whether the bank takes measures to explain in
accordance with “Explanation about the interest rate fluctuation risk to housing loan users”(by the Japanese Bankers Association dated December 21, 2004). In addition, in presenting
an estimated repayment amount in cases where the applicable interest rate rises in the
future, whether the bank shows an amount calculated based on assumptions deemed
reasonable under the economic situation at that time.

(C) With regard to a personal guarantee contract, whether the bank provides a guarantor with
explanations sufficient to form his/her intention not only to be bound by the guarantee
obligation but also to assume the responsibilities under the contract if the guarantee
obligation is enforced.
For example, whether the bank gives explanations on the legal effect and risk of theguarantee contract beyond the mere formality thereof, assuming the worst-case scenario
where a guarantor is forced to perform the guarantee obligations.
In addition, whether the bank confirms that the guarantor has received the abovementioned
explanations and records the results, etc. in writing or in electronic forms.
(D) When concluding a personal guarantee contract with a business owner, etc., whether thebank provides the principal debtor and the guarantor with detailed and specific explanations
about the following points based on the “Guidelines for Personal Guarantee Provided byBusiness Owners.” In addition, whether the bank confirms that the guarantor has received
explanations based on the matters listed below, and records the results, etc. in writing or inelectronic forms (See III-9-2).
a.

What part is insufficient and requires the conclusion of the guarantee contract (Note).

b.

What improvements may increase the possibility of modification or cancellation of theguarantee contract (Note).

c.

In principle, when requiring a guarantor to perform the guarantee obligations, the bank will
demand performance of the guarantee obligations not unconditionally for the whole
guaranteed amount but by setting the scope of performance in consideration of the financial
and asset situation of the guarantor at that time (Note).

(Note) The bank should give individual and specific explanations, depending on the debtor’ssituation based on 4(2) of the “Guidelines for Personal Guarantee Provided by Business
Owners.”224

On that occasion, it is desirable that the bank show, to the extent possible, its qualitative
standpoint as for the debtor’s assets and earning power, and its objective and specificstandpoints as for any other relevant factors.
(E) A joint and several guarantee contract has a different nature from ordinary ones such as
having neither “hojusei” nor “bunbetsu-no-rieki”. With regard to such joint and several
guarantee contract, whether the bank gives explanations to a guarantor about such difference
taking into account the guarantor’s knowledge, experience, etc.
(Note 1) “hojusei” means a nature where the principal debtor must first fulfill the obligationand the guarantor will perform the guarantee obligation only when the debtor fails to
do so.
(Note 2) “bunbetsu-no-rieki” means a nature where, when there are two or more guarantors,
each guarantor is required to guarantee only the part of the guaranteed amountdivided by the number of guarantors.
(F) When concluding a personal joint and several guarantee contract with a third party otherthan the business owner (See III-10), does the bank pay attention to the degree of such third
party’s involvement in the management of the debtor? Also, does the bank give specificexplanations about the possibility that the third party would be forced to perform theguarantee obligation in principle even if he/she is not substantially involved in the
management of the debtor? At the same time, does the bank confirm that the guarantor hasreceived the abovementioned explanations?
(Note) In cases where a third party other than the business owner (the contracting party) has
proposed to enter a joint and several guarantee contract voluntarily despite he/she notbeing substantially involved in the management of the debtor, it should be noted that thebank has confirmed that conclusion of such contract was not forced by the bank, byreceiving a written document signed and sealed by the contracting party certifying thathe/she was going to enter the contract based on his/her own free will after receiving specificexplanations from the bank.
(G) When concluding a revolving guarantee contract with a third party other than the businessowner, as a general rule, does the bank provide the guarantor with information on thebalance and repayment status of the guaranteed amount regularly or as needed upon requestof the guarantor after conclusion of the contract?
(H) With regard to a loan guaranteed by the Credit Guarantee Corporations, does the bankprovide appropriate explanations about the details of the guarantee system to use and theguarantee fee rate, etc. according to the user’s knowledge, experience, etc.?
(ii) Explanation about objective and reasonable grounds to enter a contract
Whether the bank has developed a control environment to give to a customer, upon request,
explanations about objective and reasonable grounds to enter a contract according to thecustomer’s knowledge and experience to gain his/her understanding and satisfaction in order to225

prevent any after-the-fact dispute, etc.
For the validation from (A) and (B) below, note whether the bank has developed a control
environment to give explanations about matters listed in each of them upon request from
customers, and as for validation of (C), whether the bank has developed a control environment
to give explanations of the above (D) a. to c. in case of conclusion of a guarantee contract andto record the results, etc. in writing or in electronic form.
(A) Loan contract
Objective and reasonable grounds to enter a loan contract, based on the customer’s asset
status with regard to the content of the contract such as the loan amount, interest rate,
repayment conditions, causes of acceleration and financial covenants, etc.
(B) Pledge contract
Objective and reasonable grounds to enter a pledge contract, based on the actual andprospective transaction status with the debtor and the asset status of the provider of collateralwith regard to the content of the contract such as the maximum amount of pledge, etc.
(C) Guarantee contract
Objective and reasonable grounds to enter a guarantee contract with the guarantor based on
the guarantor’s position, asset status, relationship with a principal debtor and other guarantors,
etc.
a.

For a revolving guarantee contract, objective and reasonable grounds to enter the contract,
based on the actual and prospective transaction status with the principal debtor and theasset status of the guarantor, with regard to the maximum amount of guarantee established,
the principal determination date, etc.

b.

In cases where the bank concludes a personal joint and several guarantee contract with athird party other than the business owner, objective and reasonable reasons to enter theguarantee contract with such third party in light of the perspective of “establishing a loan
practice in which, in principle, banks will not demand a personal joint and several guarantee
from a third party other than the business owner” while, as needed, considering the concept
under “Prohibition of demanding a third-party guarantor by the Credit Guarantee
Corporations.“ (See III-10-2(1).)

c.

In cases where the bank demands a guarantee from the business owner, etc., objective andreasonable grounds to enter a guarantee contract with such business owner based on the“Guidelines for Personal Guarantee Provided by Business Owners.” (See III-9-2) (Note)(Note) When explaining the objective and reasonable reasons, the bank should give individual
and specific explanations about which part makes the guarantee contract necessary owing
to its insufficiency and what kind of improvement will enhance the possibility to amend or
terminate the guarantee contract, depending on the debtor’s situation.
On that occasion, it is desirable that the bank show, to the extent possible, its qualitative
standpoint as for the debtor’s assets and earning power, and its objective and specific226standpoints as for any other relevant factors(iii) Confirmation of intention to conclude a contract(A) Whether the bank makes it a rule to first explain the content of the contract to thecontracting party, to confirm his/her intention to conclude a contract for a loan, provisionof collateral, guarantee, or derivative transaction and then to have the principal of thecontracting party(*) express consent to the content of the contract. In particular, when
confirming the intention of guarantee, whether the bank confirms with the contracting party(guarantor) about the degree of his/her involvement in the management of the debtor.
(Note)For conclusion of an important contract with an SME that is a so-called “company run
by an owner-operator,” attention should be paid to the fact that, in some cases, it is not
sufficient to obtain confirmation from a person who has mere formal authority.
In particular, in cases where the derivatives transaction may have a significant impact on
the future operation of the SME, it is important to check whether entering the contract isdecided by the board of directors of such SME.

(B) For conclusion of a contract in an exceptional manner such as via written communication
only, whether the bank has clearly determined how to handle it in the internal regulations,etc. based on sufficient consideration from the viewpoints of customer protection andcompliance. Whether the bank has developed a highly effective internal control environment
to secure compliance with the internal regulations.
(C) Whether the bank has established a highly effective internal control environment to prevent
improper use of the marginal seal practice or other unjust practices such as a case in whichbank staff require a customer to sign and seal a contract document without entering
necessary matters and then the bank staff complete the contract document by entering
necessary matters later.
(D) Whether the bank has developed a control environment not to provide an improper
explanation that may mislead a customer to think that “he/she will surely be awarded with aloan” before the official decision of the bank is made.
(iv) Issuance and delivery of contract documents
When concluding a loan contract, a pledge contract, or a guarantee contract, whether the bankdelivers a written contract and/or related documents describing the content thereof to theprincipal of the contracting party.
For this inspection, in particular, the points listed below need to be noted.
(A) Whether the bank uses the form of signing in counterpart as a banking transaction contract
or issuing a copy thereof to the contracting party.
(B) For a loan contract, a pledge contract, or a guarantee contract, whether the bank ensuresthat the contracting party can check the content of the contract at any time by issuing a copy
thereof, etc.
(C) With regard to discounting of bills and notes or loans on bills that are not fit for ordinary227

practice where a written contract is prepared and issued upon every trading transaction
because of their form of transaction, whether the bank ensures that the contracting party
can check the content thereof at any time by developing a proper contractual scheme suchas documentation of the terms and conditions of the contract.
(3) Consistency with bank’s basic loan management policy (credit policy)
It is also necessary to inspect whether each bank’s control environment for customer explanation on
credit transactions is consistent with its basic loan management policy (credit policy, etc.).
For this, the FSA will pay attention to the viewpoints, for example, of establishing a sound loan
practice and promoting loans without excessive dependence on collateral or guarantee as follows.
Banks should recognize that sound loan practice does not excessively depend on collateral or
guarantee and that they must offer loans by comprehensively judging a debtor’s management situation,use of funds, and the probability of collection. From the viewpoints of “promoting a loan that does notexcessively depend on collateral or guarantee by putting more emphasis on cash flow from the business
operation,” “further promoting a loan that does not rely on the business owner's guarantee” (see III9-2) and “establishing a loan practice that makes it a rule not to require a personal joint and several
guarantee from a third party other than the business owner” (see III-10), the FSA will inspect how thebank copes with it as its management policy and how the policy is reflected in the bank’s actual
customer explanation.
(4) Efforts to expand information sharing and to improve mutual understanding with customers
When banks offer a loan to a corporation assuming a long-term transaction relationship with it, it isimportant to establish a base for mutual understanding between the lender and debtor and to provide
the corporation with support for management improvement or quick business rehabilitation whennecessary while jointly managing the risk under such base.
From these perspectives, the FSA will inspect as to whether the following control environments are
put in place with regard to customer explanation.
(i) Efforts to establish a base for mutual understanding(A) Communication from banks
Each bank needs to manage loans sufficiently and properly according to the borrowing
corporations’ real status after granting loans by grasping their business situation, performanceof loan, confirmation of use of funds, progress of projects, etc. Whether the bank has developed
a control environment of customer explanation aimed at gaining mutual understanding
between the bank and the borrower in these processes with regard to the bank’s judgment on
the borrowing corporation’s business situation, financial position, and evaluation of collateral
to be provided, etc.
(B)

Communication from borrowing corporations

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It is important for the borrowing corporations to consult with the bank about their businesssituation as early as possible so that they can benefit from a long-term reliable relationshipwith the bank. Whether the bank has developed a control environment to explain suchimportance to borrowing corporations.
(ii) Efforts to enhance and reinforce management consultation and support functions
In cases where the bank deems it necessary to provide the borrower with management
improvement support (including formulation of a management improvement plan or a loan
repayment plan) and to back up its prompt business rehabilitation, whether the bank honestly
explains its judgment on the borrower’s business conditions, financial position, or prospect of thebusiness under mutual understanding and then holds a consultation with and gives advice to theborrower.
(5) Explanation when the bank revises the trading relationship with a customer
Customer explanation in the case where a bank revises the trading relationship with a borrowing
corporation should be made under a control environment in which the bank is able to provide
appropriate explanations to the borrower in line with its own business decision. In this case, attention
should be paid so that the bank will not give improper explanation or use an unfair excuse, for example,
that the revision is necessary because of regulatory inspection, etc.
For this, the FSA will inspect as to whether control environments to give proper explanations asfollows have been developed in the cases from (i) to (iii) below;(i) Cases where, after conclusion of a contract, interest rate or repayment conditions are revised, aguarantee contract is revised, collateral is additionally provided or canceled, etc.
Based on the transaction relationship with the customer to date, the customer’s knowledge,
experience, status of assets, and purpose of transaction, whether the bank has developed a control
environment aimed at gaining the customer’s understanding and satisfaction in principle in thesame manner in III-3-3-1-2(2) (Explanation when entering a contract).
In particular, at the time of the business succession of a borrowing corporation, the bank should,
without having the successor unconditionally succeed to the personal guarantee obligation, review
the necessity of concluding a new guarantee contract upon obtaining necessary information basedon the “Guidelines for Personal Guarantee Provided by Business Owners,” and when it has decided
to enter a new contract, the bank should give careful and specific explanations to both the principal
debtor and the successor. Whether the bank has developed such a control environment.
In addition, when requested by the predecessor (former representative/owner of the borrowing
corporation) to cancel the guarantee contract, the bank should make a proper judgment on thecancellation of the contract taking into consideration whether the predecessor still has substantial
control of the corporation, how the loan is secured by means other than said guarantee, or the
corporation's repayment probability based on its own assets and profitability (see III-9-2). Whether

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the bank has developed such a control environment.
(ii) Cases where the bank refuses a request of the customer and no loan contract is concluded
Whether the bank has developed a control environment in which it explains reasons of refusal tothe extent possible according to the transaction relationship with the customer to date, and thecustomer’s knowledge, experience, status of assets, and purpose of transaction.
・ For example, when the bank refuses a renewal of a loan on a bill requested by a customer withwhom the bank has maintained a long-term transaction relationship, whether the bank explainsto the customer about such refusal, in principle, by taking sufficient time to gain the customer’s
understanding and satisfaction based on the principle of good faith.
・ For example, with regard to a loan guaranteed by the Credit Guarantee Corporations, whether
the bank does not make any improper response such as using the fact that the “Responsibilitysharing System” was introduced in October 2007 as an excuse for refusal without giving true
and appropriate reasons according to its own business judgment.
(iii) Cases of collection of delayed loans (including those resulting from disposition of collateral andclaim for performing a personal guarantee), assignment of claims, corporation rehabilitation
proceedings (legal liquidation and voluntary liquidation), personal rehabilitation proceedings,
etc. of the debtor or guarantor(A) Whether the bank has developed a control environment where it properly performs a seriesof procedures step by step according to the transaction relationship with the customer todate, and the customer’s knowledge, experience, status of assets, and purpose of transaction
in compliance with application laws and regulations.
For example, when requesting a third-party guarantor other than the business owner of the
debtor to perform the guarantee obligation, whether the bank has a control environment inplace to properly cope with it by providing the guarantor with correct information, etc. about
the series of proceedings as necessary to prevent future disputes, etc. The bank should keep inmind that the guarantor is not in a position to know the principal debtor’s situation naturally(see III-10-2(3)).
(B) Whether the bank explains objective and reasonable grounds to the customer at every stepof procedures if requested.
(C) Particularly with regard to the performance of the guarantee obligation of the businessowner, the bank should decide the scope of the assets that may be left to the guarantor bycomprehensively considering the guarantor’s capacity to perform the obligation, themanagement responsibility and credibility of the guarantor as a business owner, and theconsistency with the concept of “property free from any encumbrance” in the bankruptcy
proceedings in collaboration with support professionals, as needed, based on the “Guidelines
for Personal Guarantee Provided by Business Owners” (see III-9-2). Whether the bank hasdeveloped such a control environment.

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(6) Enhancement and reinforcement of complaint handling function(i)Whether the bank accumulates and analyzes complaints, etc. received from customers andconsiders measures to improve customer explanation at the time of entering a contract. Whether
the bank considers whether it should continue to sell or offer products or transactions for which
the bank receives many complaints from customers.
In addition, whether the bank checks complaints from products and transactions sold or madeafter measures to improve customer explanation were taken and validates the effects of suchmeasures.
For this inspection, in particular, attention should be paid to the effectiveness of the complainthandling system relating to III-3-3-1-2(5) (Explanation when the bank revises the transaction
relationship with a customer) and III-3-5-2 (Establishment of Internal Control Environment for
Handling Complaints).

(ii) With regard to the inspection of serious complaints including alleged abuse of superior position,etc., the bank should take proper measures, for example, whereby a person in charge of theinspection at the headquarters or in the relevant inspection division, etc. directly interviews the
person who made the complaint as needed without simply believing the content of a report madeby the sales person who triggered the complaint, from the viewpoint of securing objectivity andappropriateness of the inspection. Whether the bank has developed such a control environment.
(iii) Whether the bank has introduced a proper control environment to cope with violence intervening
in civil affairs, such as refusal of any connection with anti-social forces.
(A) Whether the bank has introduced a control environment to cope with unjust acts such as
coercion to cancel a loan or collateral or prevention of collection, etc.
(B) Whether the bank has introduced an integrated management environment for legal affairs
including loan transactions in order to properly submit a notification of suspicioustransactions under the Banking Act on Prevention of Transfer of Criminal Proceeds.
(7) Prevention of explanation falsely recognized as anti-fair trade practice(i)

Whether the bank has developed a control environment to prevent any explanation that may befalsely recognized as abuse of superior position, which would infringe the Anti-Monopoly Act.
In June 2006, the Fair Trade Commission issued the “Survey report concerning thetransaction practices between financial institutions and corporations,” which shows examples ofpractices that are considered to be abuse of superior position. Whether the bank reflects thecontent of the report in its customer explanation. Whether the bank has not only distributed theabovementioned report to its sales branches but also introduced a control environment toprovide a concrete explanation based on the report in line with its actual business practice.

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For this inspection, for example, the points listed below need to be noted.
(A) As examples of violating practices, the report presents a case where “a bank forces aborrowing corporation to accept an increase of the interest rate under the loan contract or
to make a repayment before the due date without any justifiable reasons by implying thatthe bank will give unfavorable treatment to the borrower relating to future loanarrangements, etc. unless the borrower accepts such request” or a case where “a bank forcesa borrowing corporation to provide additional collateral in excess of the necessary extent tosecure the loan obligation.” Whether the bank has developed a control environment forcustomer explanation aimed at gaining the customer’s understanding and satisfaction on theobjective and reasonable grounds for revisions of interest rates, etc. while improving its
compliance system to prevent it from engaging in such practices.
(B) As examples of violating practices, the report shows a case where “a bank forcefully requests
a corporate borrower to purchase its financial products and services such as firm banking,derivatives, and corporate bond management, by implying that the bank will give
unfavorable treatment to the borrower relating to loan arrangements, etc. unless theborrower accepts such request.” Whether the bank has developed its compliance system toprevent it from making such kinds of requests.
(C) Even for a so-called “transaction considering comprehensive profitability,” meaning atransaction in which the bank grasps the profitability of multiple transactions with one
customer as a whole (excluding transactions falling under the scope of combined sales),whether the bank has developed the control environment mentioned in (A) and (B) above.
(ii) Whether the bank has developed a control environment to prevent it from giving explanations
that may be falsely recognized as unjust practices such as insider trading under the Financial
Instruments and Exchange Act.
III-3-3-1-3

Supervisory Methods and Measures(1) Whether the control environment relating to customer explanation and the consultation andcomplaint handling function to supplement it have been developed and operated relates to the baseof the bank’s sound and appropriate business operation, as well as to the viewpoints of customer
protection and user convenience. Therefore, associated internal control environments need to behighly effective.
In cases where any doubt arises on the effectiveness of the bank’s internal control environments
and the doubt relates to prohibited acts such as misleading representations to customers, the FSA
will inspect the bank by requiring it, as needed, to submit a report (including those under Article 24of the Banking Act). In cases where a problem is found in appropriateness and soundness of thebank’s business operation, the FSA will require the bank to submit a report pursuant to Article 24 of
the Banking Act and if it is a serious problem, the FSA will issue a business improvement order based232

on Article 26 of the Banking Act.
(2) In cases where, as a result of the inspection of the abovementioned reports or the business
improvement status, a material violation of laws is detected including cases where it is found that the
management of the bank failed to formulate important internal regulations, etc. against the purposeof the laws as described in III-3-3-1-1(1) or where it is recognized that the bank gave a false
explanation to customers, the regulator should keep in mind that it is necessary to consider taking
administrative dispositions based on Article 27 of the Banking Act (for example, suspension of a partof the business operation until the bank prepares a sufficient system therefor by preparing internal
regulations, etc.). It is also necessary to fully cooperate with the Securities Business Division if any
improper practices relating to individual financial instruments transaction may violate the Financial
Instruments and Exchange Act.
(References)(i) Report of Working Group for Legal Affairs for New SMEs Finance (dated July 16, 2003, by theWorking Group for Legal Affairs for New SMEs Finance)(ii) “Future Vision of Japan’s Financial System with Medium-term Outlook” (dated September 30,
2002, by the Financial System Council)(iii) Enhancement of Relationship Banking Functions (dated March 27, 2003, by the Financial
System Council)(iv) “Evaluation of Efforts in Region-based Relationship Banking and Future Response - to Establish
a Sustainable Business Model to Utilize the Accumulated Local Information” (dated April 5, 2007,
by the Financial System Council)(v) Survey Report concerning the Transaction Practices between Financial Institutions andCorporations (dated July 4, 2001, by the Japan Fair Trade Commission)(vi) Survey Report concerning the Transaction Practices between Financial Institutions andCorporations (dated June 21, 2006, by the Japan Fair Trade Commission)(vii)

Abolishment of Banking Transaction Contract Templates and Preparation of Points toNote (dated April 18, 2000, by the Japanese Bankers Association)(viii)

Reform of Japan’s Finance System (dated June 13, 1997, by the Financial System

Research Committee)
III-3-3-2
III-3-3-2-1

Sales and Customer Explanation for Deposit and Risk-Associated Products, etc.
Purpose and SignificanceA bank must provide information on the details of deposit, etc. to depositors when accepting deposits, etc.
(Article 12-2(1) of the Banking Act, Articles 13-3 and 13-4 of the Banking Act Enforcement Regulation). In
particular, a bank, when handling the financial instruments listed in each item of Article 13-5(1) of the Banking

233

Act Enforcement Regulation, must provide an explanation to customers in order to prevent customers frommisidentifying the financial instruments with deposits, etc. In addition, a bank, in accordance with the content
and method of its business, must stipulate internal regulations, etc. concerning measures in order to securesound and appropriate business management and must develop a sufficient system to manage its business inaccordance with said internal regulations, etc. (Articles 12-2(2) and 13-3 of the Banking Act and Articles 13-5,
13-7, and 14-11-3 of the Banking Act Enforcement Regulation)
In selling risk-associated products, a bank must develop the abovementioned control environments inconsideration of not only the Banking Act but also other applicable laws and regulations including, but notlimited to, the Financial Instruments and Exchange Act.
Particularly, with regard to deposits or installment savings, etc. that carry the risk of loss of the principal due
to fluctuations in the interest rate, value of currencies, market price of a financial instruments market, or otherindices (hereinafter referred to as “specified deposits, etc.”), it should be noted that the provisions of the
Financial Instruments and Exchange Act apply mutatis mutandis to them and that they are subject to the
obligation to deliver pre-contract documents, restriction of advertisement, etc. (Article 13-4 of the Banking Act
and Articles 14-11-4 to 14-11-30 of the Banking Act Enforcement Regulation)
III-3-3-2-2

Major Supervisory Viewpoints

From these perspectives, the FSA will inspect as to whether the following control environments are put inplace.
(1) Establishment of bank-wide internal control environment(i)

Has the board of directors exercised its functions properly with regard to the establishment of thebank-wide internal control environment relating to customer explanation?

(ii) Formulation of internal regulations based on the purposes of applicable laws and regulations(A)

Do internal regulations, etc. clearly stipulate the control environment for customer explanationaccording to the content and manner of each business?
In particular, when handling risk-associated products, such as specified deposits and investment

trusts, etc. has the bank prepared a control environment according to each characteristic of theseproducts?
In addition, is the control environment designed to cope with various transaction types includingInternet transaction, etc.?
(B)

Do the internal regulations, etc. clearly provide for the control environment for customer
explanation according to the customer's knowledge, experience, status of assets, and purposes oftransaction?

(iii) Establishment of implementation system based on the purposes of laws and regulations(A)

Are training and other measures (including the distribution of manuals and so forth) in place toensure the businesses are being operated based on the internal regulations, etc.?

234

(B)

Are the internal check-and-balance functions such as inspection, audit, etc. properly working toensure the effectiveness of customer explanation, etc.?

(C)

Does the bank review the contents of financial instruments or sales activity based on theverification of the effectiveness of its customer explanation, etc.?
(iv) Actions based on the Financial Service Provision Act
Are the explanation methods and the content thereof in selling financial instruments to customers
appropriate from the standpoints of Article 12-2-2 of the Banking Act, Articles 13-5 and 13-7 of the
Banking Act Enforcement Regulation, the Financial Service Provision Act, and other applicable laws?
In addition, does the bank make efforts to establish a control environment for customer explanation tosecure proper solicitation considering the purpose of the obligations to establish and publicize thesolicitation policy under the Financial Service Provision Act?
(v)

Prevention of explanation falsely recognized as anti-fair trade practice
When developing a control environment for preventing abuse of superior position, banks must take
into consideration a possibility that customers might have concerns that “proposed transaction may
have impact on the future loan arrangement.” Based on such assumption, has the bank developed acontrol environment to prevent any explanation that may be falsely recognized as abuse of superior
position?

(2) Acceptance of deposits, etc. (excluding acceptance of specified deposits, etc.)
Base on the purposes of Article 12-2(1) of the Banking Act and Article 13-3 of the Banking Act
Enforcement Regulation, with regard to the acceptance of deposits, etc., has the bank developed anenvironment to provide information with regard to the acceptance of deposits, etc. and to give proper
explanation of products information as required by the depositors? For example, the following points
should be noted.
(i)

For a variable interest rate deposit for which the criteria and method of setting the interest rate arepredetermined, is a control environment in place to provide depositors with information on thesecriteria and the interest rate?

(ii) When giving advice to affiliate financial institutions relating to the sale and customer explanation
based on the cooperation agreement for deposit products, does the bank properly provide them withinformation on risks and merchantability of such deposit products?
(3) Businesses handling risk-associated products(i)

Sale of securities-related instruments
With regard to the businesses subject to the Financial Instruments and Exchange Act including,but not limited to, over-the-counter sale of bonds and investment trusts and other financial
instruments intermediary service, does the bank secure the business operation in accordance withthe requirements for investor protection set forth in said Act and applicable laws? For example,
attention should be paid to whether there is a system in place to prevent occurrence of events that235

may disturb customer protection such as handling by a person who has not been registered as asales representative or handling financial instruments at a place other than a specified window.
For other specific supervisory viewpoints, refer to “VIII. Supervisory Evaluation Points andVarious Administrative Procedures (Registered Financial Institutions)” described in the“Comprehensive Guideline for Supervision of Financial Instruments Business Operators, etc.”
In particular, when developing a control environment for providing explanations based on theprinciple of suitability, the bank must take into account that many bank customers are depositors
who have less investment experience. Based on such assumption, is a system in place to prevent
customers from misidentifying these products as deposits, by ensuring that the bank will givethem an explanation that these products may cause loss of the principal amount or are not covered
by deposit insurance?
(ii) Acceptance of specified deposits, etc.
Considering that restriction on acts under the Financial Instruments and Exchange Act applies
to specified deposits, etc. mutatis mutandis, for specific supervisory viewpoints of specified
deposits, etc., refer to “III-2-3-1 Principle of Suitability,” “III-2-3-3 Regulation on
Advertisements, etc.” “III-2-3-4 Control Environment for Providing Explanations to Customers”
and “IV-3-1-2(3) Points of Attention Regarding Solicitation Targeting Elderly Customers”
described in the “Comprehensive Guidelines for Supervision of Financial Instruments Business
Operators, etc.”
In particular, attention should be paid to whether there is a system in place to give detailed
explanations that the value of the financial instruments could fall below the principal amount due
to fluctuations in interest rates, values of currencies, market prices of a financial instruments
market, or other indices.
For example, has the bank explained the following matters by delivering pre-contract
documents?
(A)

If, at the time of premature cancellation, there is a possibility that the amount of the deposits
could fall below the principal amount due to the penalty, etc. on cancellation, how to calculate
the penalty, etc. on cancellation (including the estimated amount of the penalty, etc. on
cancellation on the assumption deemed reasonable in the economic situation at the time ofgiving an explanation)(B)

For specified deposits, etc. denominated in a foreign currency whose value may fall below
the principal amount, that fact and the reasons therefor(C)

In cases where the bank has an option to choose the currency at the time of repayment and/or
the maturity date, the fact that the depositor may suffer disadvantage depending on theexercise of such option by the bank.

(iii) Solicitation and acceptance of, among specified deposits, etc., those that are complexly structured
with derivatives transaction defined in Article 2(20) of the Financial Instruments and Exchange
Act or commodity derivatives transaction defined in Article 2(15) of the Commodity Derivatives

236

Transaction Act (so-called “structured deposits”) that are as complex as the over-the-counter
derivative transactions
Considering that restriction on acts under the Financial Instruments and Exchange Act applies
to specified deposits, etc. mutatis mutandis, attention should be paid to whether the following
systems are in place, particularly at the time of accepting complex structured deposits that are ascomplex as the over-the-counter derivative transactions.
(A)

Points of attention regarding the distribution of notices of warning concerning complex
structured deposits
In the event of a problem arising, does the bank alert customers appropriately by distributing

clear and concise documents (Notice of Warning) which specify the following in large print andin an easily understandable manner and by giving explanations suited to the customer
attributes? (i) an alert to the associated risks and (ii) the contact details of the designated ADR
body, etc. Is there a control environment in place in which the implementation status of this canbe appropriately inspected?
(B)

Points of attention regarding the solicitation of complex structured deposits (reasonablebasis suitability and solicitation commencement criteria)
When soliciting an individual customer to purchase complex structured deposits, it is important

for the bank to ensure appropriate solicitation based on the principle of suitability from theperspective of improving investor protection. Attention should be paid to the following points,
for example:
・ Whether the bank veriﬁes in advance the suitability of a structured deposit to be sold to acustomer (reasonable basis suitability).
・ Whether the bank appropriately formulates solicitation commencement criteria according to
the risk profile of the structured deposit and the customer attributes and solicits customers
based on such criteria.
(C)

Points of attention regarding the explanation of risk on complex structured deposits
For specific supervisory viewpoints of the explanation of risk on complex structured deposits,refer to “IV-3-3-2 Control Environment for Customer Solicitation and Explanations (6)”described in the “Comprehensive Guideline for Supervision of Financial Instruments Business
Operators, etc.”(iv) Sale of specified insurance contract
For sale and solicitation of a specified insurance contract as provided for in Article 300-2 of the
Insurance Business Act, special attention should be paid to the points of attention regarding
specified insurance contract described in the “Comprehensive Guideline for Supervision of
Insurance Companies.”(4) Insurance Sales(i)

Outline237

With regard to the compliance with laws relating to insurance sale, correct explanation on
insurance products and contracts, and handling of customer information, is a proper control
environment for insurance sales in place via formulation of a manual, provision of training, andinternal audit?
For example, banks are required to develop control environments for the efforts of proper
insurance sales such as not selling insurance products to parties restricted from life insurance
solicitation by banks, etc. by earning commission or other consideration, the efforts to fulfill its
accountability while fully considering wishes and suitability of consumers, and the efforts to obtaincustomers’ confirmation and consent relating to the product explanation and the protection of
non-disclosure financial information, etc. Has the bank developed such control environments?
(References)“Troubles of bank’s over-the-counter sale of personal pension insurance policy

to the elderly” (dated July 6, 2005, by the National Consumer Affairs Center of Japan)(ii) Development of control environment for insurance sales(A)

Based on the purpose of Article 13-5 of the Banking Act Enforcement Regulation, has the bankdeveloped a system to prevent customers from misidentifying insurance contract as deposits, etc.,
for example, by delivering relevant documents and explaining that an insurance contract isdifferent from a deposit and is not covered by the deposit insurance? Have measures been taken
in order to confirm from customers that they have understood the explanation on prevention of
misidentification and to check it later; for example, receiving a written confirmation or the likefrom customers and keeping it?

(B)

Based on the purpose of Article 14-11-3 of the Banking Act Enforcement Regulation, is a system
in place to prevent any event adversely affecting the customer protection such as sales using
superior effect of the bank, failure of provision of an explanation to the effect that it will notaffect any transaction with the bank, or handling by a person who has not been registered as asales agent? In particular, when any unfair trade practice is found in connection with insurance
sales such as forced sale, abuse of superior transaction, tie-in sale, etc., this may constitute a
violation of the Anti-monopoly Act. Has the bank developed a control environment to prevent
such act beforehand?

(References)“Unfair transactions associated with deregulation of business categories andexpansion of business scope of financial institutions” (dated December 1, 2004, by theJapan Fair Trade Commission)
For other specific supervisory viewpoints, refer to the “Comprehensive Guideline forSupervision of Insurance Companies.”
III-3-3-2-3

Supervisory Methods and Measures(1) Control environments for sale and customer explanation of risk-associated products should be secured
through business operation in compliance with the related laws and regulations such as the Financial

238

Instruments and Exchange Act and the Insurance Business Act. In cases where the FSA feels, fromfollow-up of the notice of inspection results, receipt of the misconduct notifications, analysis ofconsultation and complaints, etc., any doubt in a bank’s control to secure its business operation incompliance with the related laws and regulation, etc. or the effectiveness of its sale and customer
explanation, etc. of risk-associated products, any possibility that the bank conducts a prohibited act
such as misleading representation to customers, or any doubt in the effectivity of the bank’s
acceptance and customer explanation for complex structured deposits, etc., the FSA will hold an indepth interview with the bank in light of relevant laws and regulations with regard to the causes andimprovement measures, etc. and encourage the bank to make steady improvement, by requiring
reports based on related laws as well as reports under Article 24 of the Banking Act as needed.
If it is found that the bank has a serious problem, the FSA will issue a business improvement orderpursuant to Article 26 of the Banking Act together with those based on relevant laws and regulations.
(2) In addition, as a result of the inspection, in cases where a material violation of laws is detected,
including cases where it is found that the management of the bank failed to formulate importantinternal regulations, etc. against the purpose of laws as described in III-3-3-2-1 or where it isrecognized that the bank gave a false explanation to customers, attention should be paid to thenecessity to consider taking administrative dispositions based on Article 27 of the Banking Act (forexample, suspension of a part of the business operation until the bank prepares a sufficient system
therefor by preparing internal regulations, etc.)
III-3-3-3
III-3-3-3-1

Control Environments for Management of Information Related to Customers, etc.
Purpose and Significance

Customer information constitutes the basis of financial instruments transactions. Therefore, it isextremely important to ensure the appropriate management of customer information, and banks are
required to take measures to ensure proper handling of customer information acquired in relation to theirbusiness (Article 12-2(2) of the Banking Act).
In particular, information regarding individual customers needs to be handled in an appropriate mannerin accordance with the Banking Act Enforcement Regulation, the Act on the Protection of Personal
Information (hereinafter referred to as the “Personal Information Protection Act”), the Guidelines on the
Act on the Protection of Personal Information; (General rules), (Provision to foreign third parties),(Obligation to confirm and record at the time of provision to third parties), (Pseudonymized personal
information / anonymized personal information) (hereinafter collectively referred to the “Personal
Information Protection Guidelines”), the Guidelines on the Protection of Personal Information in the
Financial Sector (hereinafter referred to as the “Financial Sector Personal Information Protection
Guidelines”) and the Guidelines for Practical Affairs regarding Safety Control Measures specified in the239

Guidelines on the Protection of Personal Information in the Financial Sector (hereinafter referred to as the“Practical Guidelines”).
In addition, personal information including credit card information (number and expiration date,etc.)(hereinafter referred to as “credit card information, etc.”) needs to be strictly managed, because
secondary damage such as spoofed purchase via unauthorized use of such information may occur if it isleaked.
Furthermore, because banks are in position where they can access sensitive corporate-related information(referred to “Corporate Information” as defined in Article 1(4)(xiv) of the Cabinet Office Order concerning
the Financial Instruments Business Operators, etc.; the same applies hereinafter), they are required tostrictly control that information and to prevent insider trading and any other unfair transactions.
Based on these matters, it is important for banks to establish a control environment wherein they canproperly manage customer information and sensitive corporate-related information (hereinafter referred
to as “information related to customer, etc.”)
III-3-3-3-2

Major Supervisory Viewpoints(1) Control environments for management of information related to customers, etc.
(i)

Whether the management team recognizes the necessity and importance of ensuring theappropriateness in the management of information related to customers, etc. based on theprinciple that access and use of information related to customers, etc. should be limited to theofficers and employees who need to know such information for the execution of business
operations (hereinafter referred to as the “Need to Know principle”) , and h as developed aninternal control environment, such as establishing an organizational structure (including
establishing appropriate checks between divisions), formulating internal regulations, andcollaborating with other financial institutions (including holding company) within the financialgroup to ensure the appropriate management of such information, depending on the content andsize of the business.

(ii) Whether the bank has formulated a specific standard for the handling of information related tocustomers, etc. and communicated it to all officers and employees through the provision oftraining and other means. Whether the formulated standard is based on Need-to-Know Principle
regarding the sharing of information related to customers, etc. internally and externally, or within
the same department of the bank or between different departments. In addition, whether thebank has formulated a standard for the provision of information related to customers, etc. to third
parties, based on careful deliberations, so as to ensure that necessary procedures are implemented
in accordance with the above laws and regulations, the Personal Information Protection
Guidelines, the Financial Sector Personal Information Protection Guidelines, and the Practical
Guidelines.
(iii) Whether the bank has established an environment for appropriately managing information240

related to customers, etc. and has established arrangements and procedures necessary for
examining, in a timely and appropriate manner, the status of the management of information
related to customers, etc. with the involvement of compliance department, including thoroughmanagement of access to information related to customers, etc. (such as preventing the people
with access rights from deviating from the scope of the Need-to-Know Principle and preventing
access rights assigned to certain people from being used by others), measures to prevent themisappropriation of information related to customers, etc. by insiders, a robust information
management system that prevents unauthorized access from the outside, and preventive
measures of leakage of information related to customers, etc. at the time of consolidation andabolition of sales branches.
Also, whether the bank has attempted to implement appropriate measures for preventing
wrongful acts utilizing information related to customers, etc., such as the dispersal of authority
concentrated upon specific personnel and the enhancement of controls and checks overpersonnel who have broad powers.
(iv) Whether the bank has established arrangements and procedures for appropriately reporting to
responsible divisions when information related to customers, etc. has been leaked, and notifying
relevant customers, reporting to the authorities, and disclosing to public in a prompt andappropriate manner to prevent secondary damage.
Also, does the bank analyze the causes of information leaks and implement measures designed
to prevent recurrence? Furthermore, in light of incidents of information being leaked at othercompanies, whether the bank examines measures needed to prevent a similar incident fromoccurring at its organization.
Regarding operationally important cases such as those posing the possibility of exerting impact
on customers, whether the management of the bank appropriately gets involved in the decisionmaking concerning actions to be taken(v)

Whether audits covering the broad range of business operations pertaining to information related
to customers, etc. are being conducted by an independent internal audit division or the like on aperiodic or as-needed basis. When such broad range of business operations are conducted
integrally by the entirety of a financial group, whether efforts for cooperation are being madeamong the internal audit divisions, etc. of other financial institutions within the group (including
holding companies).
Also, whether the bank has implemented appropriate measures, such as training programs, inorder to increase the specialization of the staff engaged in audits pertaining to the managementof information related to customers, etc.

(2)

Management of personal information(i)With regard to information concerning individual customers, has the bank implemented thefollowing necessary and appropriate measures for its safe management and supervision of persons

241engaged in order to prevent such information from being leaked, lost, or damaged, in accordancewith Article 13-6-5 of the Banking Act Enforcement Regulation?
(A)

Measures based on Articles 8 and 9 of the Financial Sector Personal Information Protection
Guidelines(B)

Measures based on I, II, and Appendix 2 of the Practical Guidelines(ii) Has the bank implemented measures to ensure that information regarding the race, religious
beliefs, family origin, registered domicile, healthcare, and criminal records of individual
customers, as well as other specified non-disclosure information (*), are not used except for thecases specified in each item under Article 5(1) of the Financial Sector Personal Information
Protection Guidelines in accordance with Article 13-6-7 of the Banking Act Enforcement
Regulation?
(Note)

Other specified non-disclosure information includes the following;(A)

Information regarding labor union membership(B)

Information regarding ethnicity(C)

Information regarding sexual orientation(D)

Information regarding matters set forth in Article 2(iv) of the Enforcement Order of the
Banking Act on Protection of Personal Information(E)

Information regarding matters set forth in Article 2(v) of the Enforcement Order of the
Banking Act on Protection of Personal Information(F)

Information regarding facts that he/she has suffered damage by crime(G)

Information regarding social status(iii) For credit card information, etc., has the bank implemented the following measures?
(A)

Whether the bank has set an appropriate period of time for keeping credit card information,etc., which takes into account the purpose of use and other circumstances, and whether it
limits the locations where such information is kept, and disposes of the information in a
prompt and appropriate manner after the retention period has lapsed.

(B)

Whether the bank has implemented appropriate measures when displaying credit card
information, etc. on computer monitors, such as not displaying whole credit card numbers,
unless needed for business operations.

(C)

Whether the bank’s independent internal audit division conducts internal audit on a periodic
or as-needed basis on whether the rules and systems for protecting credit card information,etc. are functioning effectively.

(iv) Has the bank taken measures to comply with Article 12 of the Financial Sector Personal
Information Protection Guidelines and other applicable provisions with regard to the provisionof personal data to third parties? In particular, does the bank obtain consents from individual
customers while paying attention to the following points according to the nature and methods ofthe business?
(A)

When obtaining a consent from an individual customer for the provision of his/her242

information to a third party in a non-face-to-face manner such as via PC or smartphone, etc.,
whether the bank has designed the relevant webpage so that individual customers can easily
understand the content and purpose of use of information provided to such third party bymaking it more customer-friendly in terms of the text of consent, letter size, screen
specifications, manner of giving consent, etc. in accordance with Article 3 of the Financial
Sector Personal Information Protection Guidelines.
(B)

Even in the case where the bank has obtained a consent for the provision of personal
information to a third party from an individual customer in the past, if the third party towhich the information is provided or the content of information to be provided is different
from the past case or if the scope of provision of such information exceeds the necessary
extent to achieve a utilization purpose specified before, whether the bank obtains a consent
from such individual customer again.

(C)In cases where personal information of individual customers is provided to multiple third
party contractors or where the purpose of use of personal information varies at each third
party contractor, whether the bank considers the scope of the third parties for which a
consent of the customer is necessary to obtain, and how and when to obtain such consent inproper manner so that the individual customers are able to understand the fact that theirinformation will be provided to multiple third parties, as well as the purpose of use at eachthird party contractor.

(D)

In obtaining consent for the provision of personal information to third parties, whether thebank is mindful not to cause any risk of abuse of superior position or conflict of interest
between the bank and the individual customer. For example, whether an individual customer
is forced to give consent beyond the reasonable scope of provision in terms of the third
parties to which the personal information is provided, the purpose of use, or the content of
information to be provided.

(3)

Prevention of insider trading and other unfair transactions using corporate-related information(i)Whether the bank has established procedures needed from the viewpoint of effectively preventing
the unauthorized use of corporate-related information for insider trading in a specific manner,such as setting up a Chinese Wall (Organizational, physical, or systemic barriers for information
management; the same applies hereinafter.) between private departments (The ones which areconsidered to permanently obtain corporate-related information among sales departments.) andpublic departments (The ones other than private departments among sales departments which
are to solicitate sale and purchase of securities or other transactions, operate intermediaryservices, work as an agent for such transactions, or make transactions on its own or throughbrokerage transaction.) When making Wall Cross (An information sharing across Chinese Walls;
the same applies hereinafter.) in an exceptional manner, whether the bank has establishednecessary procedures in a specific manner from the viewpoint of effectively preventing any

243unauthorized use of corporate-related information, including recording names of the relevant
officers and employees, the relevant dates, and the relevant stocks, etc. and requiring theapprovement from the compliance department in advance.
Also, in cases where the bank allows officers, etc. to have access to corporate-related
information from the managerial control necessity, whether the bank has taken measures neededfrom the viewpoint of effectively preventing the leak or unauthorized use of corporate-related
information by the officers, etc.
(Note) Conceivable examples of taking measures for the “organizational barrier” include theseparation of departments or reporting lines and the restriction on plural office holding by
officers and employees; such examples for the “physical barrier” include the restriction on
entry to the department that manages corporate-related information, and the relevant
document management; and such examples for the “systemic barrier” include managing
the rights of access to corporate-related information.
(ii) Whether the bank establishes an appropriate internal control environment, such as by developing
the internal regulations pertaining to the sale, purchase, and other transactions of securities by
its officers and employees and their related persons, and having the compliance department get
involved appropriately in the transactions that are stipulated as transactions for which the priorapproval and other relevant procedures are required under the internal regulations, and therevision thereof as needed.
(iii) Whether the bank makes efforts for strengthening the sense of compliance, such as enhancing
professional ethics and ensuring full understanding of relevant laws and regulations and theinternal regulations, aimed at preventing insider trading and other unfair trading by its officers
or employees.
(iv) Whether the bank understands the relevant situations, such as the sale, purchase, and othertransactions of securities by its officers and employees who are in a position to access corporaterelated information and their related persons, and implements appropriate measures such as therevision of the relevant methods as needed.
(v)

In cases where the bank has overseas business bases or belongs to an internationally active
financial group, with regard to the management of corporate-related information, whether thebank has established appropriate management environments of which levels are suitable for thecontent and scale, etc. of its business provided globally while also complying with the laws andregulations in each country, for example, whether the bank manages corporate-related
information not only at home but also on the global group basis through its organizational andintegrated policies, procedures, and systems, etc.

III-3-3-3-3

Supervisory Methods and Measures

If inspection results, deplorable event notifications, or the like reveal a problem relating to a bank’s

244control environment of information related to a customer, etc., the FSA will require the bank to submit
detailed reports based on Article 24 of the Banking Act, as needed. If a serious problem is found, the FSA
will issue a business improvement order or implement any other measures based on Article 26 of the
Banking Act.
In addition to the above-mentioned measures based on the Banking Act, with regard to information ofindividual customers, note that necessary measures should be taken according to the delegation of authority
to the competent minister for the relevant business under the Personal Information Protection Act asneeded.
III-3-3-4
III-3-3-4-1

Outsourcing
Purpose and SignificanceOutsourcing by banks of a part of their business operation to a third party (hereinafter referred to as“outsourcing”) may lead to not only improvement in management efficiency but also prompt response tovarious needs of customers based on speedy innovation of technology by entrusting a part of their work to
external contractors who have more expertise in the relevant field.

However, for this, banks need to ensurethat the outsourced business is properly and soundly managed in terms of protection of customers andproper management of various risks associated therewith, and are required by laws to take necessary
measures to ensure that the outsourced business is properly performed (Article 12-2(2) of the Banking Act
and Article 13-6-8 of the Banking Act Enforcement Regulation).
The following are general points to consider regarding banks’ outsourcing. Note that additional
inspection may be necessary according to the content of the outsourced business.
(Note 1)

Outsourcing includes cases where a bank outsources part of administrative work critical for its
business operation to a third party contractor (cases where a bank is deemed to substantiallyoutsource its business to an external contractor even if a formal contract is not concluded orwhere the outsourced work is performed overseas.)(Note 2)

In cases where a bank outsources a part of necessary operations relating to its inherent businessto a third party (except where such third party serves as a bank agent with the permission under
Article 52-36(1) of the Banking Act or as a financial service intermediary with the permission
under Article 12 of the Financial Service Provision Act (limited to “deposit, etc. intermediarybusiness operations” stipulated in Article 11(2) of the same Act; the same applies hereinafter),the FSA should inspect, in addition to the following points, whether said outsourcing is notdeemed to constitute bank agency services.

(Note 3)For example, outsourcing of a bank’s mere auxiliary business to an external contractor is notconsidered to be a “bank agency service” which requires permission under the Banking Act ora “financial service intermediary” which requires permission under the Financial Service

245

Provision Act. However, if the bank outsources such business, the FSA endeavors to grasp theactual situation regularly by holding an interview with the bank based on the following
viewpoints.
(Note 4)

In case of outsourcing between a bank and its subsidiary company, also refer to V-3-3, etc.

III-3-3-4-2

Major Supervisory Viewpoints(1) Whether the following control environment is developed (including the bank’s requiring its
outsourced contractor to do so in the outsourcing contract, etc.) from the viewpoint of customer
protection.
(i)

Whether the bank makes it clear that the outsourcing of business operations does not cause anychange in the contractual rights and obligations involving it and its customers and that thecustomers continue to have the same rights as if the business operations were conducted by thebank itself.

(ii) Whether the bank developed a control environment that prevents customers from sufferinginconveniences if the bank cannot be provided with the services agreed under the outsourcing
contract with its outsourced contractor.
(iii) Whether the outsourced contractor has developed a control environment for managing
information related to customers, etc. including prohibition of use of the information for
unauthorized purposes. Whether the outsourced contractor is bound by the confidentiality
obligations.
(iv) When outsourcing the handling of individual customer information to an external contractor,
whether the bank has taken the following measures to supervise the outsourced contractor interms of necessary and appropriate measures to prevent such information from being leaked, lost,or damaged based on Article 13-6-5 of the Banking Act Enforcement Regulation.
(A)

Measures based on Article 10 of the Financial Sector Personal Information Protection
Guidelines

(B)
(v)

Measures based on III of the Practice Guidelines

With regard to the management of outsourced contractors, whether the bank clarifies the
responsible division and confirms that outsourced contractors are properly managing information
related to customers, etc., such as by monitoring on a periodic or as-needed basis how business
operations are being conducted at outsourced contractors.

(vi) Whether the bank has confirmed that outsourced contractors have systems in place to takeappropriate actions and to promptly report to the bank in the event that information is leaked,
lost, or damaged.
(vii) Whether the bank restricts the access right by outsourced contractors to the information related
to customers, etc. possessed by the bank to the extent necessary according to the nature of theoutsourced business.

246

On that basis, whether the bank checks whether the officers and employees at outsourced
contractors to whom access rights are given have been defined, along with the scope of theiraccess rights.
Furthermore, whether the bank confirms that the access rights are being managed thoroughly
at outsourced contractors on a periodic or as-needed basis, such as by checking how the accessrights are used (including matching authorized persons against actual users) in order to preventthe access rights assigned to certain people from being used by others.
(viii) In cases where an outsourced contractor entrusts the outsourced business of the bank to its
subcontractors, whether the bank checks whether the outsourced contractor is adequately
supervising such subcontractors. Whether the bank directly supervises such subcontractors asneeded.
(ix) Whether the bank has developed a proper system to deal with customers’ complaints such as byproviding a direct communication line from customers to the bank.
(2) Whether the bank has developed a necessary control environment (including the bank’s requiring its
outsourced contractor to do so in the outsourcing contract, etc.) by comprehensively reviewing theoutsourcing scheme from the viewpoint of securing its management soundness including the points
shown below, etc.
(i)

Risk management
Whether the bank has comprehensively checked risk that is associated with the outsourcing suchas impact on the bank’s operation if the outsourced services are not provided as guaranteed in theoutsourcing contract. Whether the bank has considered how to cope with the risk upon occurrence.

(ii) Selection of outsourced contractor
Whether the bank selects outsourced contractors from the viewpoint of rationality in its
management and reputation.
(iii) Content of contract
Whether the outsourcing contracts fully cover and clearly stipulate the following matters.
(A)

Content and level of services to be provided and cancelling procedures, etc.

(B)

Responsibilities of the outsourced contractor if it fails to provide the bank with theoutsourced service in accordance with the outsourcing contract. Matters relating to burdenof damages that may arise in connection with the outsourcing (including securing of
fulfillment of the obligation to burden damage such as provision of collateral as needed.)(C)

Content of reports the bank receives from the outsourced contractor relating to theoutsourced business and the management status of the outsourced contractor(D)

Arrangements in response to requirements for inspection and supervision by the competent
finance regulators(iv) Statutory obligations imposed on bank
Whether the outsourcing interferes with the bank’s

247

statutory obligations which would beimposed on it if such operation outsourced is performed by the bank itself.
(v)

Control environment by bank
Whether the bank has developed a control environment within the bank in terms of appointmentof a manager in charge of the outsourcing, monitoring and inspection scheme, etc. (including
insertion of a provision enabling the bank to check and audit the appropriateness of the service
provided by the outsourced contractor, etc.)(vi) Provision of information
Whether the control environment is designed to enable the bank to promptly receive necessary
and appropriate information on progress of the outsourced business from the outsourced
contractor according to the degree of importance thereof.
(vii) Audit
Whether the outsourcing is included in the scope of audit of the bank.
(viii) Emergency response
Whether the bank has prepared measures to prevent its banking operation from being materiallydisturbed even when the outsourced service is not provided as guaranteed in the outsourcing
contract. In addition, under such circumstance, whether a system is in place to provide relevant
services to customers on behalf of such outsourced contractor.
(ix) Outsourcing to group companies
When the outsourcing contract is concluded between the bank and any of its group companies,
whether the content of the contract violates the arm’s length requirement such as substantiallyproviding favorable support to such group company.
III-3-3-4-3

Supervisory Methods and Measures(1) Cases where a problem is found in bank’s control environment
If a problem is found in a bank’s internal control environment relating to the outsourcing, from theinspection results and the misconduct notifications, etc., the FSA will require the bank to submit areport based on Article 24 of the Banking Act, as needed. If a serious problem is found, the FSA will
issue a business improvement order or implement any other measures based on Article 26 of the
Banking Act.
(2) Cases where a problem is found in control environment of business operation, etc. of the outsourced
contractor(i)

Response to bank
If a problem is found in the business operation of the outsourced contractor from the inspection
results or if it is found from the misconduct notifications, etc. that the outsourced contractor
performs improper business operation, the FSA will, in principle, first try to find the facts throughthe bank that entrusted it with the outsourced work (including the management environment of248

the bank). In this case, too, the FSA will require the bank, as needed, to submit a report basedon Article 24 of the Banking Act, and if a serious problem is found, the FSA will issue a business
improvement order based on Article 26 of the Banking Act. This, however, will not preclude the
FSA from taking the following action in parallel with the above based on the urgency andimportance of relevant cases.
(ii) Action to outsourced contractor
When the FSA considers that it is difficult to grasp the actual situation of the outsourcing
sufficiently only by the measures under (i) above, the FSA will make efforts to grasp it by holding
a direct interview with the outsourced contractor. When it is deemed particularly necessary (forexample, cases where multiple financial institutions entrust similar work to such outsourced
contractor or cases where the outsourcing may affect the whole settlement system of the bank),
the FSA will request such outsourced contractor to submit a report based on Article 24(2) of the
Banking Act with regard to necessary matters such as the fact of occurrence of a problem, analysis
on causes of occurrence of the problem, and improvement measures.
(Note) When holding an interview with an outsourced contractor, the FSA asks the bank, which
outsourced business to it, to attend the interview as needed.
III-3-4
III-3-4-1
III-3-4-1-1

Rules, etc. for User Protection
Measures to Prevent Customers’ Misidentification
Purpose and SignificanceIn some cases, a bank conducts business operations with its business offices located in a building also occupied
by another financial institution, from the viewpoint of improving customer convenience and streamlining
administrative work. In these cases, it is important that measures should be taken for prevention of
misidentification by customers.
III-3-4-1-2

Major Supervisory Viewpoints

When a bank has a business office in a building or floor also occupied by another bank’s headquarters or
branch, whether appropriate measures are taken from the viewpoints of avoiding misidentification by customers,
protecting customer information, and preventing crime. In this case, if using computer facilities in common
with others, whether the bank develops a control environment to enable it to comply with its own information
management regulations.
While banks are actively promoting the revision of their branch development strategy and business operations,
there can be some cases where a decision is made to continue the operation of a business office located in a
depopulated area based on the needs of the local community or where, as a result of business integration,249

multiple business offices are located in the same area, and two or more banks maintain one business office incommon in such area. As examples of these cases, in addition to the case where two or more banks operate acommon business office, there are given a case where a bank serves as a bank agent or financial services
intermediary, or registered financial institution of another bank on a commission basis, and a case where two or
more banks entrust the same outsourced contractor with bank agent business or financial services intermediarybusiness.
In this way, when several banks have a common business office in the same building or on the same floor,
they do not necessarily have to install a wall between the banks’ spaces. However, attention should be paid,
especially, to the following points from the viewpoint of preventing customers from misidentifying these banks.
(i)

In cases where the bank conducts business operations with its business offices located in a building or
floor also occupied by another financial institution, whether the bank provides customers with
sufficient explanations regarding the following matters.
(A)

The bank and said financial institution, its parent/subsidiary corporations, etc. sharing the samebuilding or floor are different.

(B)

Products and services provided by the bank are not ones provided by said financial institution
or its parent/subsidiary corporations, etc.

(ii) In cases where an employee of the bank concurrently holds office at the sales division of another bank,etc., whether the following measures have been taken appropriately. In addition, whether his/herreporting line and the chain of command at the bank are clarified.
(A)

The content of the products or services handled by the employee at the common business officewhere he/she works, and the name of the corporation that is the provider of such products orservices, should be posted at said business office, so that customers visiting the business officecan easily understand these matters.

(B)

The employee should clearly show the customers the scope of the bank, financial institution,etc. where he/she concurrently holds office. In particular, if the employee is engaged inreceiving an unspecified number of customers, such as in counter operations, it is recommended
that information such as the scope of the major products or services that the employee deals
with and the status of his/her holding of multiple offices should always be clearly shown tocustomers, by posting it at the counter at all times.

(C)

In particular, when the employee solicits new customers or solicits existing customers for new
products or services, he/she should give sufficient explanations on the status of his/her holdingof multiple offices and the scope of the products and services that he/she deals with.

(D)

When concluding contracts with customers, the employee should secure the opportunity for thecustomers to properly recognize the name of the corporation with which they are to conclude
the contracts, such as by making confirmation in writing.

(iii) Whether the measures based on III-3-3-3 are taken for proper management of customer information
so that the bank’s customer information will not be used for the business of other financial institutions,etc. which occupy the same business office.

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III-3-4-1-3

Supervisory Methods and Measures

If inspection results, deplorable event notifications, or the like reveal a problem relating to the preventionof misidentification by customers, the FSA will require the bank to submit a report based on Article 24 of
the Banking Act, as needed. If a serious problem is found, the FSA will issue a business improvement order
or implement any other measures based on Article 26 of the Banking Act.
III-3-4-2

Points of Attention regarding Private Banking, etc.

III-3-4-2-1

Purpose and SignificanceIn recent years, banks actively launch and promote business for wealthy people in which they identify
customers holding wealth beyond the prescribed level (“wealthy customers”) and offer them multiple
services and financial instruments for property and asset management (so-called “private banking” or“wealth management”). It is important to supervise and inspect the actual operation of such business andthe associated risk from both viewpoints; the principle of self-responsibility of users, and the protection ofdepositors, investors, and trustors, according to the independent and special nature of such business
different from the ordinary service.
III-3-4-2-2

Major Supervisory Viewpoints(1) Determination of sound and proper profit or sales goal and supervision and management of business
operation(i)Banks are required to introduce sufficient internal control and governance to properly balance
profitability and compliance and to control the sales activity in order to properly perform thetransactions relating to the customer’s property and asset management in a long-term span, tomaintain a sound transaction relationship, to set sound and proper profit and sales goals, and tosecure the appropriateness and reasonableness of the business operation. Whether the bankintroduces such internal control and governance system. Additionally, whether the bankintroduces and develops a control environment to properly supervise and manage each sales staff
member individually according to the size of the sales activities.

(ii) Whether the salary and bonus systems of sales staff, officers, and employees are not excessively
linked to short-term earnings or overly reflective of performance. In addition, whether the bankpromotes sales activities or product structures improperly concentrating on changeovertransaction and revolving trading of foreign exchange, investment trust, or other negotiable
instrument overly focusing on earning of commissions as well as solicitation and sale of financial
instruments containing derivatives or leverage effect such as structured deposits or bonds.

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(2) Development of control environment to supervise and manage proper sales(i)

From the viewpoint of fulfilling accountability in consideration of customers’ knowledge andexperience in financial trading and investment, whether the bank fully validates the suitability ofcustomers and the appropriateness and reasonableness of the financial instruments andtransactions offered by the bank. Also, whether the bank properly keeps and maintains therecords of approvals and internal decisions for these trading transactions (judgments and reasons
thereof, etc.).

(ii) Whether the bank develops a control environment to check and validate whether the transactions
with customers are continuously monitored and supervised, and whether relevant informationsuch as results of management and performance in the process of transaction, real time market
information, occurrence of risk and fluctuation factor, etc. are timely disclosed and explained tocustomers in a proper and sufficient manner in accordance with applicable laws and regulations
and the bank’s internal regulations.
(iii) Whether there is a situation in which a sound and appropriate relationship that should bemaintained between a bank and a customer is not maintained because the bank prioritizes
acquisition of customers, such as a case where persons in managerial positions of the bank’s sales
division excessively respond to customers.
(iv) In addition to an individual transaction with customers, whether any conditions that aresubstantially equivalent to unfair kickback or rebate, etc. are included in any arrangements
between the bank’s sales staff and those related to the transaction. Whether an internal control
environment is in place to restrain and control these conditions, etc.
(3) Establishment of information control environment, etc.
(i)

When a bank, which has the function to grant credit to them, conducts financial transactions withspecific customers, the bank is prohibited from abusing the bank’s superior position andconducting so-called “tie-in sales,” which means selling financial instruments, etc. in reward for
granting credit. Whether the bank develops a control environment to implement the customer
assessment and check each transaction in a sufficient manner to prevent the bank fromconducting such activities. Whether there are any cases where the customer compels the bank to
grant credit and the bank improperly accepts such demand.

(ii) Whether the bank has a system to properly use customers’ non-disclosure or important
information and to keep and reserve it in a proper and sufficient manner. Whether the bankestablishes a control environment in which, when customer information has been leaked, thebank is able to correctly grasp the details thereof and take prompt and proper actions to prevent
secondary damage. Note that with regard to the actual status of archiving and common use bylegal units of customer information, inspection may be needed as to their control environment
and to whether the bank has obtained customers’ sufficient understanding and prior approvals

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and consents.
(4) Establishment of a control environment to prevent violation of laws and to secure fair and reasonable
trade, etc.
(i)

From the standpoint of eliminating illegal transactions and unfair and improper trade, whether
the bank not only checks the compliance of each transaction but also secures a fair trade priceand transparency of transaction. Also, whether the bank sufficiently validates the appropriatenessand reasonableness of each customer transaction itself by paying attention to the true purpose of
the customer, the purpose of the whole structure, transaction effect given to customers and otherstakeholders, possibility of risk occurrence, reasonable burden, economic rationality, etc.

(ii) Whether procedures and an internal control environment have been established appropriately tovalidate that the commission earnings and profit margins received by the bank from thetransactions, etc. with customers are set at a proper and reasonable level and to check and restrain
such level at all times.
(iii) Whether the bank has established an internal control environment to properly supervise andmanage responses to specific disputes with customers according to the degree and situation
thereof.
(5) Establishment of a control environment to detect and eliminate money laundering and othersuspicious transactions, etc.
(i)

Whether the bank has a control environment to enable the bank to grasp the customers’ asset
background, fund source, the interrelationship between those who are involved in a transaction
as well as the true purpose of the financial transactions structured in each case and thebackground thereof in a proper and sufficient manner. Whether the bank ensures that thechecking function works at every transaction, and conducts an adequate assessment as to whether
to approve the customer and transaction, etc. in a timely and proper manner.

(ii) In particular, whether the bank has appointed experienced staff in charge to detect and checkmoney laundering or other suspicious transactions in which customers’ funds or assets areconcealed or transferred to overseas or in Japan by way of unlawful means and an unjust
mechanism, etc. Whether the bank has established a control environment to restrain and preventthe bank’s sales division, etc. from being involved in such kinds of transactions.
(iii) Whether the bank has introduced procedures and a system to detect, analyze, monitor, andintegrally manage suspicious customers and transactions at all times. And whether the bank has
a control environment to properly manage and handle the customers and transactions, etc. withwhom/which a problem is found.
III-3-4-2-3

Supervisory Methods and Measures253

If regular supervisory off-site monitoring, inspection results, written reports for notification of
misconduct, or the like reveal a problem relating to the operation of such business or the internal control
environment, the FSA will require the bank to submit a report based on Article 24 of the Banking Act, as
needed. If a serious problem is found, the FSA will issue a business improvement order or implement anyother measures based on Article 26 of the Banking Act.
III-3-5

Dealing with Complaints (including Financial ADR System)

III-3-5-1

Purpose and Significance(1) Need for dealing with inquiries, complaints, disputes, etc. (hereinafter, “complaints”)
Many financial products and services have inherent risks, and coupled with being specialized andinvisible in nature, it is considered that there is a strong possibility of their leading to problems.
Therefore, with regard to the sale and provision of financial products and services, in addition toproviding information and adequately implementing other advanced measures from the viewpoint ofpreventing problems and protecting customers, handling complaints after the fact is also important.
In recent years, increasing the diversity and complexity of financial products and services has led to
the greater likelihood of problems, and so from the viewpoint of protecting customers and ensuring
customer confidence, handling complaints after the fact has become even more important.
Based on these perspectives, a financial ADR system has been introduced as a framework for simply
and expeditiously processing complaints and resolving disputes related to financial products andservices (refer to Note for description of ADR), and banks are required to appropriately handle
complaints taking into account this financial ADR system.
(Note)ADR (Alternative Dispute Resolution)
An alternative method to litigation for resolving disputes which is based on agreement by theparties, such as mediation or arbitration. ADR is expected to result in prompt, simple, andflexible dispute resolution in a manner suited to the nature of the case, the circumstances of theparties, and so on.

(2) Scope
There are various forms of expression that can be made regarding the business operations of a bank.
Besides inquiries, there are also expressions of dissatisfaction made by customers, such as complaints
and disputes. It is important for banks to deal with these various forms of expression appropriately,and so they are required to develop appropriate internal control environments that enable suchtreatment.
In addition, banks are also required to develop appropriate control environments for complaints anddisputes in the financial ADR system.
However, it must be added that the distinction between these complaints and disputes is relative254

and they are connected with each other. In particular, in light of the requirement in the financial ADR
system for designated ADR bodies to ensure links between complaint processing procedures anddispute resolution procedures, rather than dealing with individual cases by formally dividing
applications made by customers into “complaints” and “disputes,” it is important that banks deal withcomplaints and disputes appropriately while taking into consideration their relativity and connections.
III-3-5-2
III-3-5-2-1

Establishment of Internal Control Environment for Handling Complaints, etc.
Purpose and SignificanceHandling complaints, etc. in a prompt, fair, and appropriate manner is an important activity that carries
the connotation of complementing the accountability to customers after the fact, and is important for
ensuring the confidence of customers in financial products and services. Banks need to develop internal
control environments to handle and deal with complaints, etc. made by customers in a prompt, fair, andappropriate manner, including measures and responses required in the financial ADR system.
III-3-5-2-2

Major Supervisory Viewpoints

The FSA will examine whether the bank has, in developing an internal control environment for handlingcomplaints, etc., developed an appropriate and effective control environment in light of the size and specificcharacteristics of its business operations. For this, the FSA will take the following points, among others,
into consideration, while being mindful of avoiding their application in a mechanical and uniform fashion.
In particular, for an examination of handling complaints, etc. of credit transactions, deposits, and riskassociated products, the FSA will keep in mind that handling complaints, etc. complements customer
explanation, and refer to III-3-3-1-2 and III-3-3-2-2 when necessary.
(1) Role of management
Whether the board of directors has exercised its functions properly with regard to the establishment of
the bank-wide internal control environment for the function of handling complaints, etc.
(2) Internal regulations, etc.
(i)

Whether the division in charge of complaints, etc., its responsibility and authority, and theprocedures for handling complaints, etc. (including response in case where an administrative
error occurs) have been established in the internal regulations so that complaints can be
responded to and dealt with in a prompt, fair, and appropriate manner. Also, whether
procedures concerning business improvement have been established so that the views ofcustomers are reflected in the conduct of business operations.

(ii)

Whether the bank has developed a control environment to disseminate internal regulations, etc.

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to its employees by means of training and other measures (including the distribution of manuals
and so forth) so that business operations for handling complaints, etc. can be conducted basedon those internal regulations.
Particularly in cases where complaints, etc. are being made frequently by customers, whether
the bank first confirms how internal regulations, etc. (not only those for handling complaints,etc.) are publicized and enforced at branches. And then whether the bank examines the causes
and problem areas in terms of control environments.
(3) Control environment for handling complaints, etc.
(i)

Whether the bank has appropriately appointed staff in charge of handling complaints, etc.

(ii)

Whether the bank has developed a control environment wherein relevant departments
cooperate and promptly deal with any complaints, etc. made by customers. In particular,
whether the bank has developed a control environment wherein the responsible division or
person in charge of handling complaints, etc. strives to fully understand the customer
complaints, etc. faced by each individual employee, and reports promptly to the relevant
departments.

(iii) Whether the bank has developed a control environment wherein it promptly settles any
outstanding cases and prevents the occurrence of any long-term outstanding cases byconducting progress management aimed at the resolution of complaints, etc. properly.
(iv) Whether the bank has developed a control environment wherein it can receive complaints
extensively, such as by improving the response provided at contact points according to theoccurrence of complaints, etc., and, by setting access hours and means of access (e.g. telephone,
mail, facsimile, and email) that are considerate of customer convenience. Also, whether thebank has developed a control environment wherein it extensively publicizes these contact points
and ways of making applications, etc. and wherein it makes them well known to customers inan easy-to-understand manner taking into account their diversity.
(v)

Whether the bank has developed a control environment for, when handling complaints, etc.,
ensuring the proper handling of personal information in accordance with the Personal
Information Protection Act, and other applicable laws and regulations, the Personal
Information Protection Guidelines, and the Financial Sector Personal Information Protection
Guidelines (See III-3-3-3).

(vi) With regard to complaints concerning outsourced business operations conducted by an external
contractor, including bank agents or financial service intermediaries, whether the bank hasdeveloped a control environment for handling such complaints, etc. promptly and appropriately,such as by establishing a system of direct communication to the bank itself (see III-3-3-42(1)(v) and VIII-5-2-2(9)).
(vii) Whether the bank has developed a control environment wherein it can communicate quickly
with relevant divisions and cooperate with the police and other relevant organizations where
necessary, in order to distinguish any pressure by anti-social forces disguised as complaints, etc.

256

from ordinary complaints, etc. and to take a resolute stance against them.
(4) Dealing with customers(i)Whether the bank goes beyond perceiving the handling of complaints as a simple problem ofprocessing procedures, and instead regards it as a question of a control environment forproviding after the fact explanations and aim to resolve a complaint with the understanding andagreement of the customer wherever possible while suitably interviewing customers on thecircumstances according to the nature of the complaint, etc.

(ii)

Whether the has bank has developed a control environment wherein it provides customers who
have made a complaint, etc. with appropriate explanations, as according to the progress of theprocedures for handling complaints, etc. while also being considerate of the specificcharacteristics of the customer, from the time the complaint is made to after its settlement (forexample, an explanation of the procedures for handling complaints, notification to the effectthat the complaint, etc. has been received, an explanation on the progress, an explanation of
the results, etc.).

(iii) With regard to complaints, etc. made by customers, whether the bank has developed a control
environment wherein, rather than only handling a complaint, etc. itself, it refers customers toappropriate external organizations according to the nature of the complaint and the wishes of
the customer, and provides information such as an overview of the standard procedures.
In cases where there is more than one means of processing a complaint or resolving a dispute(including the financial ADR system), customers should be able to choose freely, and so inreferring customers to external organizations, care should be taken so that a customer’s choice
is not unduly restricted.
(iv) Whether the bank has developed a control environment wherein, even during a period whenproceedings for handling a complaint, etc. are pending at an external organization, the banktakes appropriate action where necessary with respect to the customer who is the other party to
said proceedings (ordinarily handling customers such as providing the customer with generalmaterials or explanations.
(5) Information sharing, business improvements, etc.
(i)

Whether the bank has developed a control environment wherein complaints, etc. and theassociated results from handling them are categorized and reported to its internal control
division and sales division, and wherein information necessary for the particular case is shared
between those concerned, such as reporting important cases to the audit division andmanagement.

(ii)

Whether the bank properly and accurately records and stores information on the contents ofcomplaints, etc. and the results of dealing with them, including both complaints, etc. it deals
with itself, and those dealt with through the mediation of an external organization. Also,
whether the bank has developed a control environment wherein it analyzes the contents of257

complaints, etc., and the results of handling them, taking into consideration information, etc.,
provided by a designated ADR body, and applies this on an ongoing basis to the improvementof control environments for dealing with customers and conducting administrative processes
and to the formulation of measures for preventing any occurrence or recurrence of complaints,
etc.
(iii) Whether the bank has developed a control environment wherein the internal checks andbalances functions, such as of inspection and audit, can function properly to ensure theeffectiveness of how complaints, etc. are handled.
(iv) Whether the bank has developed a control environment wherein, when reflecting the treatmentof complaints, etc. in the conduct of business operations, the management supervises any
decisions to implement measures for business improvement or recurrence prevention, as wellas any examination or ongoing review of how the control environment for handling complaints,
etc. should be.
(6) Relationship with external organizations, etc.
(i)

Whether the bank has developed a control environment wherein it cooperates appropriately
with external organizations, etc. in working toward the prompt resolution of any complaints,
etc.

(ii)

Whether the bank has developed a control environment wherein, when filing a petition for
dispute resolution procedures with external organizations, etc. by itself, rather than simply
filing a petition without fully exhausting its own procedures, it first responds sufficiently to thesubmission of the complaint from the customer and goes through an appropriate internaldeliberation on the need for the petition.

III-3-5-3

Response to the Financial ADR System

III-3-5-3-1

In Cases Where There is a Designated ADR Body

III-3-5-3-1-1

Purpose and SignificanceIn order to enhance customer protection and improve customer confidence in financial products andservices, it is important to ensure substantial equality between banks and customers, and to resolve
customers’ complaints, etc. in a neutral, fair, and effective manner. Therefore, in the financial ADR system,complaint processing and dispute resolution from a third-person perspective are conducted by designated
ADR bodies with the participation of experts and others.
Under the financial ADR system, responses to complaint processing and dispute resolution are primarily
regulated according to basic contracts for the implementation of dispute resolution procedures (Article2(32) of the Banking Act) concluded between banks and designated ADR bodies.
Banks are required to appropriately address their obligations, etc. set forth in their basic contracts for258

the implementation of dispute resolution procedures, while bearing in mind the objective of processing
complaints or resolving disputes at designated ADR bodies.
III-3-5-3-1-2

Major Supervisory Viewpoints

The FSA will inspect whether the bank has, in responding to the financial ADR system based on theabove-mentioned purpose and significance, developed an appropriate and effective control environment
in light of the size and specific characteristics of its business operations. For this, the FSA should take into
consideration the following points, among others, while being mindful of avoiding their application in amechanical and uniform fashion.
See also the points to note in “III-3-5-2

EstablishmentofInternal

Control

Environmentfor

Handling Complaints, etc.”(1) Outline(i)

Basic contract for the implementation of dispute resolution procedures(A)

Whether the bank has promptly entered into a basic contract for the implementation of
dispute resolution procedures with a designated ADR body with respect to banking services(as defined in Article 2(25) of the Banking Act).
For example, even in cases where there is a reassignment of designation, such as adesignated ADR body having its designation rescinded or a new ADR body being
designated, whether the bank selects the best measure from the perspective of customer
convenience and promptly implements any necessary measures (such as implementing newcomplaint processing measures or dispute resolution measures, or concluding a basic
contract for the implementation of dispute resolution procedures). Also, whether the banktakes appropriate action, such as making the reassignment known to all customers.

(B)

Whether the bank has developed a control environment to faithfully perform the basic
contract for the implementation of dispute resolution procedures concluded with adesignated ADR body.

(ii) Publication, dissemination, and response to customers(A)

Whether the bank has properly publicized the name or trade name and the contact addressof a designated ADR body with which the bank has concluded a basic contract for the
implementation of dispute resolution procedures.
With regard to methods of publication, whether the bank takes measures suitable to thesize and specific characteristics of its business operations, for example, presenting
information on its website, putting up posters at its branches, producing and distributing
pamphlets, and conducting publicity activities through the mass media. Even supposingthat the bank has posted information on its website, if it is assumed that there are customers
who cannot view this information, whether the bank gives consideration to these kinds of259

customers.
In publicizing such information, whether the bank presents it in a manner that is easy forcustomers to understand. (For example, in the case of publicizing information on a website,
the page should be so designed that customers can easily access the page that provides
information on the use of the financial ADR system.)(B)

Whether the bank has developed a control environment wherein it disseminates any
necessary information to customers, such as the flow of standard procedures by thedesignated ADR body and the effects of using a designated ADR body (such as the effect ofprevention of prescription), in light of the basic contract for the implementation of dispute
resolution procedures.

(C)

In cases where the bank sells financial products or insurance products arranged by financial
instruments business operators or insurance companies, where multiple operators withvaried forms of operation are involved, including the financial instruments business
operators or insurance companies that arranged the products and banks that sold the
products, whether the bank responds to customers in a careful manner. For example,
whether the bank understands what the customers see as the problem and refers them todesignated ADR bodies that are appropriate for the causes of the problems.

Note:

In the case of an insurance product, even if the problem is related to an explanation
made by a bank selling the product (i.e., insurance agent), the entrusting insurancecompany, etc., shall be liable for any damage caused by an insurance agent to apolicyholder in carrying out the insurance solicitation activities under the provisions ofArticle 283(1) of the Insurance Business Act (except in cases provided in (2) of the same
Article). As such, attention should be paid to the fact that customers are in principle
eligible to file applications not only with designated ADR bodies with whom the bankexecutes a basic contract for the implementation of dispute resolution procedures, butalso with designated ADR bodies with whom the insurance company concludes a basic
contract for the implementation of dispute resolution procedures.

(2) Points of attention regarding complaint processing procedures and dispute resolution procedures
In light of the fact that, under basic contracts for the implementation of dispute resolution
procedures, banks assume various obligations, including those to comply with procedures, submit
materials, and respect special conciliation proposals, the FSA should take the following points, among
others, into consideration when conducting examinations.
(i)Common items(A)

Whether the bank has developed a control environment wherein, in cases where it receives
a request from a designated ADR body for compliance with procedures, submission ofmaterials, or the like, it responds to the request promptly, unless there is a justifiable reason
not to do so.

260

(B)

Whether the bank has developed a control environment wherein, in cases where it refuses arequest from a designated ADR body to comply with procedures, submit materials, or the
like, rather than the division that caused the complaint or dispute simply deciding by itself
to refuse the request, the bank conducts a proper examination as an organization withrespect to such decision of refusal. Also, whether the bank has developed a control
environment wherein, wherever possible, it explains the reasons (justifiable reasons) for thatdecision.

(ii) Response to dispute resolution procedures(A)

Whether the bank has developed a control environment wherein, in cases where it ispresented with a recommendation to accept a reconciliation plan or with a special
conciliation proposal from a dispute resolution committee member, it makes prompt
decisions on whether or not to accept it.

(B)

Whether the bank has developed a control environment wherein, in cases where it has
accepted a reconciliation plan or a special conciliation proposal, the division in charge takes
prompt action, and the audit division conducts a follow-up examination on matters including
the progress of its fulfillment.

(C)

Whether the bank has developed a control environment wherein, in cases where it rejects
acceptance of a reconciliation plan or a special conciliation proposal, it promptly explains its
reasoning and takes necessary action, such as instituting legal proceedings, in light of theoperational rules of the designated ADR body (Article 52-67(1) of the Banking Act).

III-3-5-3-2

In Cases Where There is No Designated ADR Body

III-3-5-3-2-1

Purpose and SignificanceIn the financial ADR system, even in cases where there is no designated ADR body, there is a legal
requirement for banks to instead implement complaint processing measures and dispute resolution
measures. Banks are required to ensure proper customer protection and to strive to improve customer
confidence in financial products and services by implementing these measures properly and by resolving
any complaints or disputes regarding financial products and services in a simple and expeditious manner.
III-3-5-3-2-2

Major Supervisory Viewpoints

The FSA will examine whether the bank has developed a control environment in light of the scale andspecific nature of its business operations, wherein, in cases where it implements complaint processing
measures and dispute resolution measures, it deals properly with any complaints or disputes made bycustomers while bearing in mind the objectives of the financial ADR system. For conducting examination,
the FSA should take into consideration the following points, among others, while being mindful of avoiding

261

their application in a mechanical and uniform fashion.
See also the points to note in “III-3-5-2

EstablishmentofInternal

Control

Environmentfor

Handling Complaints.”(1) Outline(i) Selection of complaint processing measures and dispute resolution measures(A) Whether the bank appropriately selects one or multiple measures in each type of registeredbusiness prescribed by law as its complaint processing measures or dispute resolution
measures, in view of the nature of its business operations, the occurrence of complaints, its
business area, and other factors. In this case, it is desirable that the bank has measures inplace that would enhance convenience for customers in making complaints or disputes, suchas providing an environment that makes it easier for customers to access relevant services interms of geography.
(B) Whether the bank has developed a control environment wherein it continuously monitors
the processing status of complaints and disputes, and where necessary, reviews and revises
its complaint processing measures and dispute resolution measures.
(C)

In cases where the bank utilizes a corporation that can conduct complaint processing services
or dispute resolution services in a fair and appropriate manner, whether the bank evaluates
whether such corporation has a financial basis and personnel structure that are sufficient tofairly and appropriately carry out operations pertaining to the handling of complaints related
to its services (Article 13-8(1)(v) and (2)(v) of the Banking Act Enforcement Regulation),in a reasonable manner based on considerable materials and other factors.

(D)

In cases where the bank utilizes an external organization, although it is not necessarily
required to enter an outsourcing contract with such external organization, it is desirable todetermine necessary matters with the external organization in advance, such as the flow ofstandard procedures and the terms and conditions regarding the burden of expenses.

(E)

In cases where expenses are incurred by utilizing the procedures of an external organization,
whether the bank has taken measures that would prevent such expenses from becoming animpediment to the filing of a petition for complaint processing or dispute resolution, such as
taking measures likely to prevent the customer’s burden of expenses from becoming
excessive.

(ii) Operation
The FSA will examine whether the bank operates measures inappropriately, such as unduly
restricting the scope of the complaint processing measures and dispute resolution measures. It
should also be kept in mind whether the bank has maintained appropriate coordination between
complaint processing measures and dispute resolution measures (refer to III-3-5-1(2)).
(2) Points of attention regarding complaint processing measures (cases where banks develop their own

262

control environments)(i)

Cases where a control environment is developed wherein consumer counselors, etc. give
guidance and advice to employees(A)

Whether the bank has developed a control environment wherein it improves the skills of its
employees engaged in processing complaints, such as periodically conducting a training run
by consumer counselors and the like.

(B)

Whether the bank has developed a control environment wherein it utilizes the specialized
knowledge and experience of consumer counselors and the like, where necessary, forprocessing individual cases, such as building a network with consumer counselors and thelike.

(ii) Cases where a bank develops its own operational system and internal rules(A)

Whether the bank has properly developed an operational system and internal rules on thebasis of the status of occurrence of complaints, and whether it has developed a control
environment wherein it processes complaints in a fair and appropriate manner based on said
system and rules.

(B)

Whether the bank has made customers aware of the contact point for making complaints in
an appropriate manner, and whether it has properly published the operational system andinternal rules pertaining to complaint processing.
In terms of the content of the dissemination and publications, although the full text of
the internal rules is not necessarily published, in order for customers to confirm forthemselves whether complaints are being processed in accordance with appropriate
procedures, as it is important that the contact information for inquiry about the processing
complaints and the flow of standard operations are clearly indicated, it should be kept inmind whether this information is covered in its publication.
For the methods of publicity and publication, refer to III-3-5-3-1-2(1)(ii).

(3) Points of attention regarding complaint processing measures (when using external organizations) anddispute resolution measures(i)

Dissemination and publication(A)

In cases where the bank is using an external organization, from the perspective of customer
protection, it is desirable that the bank disseminates and publishes information regarding
the external organization, including, for example, the availability of using the externalorganization when making complaints or disputes, the name and contact information of theexternal organization, and the instructions on how to use it, in an easy-to-understandmanner for customers.

(B)

Whether the bank has developed a control environment for referring customers to otherexternal organizations, when the petition for complaint processing or dispute resolution isout of the scope handled by the external organization to which the customer was firstly

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referred to by the bank due to geographical reasons, the nature of the complaint or dispute,or for any other reason, or when the handling of the complaint or dispute by another externalorganization is appropriate (not limited to external organizations used by the bank ascomplaint processing measures or dispute resolution measures).
(C)

For cases in which the bank sells financial products arranged by financial instruments
business operators or insurance products arranged by insurance companies, refer to III-3-53-1-2(1)(ii)(C).

(ii) Response to procedures(A)

In cases where the bank receives a request from an external organization for its acceptanceof compliant processing or dispute resolution procedures, an investigation of the facts or thesubmission of relevant materials or the like, whether the bank has developed a control
environment wherein it responds to the request promptly in accordance with the rules, etc.
of the external organization.

(B)

In cases where the bank refuses a request for its acceptance of complaint processing or
dispute resolution procedures, an investigation of the facts, or the submission of relevantmaterials or the like, whether the bank has developed a control environment wherein it
makes a proper decision as an organization with respect to the content of complaints anddisputes, the nature of the facts or materials and the rules of external organizations, etc.,
rather than refusal by the section that caused the complaints or disputes without carefulconsideration.
Also, whether the bank has developed a control environment wherein it explains thereasons of the refusal wherever possible on the basis of the rules, etc. of the externalorganization.

(C)

In cases where a proposed solution, such as a reconciliation plan or mediation plan ispresented from an external organization that has commenced dispute resolution procedures(hereinafter referred to as a “proposed solution”), whether the bank has developed a control
environment wherein it makes prompt decisions on whether or not to accept the proposedsolution on the basis of the rules, etc. of the external organization.

(D)

In cases where the bank has accepted a proposed solution, whether the bank has developed
a control environment wherein the section in charge takes prompt action, and also the audit
section conducts an ex-post review on the status of the progress of its fulfillment, etc.

(E)

In cases where the bank rejects acceptance of a proposed solution, whether the bank hasdeveloped a control environment wherein it promptly explains its reasoning and takes
necessary action on the basis of the rules, etc. of the external organization.

III-3-5-4Statements in Various Documents

Banks are required to state the details of their response to the financial ADR system in various documents

264

(such as information for depositors, etc. and pre-contract documents). In cases where there is no
designated ADR body, banks are required to state the details of their complaint processing measures anddispute resolution measures in these documents. In addition to this, it should be kept in mind that banksneed to include relevant information in the context of their actual situation such as, if, for example, a bankutilizes an external organization, the name and contact information thereof, etc. (in cases where part of theservices pertaining to the complaint processing or dispute resolution are entrusted to another organization,then including such other organization).
III-3-5-5Administrative Response

Whether or not the control environment with regard to handling complaints, etc., including responses
to the financial ADR system, has been established and is functioning is related to the foundation of thebank’s sound and appropriate business operation, as well as to the viewpoints of protecting customers andensuring the bank’s reliability. Therefore, associated internal control environments are required to behighly effective.
If the FSA finds a problem in a bank’s internal control environment in securing the sound andappropriate operation of the bank’s services as a result of comprehensive and continuous reviews on the
bank’s responses, the FSA, when it deems necessary, will require the bank to submit a report based on
Article 24 of the Banking Act. If a serious problem is found, the FSA will consider issuing a business
improvement order based on Article 26 of the Banking Act. In addition, if it is identified that the bankcommits a serious or malicious violation of any law or regulation, the FSA will take necessary administrative
disposition, including issuance of a business suspension order.
In this regard, in cases where there is a designated ADR body, even if the breach or negligence of theobligation to comply with procedures is recognized in the bank, it does not immediately result in
administrative disposition as this is primarily the bank’s nonfulfillment of the basic contract for the
implementation of dispute resolution procedures with the ADR body. Being mindful of that, the FSA will
make a relevant judgment by overseeing the bank’s responses comprehensively and continuously as
mentioned before.
It should also be kept in mind that an individual dispute that arises between a customer and a bank is, ingeneral, a problem pertaining to a private-law contract, and as such, is basically a matter to be resolved
between the parties via ADR or other judicial or legal proceedings.
III-3-6
III-3-6-1

Development of Environments for Operational Resilience
Purpose and Significance“Operational resilience” means the ability of financial institutions to continue to deliver their criticaloperations (Note 1) at the minimum level that should be maintained even in the event of system failure,265

terrorism, cyberattacks, infectious diseases, natural disasters, or other similar events(i.e., tolerance fordisruption).(Note 2)
In light of rapid environmental changes in recent years, such as the increasing dependence on IT systems
and third parties, etc. (Note 3), pandemics, the increases in cyberattacks and large-scale natural disasters,
there is a greater possibility that existing risk management strategies and business continuity plans(BCPs) may not be sufficient to maintain critical operations for the financial system. Thus, it is beneficial
to develop a framework for operational resilience while utilizing existing governance scheme (Note4),
assuming that business disruption can inevitably occur even after all preventive measures are taken.
In particular, major banks, etc. or entities subject to the international uniform standards (including thehighest designated parent companies) need to be aware of ensuring the operational resilience based on therelevant trend of international discussions (Note 5), while also taking account of potential impact on thefinancial systems and customers both in Japan and abroad.
Each financial institution should decide how to ensure its operational resilience based on its own
judgement considering its own size of business, uniqueness of its business, the degree of importance of its
operations, and impacts on customers, etc. That is,, it should be noted that there is not any uniform or onesize-fits-all response for financial institutions.
（Note 1）In this section, the term “critical operations” means ﬁnancial services whose
could pose a significant adverse effect on the stability of financial systems or

disruption
on theeveryday lives of end-users.
When a financial institution identifies its critical operations, financial institutions may utilize
the existing BCP as well as critical functions which is identified in III-11-4 Measures to Ensure
the Continuity of Systemically Important Functions in Orderly Resolution, (which refer tooperations to be provided to third parties outside of its group, of which discontinuation could
cause a significant disorder in financial systems), while considering the user’s perspective.
Specifically, factors that should be taken into account are: potential impact of disruption ofcritical operations on the maintenance of the functions of the financial system, the size of thefinancial institution, its market share, the number of users, the frequency of service use, theinstitution's revenue and market credibility, and the possibility of service substitution by otherinstitutions.
For instance, under existing BCM frameworks (III-8-2 (2)), certain financial services are
considered crucial for maintaining the functions of the financial system. These include theprocessing of large-lot, large-volume settlements conducted through the interbank market andthe interbank settlement system, acceptance of individual users' requests for cash withdrawal
and remittance, and bill clearing. Such services could potentially be defined as criticaloperations in the context of operational resilience.
(Reference) “Discussion Paper on Ensuring Operational Resilience,” April 2023, Financial
Services Agency (FSA)(Reference) “Guidance on Identification of Critical Functions and Critical Shared Services,”266

July 2013, Financial Stability Board (FSB)(Note 2)The tolerance for disruption of critical operations typically aligns with the Recovery Time
Objective (RTO) set in the BCP. However, from the perspective of mitigating the impact on
the financial system and users' everyday lives within a certain range, financial institutions canalso consider other factors such as scope of business disruption, the number or amount oftransactions, and the number of users affected (e.g., the number of complaints from users at
the time of business disruption).

(Note 3)“Third parties, etc.” refer to the outsourced contractors who are engaged in the outsourced
operations (including two- or more-tiered outsourcings) that are stipulated in III-3-3-4 andIII-3-7-1-2 (8),procurement partners, and service collaboration partners, etc..
Among them, “critical third parties, etc.” are those who are essential to deliver criticaloperations at tolerance for disruption e.

(Note 4)The existing governance scheme here refers to the one stipulated, for instance,in III-1

Governance, III-2-3 Risk Management (especially III-2-3-7 Operational Risk Management),
III-3 Appropriateness of Business Operations, etc. (especially III-3-1 Legal Compliance (forEspecially Important Matters), III-3-3-4 Outsourcing, III-3-7 Information Technology (IT)
System Risk, and III-3-10 System Integration Risk and Project Management), III-8 BusinessContinuity Management (BCM), and III-11 Ensuring Smooth Implementation of Orderly
Resolution, etc. as examples.
(Note 5)

“Principles for operational resilience,” March 2021 and “Revisions to the principles for thesound management of operational risk,” March 2021, The Basel Committee on Banking
Supervision

III-3-6-2

Major Supervisory Viewpoints(1) Whether the board of directors, etc. has identified the critical operations from the viewpoint ofoperational resilience.
(2) Whether the board of directors, etc. has established the risk appetite, and then, with regard to
financial services identified as critical operations, whether the board of directors, etc. has establishedthe minimum level to be maintained as the “tolerance for disruption” on the assumption that thebusiness disruption can inevitably occur even after all measures are taken. For example, whether
relevant factors including the recovery time during business disruption, the scope of the businessdisruption, the number of affected transactions, the amount of such transactions, and the number ofusers affected.
(3) Whether the board of directors, etc. has identified the internal and external management resourcesthat are necessary to perform the critical operations at the tolerance for disruption as described in (1)267above. Specifically, whether the board of directors, etc. has employed and assigned relevant employees
and officers who have necessary expertise and has ensured that it has the appropriate budget, facilities,
and systems. In addition, whether the board of directors, etc. has identified and mapped theinterconnection and interdependence among the necessary management resources (both internal andexternal management resources; including external management resources such as those of third
parties, etc.) to perform the critical operations at the level of tolerance for disruption as mentioned
above.
(4) Whether the board of directors, etc. regularly and cross-organizationally verifies the appropriatenessof respective setups and allocations of risk appetite, critical operations, tolerance for disruption, andnecessary management resources through the analysis and training to be conducted under extreme
but plausible scenarios, and revises them or takes additional measures as needed.
III-3-6-3

Supervisory Methods and Measures

As a result of an on-site inspection or misconduct notifications, etc., a problem relating to a bank’s
operational resilience is revealed, the FSA will require the bank to submit detailed reports based on Article
24 of the Banking Act, if it deems necessary. If a serious problem is found, the FSA will issue a business
improvement order or implement any other measures based on Article 26 of the Banking Act.
III-3-7
III-3-7-1
III-3-7-1-1

Information Technology (IT) System Risk
Information Technology (IT) System Risk
Purpose and SignificanceInformation technology (IT) system risk is the risk of loss incurred in customers and banks because of
system adequacies, including a computer system breakdown or malfunction, or because of inappropriate
or illegal use of computer systems. As IT systems used by banks are becoming increasingly advanced andcomplex in line with the integration of computer systems due to mergers and other management
restructuring and an expansion of the range of new products and services, the risk of illegal access and leaksof important information has been increasing further with an expansion of computer networks.
In particular, computer systems of major banks, which are originally equipped with advanced functions,tend to be large in scale and complicated in configuration because they are required to process a hugevolume of data. In addition, as the system configuration and operational environment become more
complicated due to cumulated management restructuring, major banks are particularly required to address
various issues related to IT systems appropriately. If a system failure or cyber-security incident occurred ina major bank, it would have an extremely huge impact not only on users’ social and economic lives and268

corporations’ economic activities but also on Japan’s economy as a whole. In addition, the impact would
not be limited to a single bank but spread over the whole financial system. The secure and stable operationof IT systems is a basic premise for ensuring public confidence in the financial settlement system and banks,
and that is why it is extremely important to enhance and strengthen the control environment for managing
IT system risk.
Furthermore, taking into account the recent change in environments surrounding the financial industry,the IT strategies of financial institutions are, now, key factors affecting their business models. As such,there are increasing needs in financial institutions to consider business strategies integrally with IT
strategies. From these viewpoints, it is very important that “IT governance, ” which is a framework
allowing the management of a bank to show leadership and to create corporate value by linking information
technologies to management strategies, works properly and well.
Note:"Cybersecurity incidents" refer to instances of cybersecurity being threatened by so-called“cyberattacks,” including unauthorized intrusion, theft, modification and destruction of data,
failure or malfunction of information systems, execution of illegal computer programs, and DDoS
attacks, committed via the Internet through malicious use of information communication
networks and information systems.

(Reference) Discussion Paper on Dialogues and Practices Regarding IT Governance at Financial
Institutions (June, 2019)
III-3-7-1-2

Major Supervisory Viewpoints(1) Recognition of IT system risk(i)

Whether officers and employees, including the representative director, have fully recognized theimportance of IT system risk, reviewed it regularly, and formulated a basic policy for the bankwide management of IT system risk.

(ii) Whether the representative director has recognized that prevention and efforts for rapid recovery
from an IT system failure and cybersecurity incident (hereinafter referred to as "system failure")is an important issue for the management of the bank, and developed an appropriate control
environment.
(iii) Whether the board of directors has appointed a person who has sufficient knowledge andexperience relating to the IT system to properly perform the relevant work as a director who takes
overall responsibility for the IT system upon fully recognizing the importance of managing theIT system risk.
(iv) Whether the representative director and directors (or executive officers in cases where the bankis a company with a nominating committee, etc.) have determined their specific responsibility toassume and the response to take in case of a crisis in which a system failure occurs.
Also, whether they conduct drills giving directions by themselves and ensure the effectivenessthereof.

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(2) Control environment for managing IT system risk(i)

Whether the board of directors has established the risk management environment while fully
understanding that, due to the highly networked computer system, if risk becomes apparent, theimpact will cause a chain reaction, spread widely and seriously, and badly affect the managementof the bank.

(ii) Whether the bank has established a basic policy for managing IT system risk, and whether thebasic policy for managing IT system risk contains the security policy (a basic policy for proper
protection of information assets of an organization) and the outsourcing policy.
(iii) Whether the bank is basing the details of its control environment for managing IT system risk on
criteria that allow it to judge objective levels of its details.
Also, whether the bank revises, on a continual basis, its control environment for managing IT
system risk according to the identification and analysis of system failures, results ofimplementation of risk management, progress of technology, etc.
(3) Assessment of IT system risk(i)

Whether the section in charge of managing IT system risk recognizes and assesses risks
periodically and in a timely manner by recognizing the fact that risks are becoming diverse due
to changes in the external environment, such as seen in the examples of system failures inducedby large-scale transactions as a result of increased customer channels and efforts to enhance
information networks that bring about more diverse and broad-based impacts.
Also, whether it takes sufficient measures to address the risks that have been identified.

(ii) Whether the section in charge of managing IT system risk checks and manages the upper limitof the transactions through the computer system, such as the number of unrecorded transactions
in a bank book per account to be kept in the system, and whether it reviews the countermeasuresfrom the IT system aspect and the administrative work aspect in cases where the transactions
exceed the upper limit.
(iii) Whether the section in charge of product development cooperates with the section in charge ofmanaging IT system risk at the time of introduction of a new product or alternation of the content
of an existing product, and also, whether the section in charge of managing IT system risk
evaluates the relevant IT system regardless of whether the system is newly developed or not.
(4) Management of information security(i)Whether the bank has made a developed policy, instilled organizational readiness, and introduced
in-house rules and a developed internal control environment, in order to appropriately manage
information assets. Also, whether it is making continuous efforts to improve its information
security control environment through the PDCA cycle, taking notice of illegal incidents or lapses
at other companies.

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(ii) Whether the bank manages information security by designating individuals responsible for it andclarifying their roles/responsibilities in an effort to maintain the confidentiality, integrity, andavailability of information. Also, whether the individuals responsible for information security aretasked with handling the security of IT system, data, and network management.
(iii) Whether the bank takes measures to prevent unauthorized use of computer systems,
unauthorized access, and intrusion by malicious computer programs, such as computer viruses.
(iv) Whether the bank identifies important customer information that it is responsible for protecting
in a comprehensive manner, keeps its records, and manages them.
Whether the scope of important customer information to be identified by the bank covers
information and data used in the course of business operations or stored in IT systems and kept
by external contractors and includes data, for example, as listed below;
・ Data stored in the areas within the IT system that are not used in ordinary operations;・ Data output from the IT system for analyzing system failures; and・ Transaction logs stored in ATMs (including those outside of branches), etc.
(v)

Whether the bank assesses important points and risks regarding important customer informationthat has been identified.
Also, whether it has developed rules to manage information, such as that listed below, in
accordance with the importance and risks of each information;
・ Rules to encrypt or mask information;
・ Rules for utilizing information; and・ Rules on handling data storage media, etc.

(vi) Whether the bank has introduced measures to discourage or prevent unauthorized access,unauthorized retrieval, data leakage, etc. such as those listed below, for important customer
information;
・ Provision of access rights only to employees who need access according to their authority;
・ Storage and monitoring of access logs; and・ Introduction of mutual checking functions, such as by separating the individuals in charge ofdevelopment and those responsible for operations, system administrators and system users, etc.
(vii) Whether the bank has established rules for controlling confidential information, such as
encryption and masking. Also, whether it has developed rules regarding the management ofencryption programs, encryption keys, and design specifications for encryption programs.
Note that "confidential information" refers to any information that may cause damage or loss
to customers if it is disclosed or stolen, including PINs, passwords, credit card information.
(viii) Whether the bank gives due consideration to the necessity of holding/disposing of, restricting
access to, and taking outside, of confidential information, and treats such information in a stricter
manner.
(ix) Whether the bank periodically monitors its information assets to see whether they are managed
properly according to management rules, etc. and reviews the control environment on an ongoing271

basis.
(x) Whether the bank conducts security education (including security education at external
contractors) to all officers and employees in order to raise awareness of information security.
(5) Management of cybersecurity(i)Whether the board of directors, etc. has developed the necessary control environment uponrecognizing the importance of cybersecurity amid increasingly sophisticated and cunningcyberattacks.

(ii) Whether the bank has developed the control environment for managing cybersecurity, such as
those listed below, in addition to making the organization more secure and introducing in-houserules.
・ Monitoring systems against cyberattacks;
・ Systems for reporting and public relations when cyberattacks occur;
・ Emergency measures by an in-house Computer Security Incident Response Team (CSIRT)
and systems for early warning; and・ Systems for collecting and sharing information through information-sharing organizations, etc.
(iii) Whether the bank has developed a multi-layered defense system against cyberattacks thatcombines security measures respectively for inbound perimeter control, internal network security
control, and outbound perimeter control.
・ Security measures for inbound perimeter control (e.g., introduction of a ﬁrewall, anti-virus
software, instruction detection system, instruction protection system etc.);
・ Security measures for internal network security control (e.g., proper management of privileged
IDs/passwords, deletion of unnecessary IDs, monitoring of execution of certain commands,etc.); and・ Security measures for outbound perimeter control (e.g., retrieval and analysis ofcommunication/event logs, detecting/blocking inappropriate communication, etc.)(iv) Whether measures such as those listed below are implemented to prevent spreading damage
when cyberattacks occur.
・ Identiﬁcation and blocking of IP addresses from which the cyberattacks originate;
・ Functions to automatically decentralize access against DDoS attacks; and・Temporary suspension of the entire or part of the system, etc.
(v)

Whether necessary measures for vulnerabilities in the system, such as updating of the operating
system and application of security patches, are introduced in a timely manner.

(vi) Whether the bank, as part of cybersecurity measures, assesses its security levels by using relevanttests on network intrusion, vulnerability scanning, or penetration tests, etc. and make efforts toimprove security.
(vii) In cases where the bank executes transactions via communication methods such as the internet
without any face-to-face contact, whether the bank takes the security measures described in III-272

3-8-2(2) or III-3-9-2(2).
For information, the following cases of security measures using authentication methods andanti-fraud measures are described in the agreements or guidelines, etc. of the Japanese Bankers
Association.
・ Authentication methods that do not rely on ﬁxed IDs/passwords, such as variable passwords
and digital certificates;
・ Transaction authentication through multiple channels by using, for example, devices other thana PC web browser used in transactions, such as a mobile phone;・ Transaction authentication using transaction signatures by means of a hardware token, etc.;
・ Adoption of methods to store digital certiﬁcates on media or devices separate from PCs usedin transactions, such as IC cards;
・ Provision of security software that allows users to detect and remove viruses, etc. when
executing transactions;・ Introduction of software that allows the bank to detect virus infection of the user's PC and issue
a warning;・ Introduction of a system that allows the bank to detect unauthorized log-ins, irregulartransactions, etc. and promptly notify such anomalies to users.
Note: it is desirable to avoid using authentication methods on the internet that use information witha small number of combinations like a cash card PIN as a storage element.
(viii) In order to prevent unauthorized use of internet banking, etc., whether appropriate procedures
are established to not allow unauthorized registration and change of information used for
notification of depositors or personal identification, such as a telephone number or an email
address.
(ix) Whether the bank has developed contingency plans against potential cyberattacks, and conducts
drills and reviews such plans. Also, whether it participates in industry-wide exercises as necessary.
(x)

Whether the bank has formulated and implemented plans for fostering and developing humanresources responsible for cybersecurity.

(6) IT system planning/development/management(i)Whether the bank has clearly established a policy for IT system strategy as part of its businessstrategy, and then established medium- to long-term development plans.
Also, whether such medium- to long-term development plans have been approved by the boardof directors.

(ii) Whether the bank has been making continuous efforts to identify the risks inherent in the current
IT system and to make investment in maintaining and improving it systematically.
(iii) Whether rules to authorize plans, development, and transitions of IT system development
projects are clearly established.

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(iv) Whether the bank appoints and assigns a responsible person to each IT system development
project and manages the project according to the development plan.
(v)

In developing IT systems, whether the bank creates test planning and conducts tests in an
appropriate and sufficient manner, such as by involving user divisions.

(vi) With regard to development of human resources, whether the bank creates and implements
specific plans for developing human resources with expertise for succession of the current IT
system structure and technology.
(7) IT system audit(i)Whether an internal audit division that is independent from the IT systems division conducts
periodic audits of IT systems.

(ii) Whether the bank conducts internal audits by computer system experts and utilizes external
audits by IT system auditors, etc.
(iii) Whether the audit covers all business operations related to IT system risk.
(iv) Whether the results of the IT system audit are reported to the board of directors in a proper
manner.
(8) Management of outsourcing relating to IT system(i)

In selection of outsourcing contractors (including system-related subsidiaries), whether the bankselects after evaluation and consideration based on selection standards.

(ii) In the outsourcing contract, whether the bank stipulates the division of roles and responsibilities
with the outsourcing contractor, audit authority, subcontracting procedures, and level of services
provided, etc. Also, whether the bank presents the rules and security requirements to theoutsourcing contractor so that its officers and employees comply, and stipulates them in thecontract, etc.
(iii) Whether risk management is carried out properly in outsourced IT system work (including work
sub-outsourced).
In particular, where the bank outsources IT system work to multiple contractors, whether thebank has developed a control environment upon fully understanding the situation in which
related administrative work becomes more complicated,
In cases where the bank outsources IT system administration, whether the bank properly
manage the risk thereof in the same manner as outsourcing of IT system work.
(iv) Whether the bank, as an entrustor, periodically conducts monitoring to ensure that outsourced
work (including further sub-outsourced work) is carried out appropriately.
Also, whether the bank takes necessary measures not to leave everything to contractors by, forexample, deploying its staff as an entrustor at a contractor office, etc. In particular, whether thebank receives reports on the status of internal management, and development and operation of
the shared system center.

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Also, for developing a shared system, etc., whether a control environment is in place thatallows the bank, as an entrustor, to monitor and track the status of customer data being
processed at outsourcing contractors.
(v)

Whether the bank conducts audits on its important outsourcing contractors such as the sharedsystem center by its internal audit division or IT system auditors, etc.

Note:

The abovementioned items would apply to cases where the bank uses an external service suchas integrated ATM switching service.

(9) Contingency plan(i)

Whether the bank has developed a contingency plan and established arrangements andprocedures for emergency situations.

(ii) When developing a contingency plan, whether its content is based on information that could be
judged at an objective level (e.g., "Manual for the Development of Contingency Plans in
Financial Institutions (Plans for Measures in the Event of Emergencies)" compiled by the Center
for Financial Industry Information Systems).
(iii) When developing a contingency plan, whether the bank assumes not only contingencies due tonatural disasters but also system failures due to internal or external factors.
Also, whether the bank assumes sufficient risk scenarios, such as a case of major delay in batchprocessing.
(iv) Whether the bank reviews assumed scenarios in its contingency plan by, for example, taking into
consideration case studies of system failures at other financial institutions and results ofdeliberations at the Central Disaster Management Council, etc.
(v)

Whether the bank periodically conducts drills on the basis of the contingency plan at thecorporate level, jointly with outsourcing contractors, etc., such as the shared system center.

(vi) Whether the bank introduced off-site backup systems, etc. in advance for important systems
whose failure could seriously affect business operations, and has developed a control
environment to promptly continue business operations in the event of disasters and system
failures, etc.
(10)

Response to IT system failures(i)

Whether the bank has taken appropriate measures to avoid causing unnecessary confusion
among customers when system failures occur.
Also, whether the bank has developed a control environment to take necessary measuresaccordingly, upon assuming a worst-case scenario in preparation for system failures.

(ii) Whether the bank has clarified reporting procedures and the framework of command andsupervision including at the outsourcing contractors in preparation for system failures.
(iii) In cases where a system failure that would significantly affect its business operations occurs,
whether the bank has developed a control environment to promptly notify the representative275

director and other directors and report the maximum risk that could occur under the worst-casescenario (for example, if there is a possibility that the failure could gravely affect their customers,
the reporting persons promptly report the maximum possibility without underestimation of therisk).
In addition, whether the bank has developed a control environment to launch a task force
where necessary, and the representative director and other directors give appropriate
instructions and orders, and promptly resolve the issues.
(iv) Whether the bank has made mutual support for preparation of system failures clear, such as
through prior registration in order to promptly gather human resources with know-how andexperience from the IT systems division, other divisions, and outsourcing contractors.
(v)

In cases where system failures occur, whether the bank has published the content and causes ofthe failure, expected recovery time, etc. and has established a call center to properly respond toinquiries from their customers where necessary.
Also, whether the bank has made the methodology of providing information to the relevantbusiness divisions in preparation for system failures clear.

(vi) Whether the bank has conducted analysis of causes of system failures, investigation about the
impact until recovery, corrective action, and preventive measures for recurrence in a proper
manner.
Also, whether the bank has periodically analyzed tendencies of factors that have led to system
failures and taken measures according to them.
(vii) Whether the bank has established a systematic framework to minimize impacts of system failures
such as a system to bypass the affected part.
(Reference) As an example of reference materials relating to IT system risk, “FISC Security Guidelines
on Computer Systems for Banking and Related Financial Institutions” (The Center for
Financial Industry Information Systems) may be taken.
III-3-7-1-3

Supervisory Methods and Measures(1) When system failure occurred(i) General response(A)

Upon recognizing the occurrence of an IT system failure or cybersecurity incident, the bankwill be required to immediately notify the authority of the fact and then to submit a reportto the authority in the form of the “Report on Occurrence of System Failure, etc.” (Form
4-45 in the Forms and Reference Information).
In addition, the bank will also be required to make a report upon recovery of the system
or identification of the cause of the IT system failure. Even if the causes are not identified,the bank will be required to make a report on the status within one month from theoccurrence of the IT system failure.

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Note:

IT system failures that should be reported:
Failure or trouble that occurs in the IT systems and devices (both hardware and software)
currently used by the bank, regardless of the cause and;a.

that delays or suspends, or may delay or suspend repayment of deposits or the settlement
function of funds transfer transactions;b. that affects or may affect its cash flow and grasp of financial situations, etc.; orc.

that may otherwise be deemed similar to the above in the course of business.
This reporting requirement, however, does not apply, provided that, even when a partof an IT system or device fails or has problems, there is no substantial impact or damage
because the affected part is able to be promptly replaced by another system or device (e.g.,cases where even when some ATMs are out of service, users can access banking services
at other ATMs or the counter of the same branch or nearby branch.)
In the meantime, the bank will be required to make a report, even though failure or
trouble does not actually occur, when its customers or business operations are affected or
likely to be affected because it receives an advance notice of a cyberattack or it found acyberattack in its IT system.

(B)

The FSA will require the bank to make an additional report pursuant to Article 24 of the
Banking Act, when it deems necessary, and if a serious problem is found, the FSA will issue
a business improvement order pursuant to Article 26 of the Banking Act.

(ii) Emergency response
In particular, when a large-scale system failure has occurred, or when it takes considerable time
for the bank to identify the causes of the failure, the FSA will require the bank to make a prompt
identification of the causes and recovery as well as to make a report pursuant to Article 24 of the
Banking Act, while immediately monitoring the status of implementing a contingency plan, suchas general publication of the facts of the failure and customer relations at the branches.
Additionally, in cases where there is uncertainty about recovery from a large-scale system
failure which is seriously affecting market transactions and a settlement system, such as ATM
transactions, bank transfers, or remittance of salaries, the FSA will take actions to consider issuinga business improvement order promptly based on Article 26 of the Banking Act.
(2) Updates of IT systems
When the bank intends to update its important IT systems, etc., the FSA, if it deems necessary,
will require the bank to make a report based on Article 24 of the Banking Act and confirm theplanning and progress as well as appropriateness and feasibility of the project management thereof.
(3) When a problem is foundAs a result of on-site inspection results, etc., a problem relating to a bank’s control environmentfor IT system risk is revealed, the FSA will require the bank to submit detailed reports based on277Article 24 of the Banking Act, if it deems necessary. If a serious problem is found, the FSA will issue
a business improvement order or implement any other measures based on Article 26 of the Banking
Act.
(4) Response to outsourcing contractors
When it deems necessary, for example, in cases where there is a concern that outsourcing
contractors fail to properly operate outsourced work relating to IT systems, the FSA will take actions
based on III-3-3-4-3.
III-3-7-2
III-3-7-2-1

Security for ATM System
Purpose and SignificanceThe ATM system provides various banking services in a simple and prompt manner, and it is very
convenient for customers and widely used by them. On the other hand, transactions via the ATM system,
which are executed without face-to-face contact, have inherent risks, including the difficulty of confirming
irregular transactions.
Financial institutions are required to manage customers’ assets safely in the course of providing financial
services. They are, therefore, encouraged to take sufficient information security measures for the ATM
system from the viewpoint of ensuring customer protection, while securing users’ convenience. In thisregard, the Depositor Protection Act (Act on Protection of Depositors from Unauthorized ATM
Withdrawals Using Counterfeit or Stolen Cards, etc.) stipulates that banks are responsible for developmentof necessary IT systems, provision of relevant information to customers, raising of their awareness, anddissemination of knowledge among them to prevent the occurrence of unauthorized ATM withdrawals, etc.
using counterfeit or stolen cards, etc.
Additionally, banks need to take security measures considering the fact that if a certain financial
institution leaves its ATMs vulnerable in security, it may adversely affect other financial institutions
because ATMs are interconnected among financial institutions via the integrated ATM switching service.
III-3-7-2-2

Major Supervisory Viewpoints(1) Development of internal control environment
In light of the changing situation with more sophisticated crime techniques, etc., whether the bankpositions preventive measures against illegal withdrawals using counterfeit cash cards, etc. as one of
the highest priority management issues that the bank must address and implements necessary reviewsat the board of directors to improve the security level. Also, to secure sound and proper ATM system
operations, whether the bank has each division share information on the current status thereof andhas a control environment to address it in the entire bank.

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Whether the bank has developed the necessary control environment after conducting reviews
according to the characteristics of its customers and operations based on the situation of crime
occurrence.
Furthermore, whether the so-called “PDCA cycle” is functioning in terms of risk analysis andsecurity measures, which is composed of plan, do, check, and act.
(Reference) PDCA cycle shown at the Study Group on Cyber Security(i)

Identifying and understanding risks attributable to financial institutions (development ofinternal control environment, framework of IT system development, attributes of IT systemand outsourcing of IT system configuration, etc.);(ii) Identifying and understanding risks regarding use of ATMs (upper limit of transaction
amount, operating hours, locations of ATMs, crime occurrence in areas surrounding theATMs, etc.);(iii) Determining the priority as to what kind of crime or risk should be addressed based on therisk characteristics mentioned above;(iv) Implementation of measures; and(v) Review of the effect of measures and improvement.
(2) Securing security
Whether the bank has evaluated the security level of its cash cards and ATM system according torelevant criteria. And whether the bank has taken proper measures to keep it safe and proper byreviewing it from the IT system aspect and the technology aspect based on the results of the evaluation.
For this, whether the bank has taken measures suitable to the characteristics of its customers andoperations while identifying the risk arising at the time of structuring the IT system and each phase ofuse thereof based on the discussions at the Study Group on Cyber Security. Also, whether the bankaims at improving security as a whole rather than taking individual measures in an impromptu manner.
Whether the bank has taken proper measures to prevent unauthorized withdrawals including
introduction of appropriate authentication technology, prevention of information leaks, and early
detection of irregular transactions based on the Depositor Protection Act. In this case, whether thebank has taken care not to impose an excessive burden on customers, and makes efforts to avoid
causing inconvenience for customers by assuring compatibility, etc.
Whether the bank has taken security measures according to the risk if high-amount transactions
with high risk are available at ATMs. In particular, whether the bank has considered methods toenhance the security of magnetic cards which are pointed out to be vulnerable in terms of security.
For an internationally active bank, whether it has implemented necessary reviews while considering
measures in line with international security trends.
(Reference 1) As an example of the security standards, “FISC Security Guidelines on Computer Systems
for Financial Institutions” (The Center for Financial Industry Information Systems) may
be taken.

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(Reference 2) Materials at the Study Group on Cyber Security can be used as references in identifying andunderstanding the risks.
(3) Response to customers
Whether the bank has established a control environment to provide sufficient customer explanation
about various risks associated with use of cash cards, such as skimming, theft of PIN number and card,
use of easily assumable PIN number, possibility of damage expansion (against which the bank could
introduce an upper limit of the amount to be transferred or withdrawn at an ATM), and other problems
caused from having too many cards.
Whether the bank has established a control environment for promptly receiving and processing
notifications from customers. Also, whether the bank has developed a control environment for
promptly disseminating necessary information to customers (including public announcement) whenneeded. In particular, when it is possible to identify customers who are likely to be victimized by acrime, whether the bank takes measures to minimize damage by informing them of such concern assoon as possible.
Whether the rules concerning compensation for loss or damage caused by unauthorized withdrawal
are clear and specific as much as possible based on the Depositor Protection Act. Also, whether acontrol environment is in place to disseminate and make the contents of the rules known to customers
sufficiently.
(i) Whether the bank conducts a necessary review of the policies and standards relating to response
to customers and cooperation with investigative authorities after a crime occurs in considerationof the bank’s own stance toward anti-crime measures, etc.
(ii) Whether the bank has determined uniform rules and procedures of compensation for loss ordamage caused by unauthorized withdrawals, if any, in the terms and conditions of transactionor the customer policy, etc.
(iii) Whether the bank has a control environment in place to respond to customers properly andpromptly by establishing a dedicated customer contact center, etc. In asking victimized
customers for cooperation in providing information, whether the bank is mindful of their age,physical and mental conditions, etc.
Whether the bank properly preserves the records of unauthorized withdrawals and is prepared
to cooperate sincerely with customers and investigative authorities when asked by them to offer
the recorded materials, etc.
(4) Actions when operation and maintenance of the ATM system are outsourced
When the bank has outsourced its ATM system, whether the bank reviews the outsourcing risk andtakes necessary security measures.
III-3-7-2-3

Supervisory Method and Actions

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(1) When crime occurred
Promptly after recognizing an illegal withdrawal using a counterfeit or stolen cash card, the bankshall be required to make a report to the authorities in the form of a “crime report.”(2) When a problem is foundIf inspection results, crime reports, etc. reveal doubt over the bank’s control environment relating
to the security and anti-crime measures for its ATM system, supervisors shall require the bank tosubmit additional reports under Article 24 of the Banking Act, as needed. If a problem is still foundfrom the viewpoint of customer protection, such as that the bank fails to conduct a necessary review
of anti-crime measures and take action after the crime occurs, or that many crimes are reported,
supervisors shall take such action as issuing a business improvement order under Article 26 of the
Banking Act.
Note:

When the bank has outsourced its ATM system, supervisors will take actions under III-3-3-4-3,
as needed.

(Reference)・ “Final Report of Study Group on Counterfeit Cash Card Problems” (June 24, 2005 by Study Groupon Counterfeit Cash Card Problems)
・ “Agreement on Protection of Depositors concerning Counterfeit/Stolen Cash Cards” (October 6,2005 by the Japanese Bankers Association)
・ “Crime Prevention Standards for Financial Institutions” (National Police Agency)
・ “The JBA’s IC cash card standard speciﬁcation” (the Japanese Bankers Association)
III-3-7-3

Use of Interbank System/Network

III-3-7-3-1

Purpose and SignificanceCurrently, the interbank (including financial institutions) system/network serves as an essential
infrastructure for banks to settle financial transactions and to maintain CD/ATM online alliance with otherbanks and financial institutions. If a failure occurred in the system/network, the impact would spread over
the whole settlement system and all services provided to customers. That is why it is critically important toenhance the risk management environment relating to this system/network.
III-3-7-3-2

Major Supervisory Viewpoints(1) When using services of the interbank system/network including the integrated ATM switching service
or the Zengin Data Telecommunication System, etc., whether the bank has implemented proper risk
management in the same manner as when it outsources its own IT systems.

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(2) In particular, when the IT system of such external service is renewed or changed, whether the bankfully evaluates and confirms that proper actions are in place on the system both at the administratorof such external service and at the bank in order not to cause any inconvenience or impact on its
customers and operations. And, when needed, whether it requires the administrator of the external
service to take proper actions.
(3) In particular, when the bank plays a leading role in operation, renewal, or change of such external
service, whether it has developed proper and sufficient control environments for risk management andproject management together with the administrator of such external service in order not to adversely
affect customer services or the settlement system in Japan.
III-3-7-3-3

Supervisory Methods and Measures

If inspection results, etc. reveal doubt over a bank’s sound and proper business operation relating to thesystem/network, the bank shall be required to submit detailed reports under Article 24 of the Banking Act,as needed. If a serious problem is found, supervisors shall issue a business improvement order or implement
any other measures under Article 26 of the Banking Act. Also when the bank plays a leading role inoperation, renewal, or change of such external service, if a doubt arises relating to the risk management
environment for such system network, the same actions shall be taken.
Note:Among administrators of the external system/network, with respect to those who fall under thescope of outsourcing contractors, if there is concern about their business operation, supervisors
shall take actions under III-3-3-4-3.

III-3-8
III-3-8-1

Internet Banking
Purpose and SignificanceThe Internet is, for financial institutions, a tool enabling them to provide low-cost services and for users,
a useful transaction tool. On the other hand, Internet banking transactions, which are executed without
face-to-face contact, have risks peculiar to an online environment, such as that it is difficult to checkabnormal transactions.
Financial institutions are required to manage customers’ assets safely in the course of providing financial
services. Therefore, it is important for them to take sufficient security measures for Internet banking aswell as to provide customers with relevant information, enlightenment, and knowledge from the viewpointof securing user protection, while securing user convenience.
III-3-8-2

Major Supervisory Viewpoints

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(1) Development of internal control environment
In light of the fact that cybercrime through Internet banking become increasingly sophisticated andcunning, whether the bank positions anti-crime measures via the Internet banking service as one of
the highest priority management issues and implements a necessary review at the board of directors
to improve the security level. Whether it has developed a control environment to provide customers
points of attention in using the Internet banking service. Also, to secure sound and proper operationof Internet banking, whether the bank has a control environment in place to have each division share
information on its current status and to address it in the entire bank.
For this, whether the bank provides and collects information on crime occurrence and techniques
via information-sharing organizations and shares effective countermeasures with them. And then,whether it endeavors to develop the necessary control environment by conducting a review according
to the characteristics of its customers and operations and while considering preventive actions against
future crime incidents and techniques.
In addition, in this connection, whether the PDCA cycle works well, which is composed of
conducting risk analysis, setting a plan, practicing, and evaluating and reviewing the security measures.
(2) Ensuring security
Whether the bank has taken measures according to the characteristics of its customers andoperations while identifying the risk arising at the time of structuring its IT system and each phase ofuse thereof based on the content of discussions at the Study Group on Cyber Security. Also, whether
the bank aims at, rather than taking individual measures in an impromptu manner, improving thesecurity as a whole by combining multiple effective measures as well as determining the necessity andkinds of measures to take prompt actions upon recognizing and evaluating the existence of risks
sufficiently.
Whether the bank has a control environment in place to prepare a security program for Internet
banking and to verify the effectiveness thereof against various crimes and then to revise it as needed.
In addition, whether the bank takes security measures suitable for each transaction risk based on the
JBA’s agreements while considering the attributes of customers, whether individuals or corporations,according to the program, etc. For this, whether the bank considers the trends in crime, such as crime
becoming increasingly sophisticated and cunning (“man in the middle attack” or “man in the browser
attack,” etc.).
Whether links of the bank’s webpage are configured to prevent a user from misrecognizing acounterparty to a transaction. In addition, whether the bank takes proper anti-phishing measures
suitable for its business, such as providing for measures to allow users to verify the authenticity of the
Web site accessed.
Note:

In order for banks to collect information, surveys, etc. of relevant financial organizations or theCenter for Financial Industry Information Systems, reviews or discussions at the Study Group on

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Cyber Security and at the Financial Institution Anti-Crime Liaison Council, and information
given by the FSA and Police can be used.
(Reference)
・ JBA’s “Agreements” on Improvement and Enhancement of Security (January, 2012; November,
2013; May, 2014; July 2014, etc.)
・ Matters to be Considered in Internet Banking (the Japanese Bankers Association)
・ FISC Security Guidelines on Computer Systems for Financial Institutions (The Center for Financial
Industry Information Systems)
・ Materials at the Study Group on Cyber Security(3) Response to customers
Whether the bank has established a control environment to provide sufficient customer explanation
about various risks associated with the use of Internet banking, such as phishing of personal
information including PIN number, use of easily assumable PIN number, possibility of damage
expansion (against which the bank could introduce an upper limit of amount to be transferred throughthe Internet banking service), and cautions to customers, including dissemination of anti-fraud
security actions they are required to take.
Whether the bank takes measures enabling customers to check the transaction records timely inorder for them to detect crime early by themselves.
Whether the bank has established a control environment for promptly receiving and processing
notifications from customers. Also, whether the bank has developed a control environment for
disseminating necessary information to customers (including public announcement) when needed, ina prompt and easily understandable manner. In particular, when it is possible to identify customers
who are likely to be victimized by a crime, whether the bank takes measures to minimize damage by
informing them of such concern as soon as possible.
Whether the bank monitors periodically if its anti-fraud measures are widely disseminated amongusers and takes additional measures for further dissemination.
With regard to the compensation for loss or damage caused by fraud transactions, whether the bankhas established a policy to respond to individual and corporate customers. and is prepared toconscientiously respond to them, from the viewpoint of customer protection, based on the purposesof the Depositor Protection Act and JBA’s relevant agreements.
Whether the bank properly preserves the records of fraud transactions and is prepared to cooperatesincerely with customers and investigative authorities when asked by them to offer the recordedmaterials, etc.
(4) Others284

Whether the bank has introduced a customer management system such as verification at the timeof transaction considering that transactions via Internet banking services are executed without faceto-face contact.
When the bank has outsourced its Internet banking system, whether it reviews the outsourcing risk
and takes necessary security measures.
(Reference)・ Matters to be Considered in Internet Banking (the Japanese Bankers Association)
・ FISC Security Guidelines on Computer Systems for Financial Institutions (The Center for Financial
Industry Information Systems)
・ Measures on Illicit Deposit Withdrawals (February 19, 2008 by the Japanese Bankers Association)
・ Compensation concerning Unauthorized Withdrawal of Deposits, etc., through Internet Banking
Services to Corporations (Jul 17, 2014 by the Japanese Bankers Association)
III-3-8-3

Supervisory Methods and Measures(1) When crime occurred
Promptly after recognizing a fraud transaction through Internet banking, the bank shall be required
to make a report to the authorities in the form of a “crime report.”(2) When a problem is foundIf inspection results, crime reports, etc. reveal doubt over a bank’s sound and proper business
operation relating to its Internet banking service, supervisors shall require the bank to submit
additional reports under Article 24 of the Banking Act, as needed. If a problem is still found from theviewpoint of customer protection, such as that the bank fails to conduct a necessary review on anticrime measures and action after the crime occurs, and that many crimes are reported, supervisors shalltake such action as issuing a business improvement order under Article 26 of the Banking Act.
Note:

When the bank has outsourced its Internet banking system, supervisors will take actions underIII-3-3-4-3, as needed.

III-3-9
III-3-9-1

Cooperation with External Payment Service Providers
SignificanceAlong with the development of fintech, a large number of players have appeared who provide settlement
services linked with deposit accounts through internet account transfer services, etc. using smartphone
applications, etc.
(hereinafter referred to as "linked services").
While these linked services will provide highly convenient financial services to users, which contributes285

to realizing a cashless society, there have been crimes targeting linked services, such as fraudulent
transactions by impersonating a depositor of a linked deposit account. Therefore, it has become an
important issue for both banks and linked service providers to understand the risks of the overall linked
services and ensure their security.
In order to protect customers and to secure the trust of deposit accounts, banks need to take security
measures related to linked services. In such cases, it is necessary to cooperate with linked service providers
and achieve both customer protection and user convenience, based on the following points specific to linked
services.
・ Although the linked services are provided by the linked service provider to users, banks need to establish
the control environment for customer protection together with linked service providers, taking into accountthat the users of the linked services are depositors.
・ There is a risk of damage to depositors who do not use internet banking, depending on the form offraudulent transactions related to the linked services.
・ It is necessary to understand the risks of the entire linked services and take measures at each stage ofthe linked services, such as linking with deposit accounts, transferring accounts to linked services,monitoring of fraudulent transactions, and responding to customers and compensating for fraudulent
withdrawals, etc.
Note:

Although banks are conducting fund transfers with business operators other than linked service
providers based on account transfer agreements, etc., it should be noted that even in such cases,banks need to appropriately understand risks related to impersonation of depositors and fundtransfers under such account transfer agreements, etc., and take measures according to thecharacteristics of such risks and services, based on the purpose of these Supervisory Guidelines.

III-3-9-2

Main Supervisory Viewpoints(1) Internal Control Environment(i)

In light of the increasing sophistication of criminal activities such as fraudulent transactions
related to deposit accounts, whether measures related to linked services are positioned as one of
the highest priority management issues, and efforts are made to provide services that balancesafety and convenience by conducting necessary reviews at the Board of Directors, and byimproving the security level.

(ii)

Whether the bank has developed a control environment to confirm that the linked service
provider appropriately operates linked services, by such actions as clarifying the responsible
department for the linked services or monitoring, on a regular or as-needed basis, and the statusof implementation of operations related to the linked services (including the status of
implementation of operations at the linked service provider (including cases where the linked
service is changed)).

(iii) Whether the bank has established a control environment for ensuring the sound and appropriate

286

management of business operations related to linked services, by such actions as collecting andanalyzing information about the occurrence of fraudulent transactions, the modus operandi of
criminal activities, and consultations from customers related to the linked services, enhancing
security or promptly detecting and improving risks related to linked services. Also, whether asystem has been established for coordinating necessary information and analysis results withfinancial-related organizations.
(iv) Whether the internal audit division periodically or as necessary audits the implementation status
related to linked services (including matters related to security levels), and reports to the Board
or Directors, etc.
(v) Whether the so-called PDCA cycle, which consists of risk analysis, formulation andimplementation of measures, verification of the effects, and evaluation and review of measuresrelated to linked services, is functioning.
(2) Ensuring security(i)From the viewpoint of preventing fraudulent transactions related to linked services andprotecting customers, whether the bank, in cooperation with the linked service provider,continuously identifies and evaluates risks of the overall linked services, and based on theevaluation, takes appropriate measures by considering both systems and technologies to maintaina certain level of security. Also, whether the bank cooperates in risk assessment and verification
work conducted by the linked service provider.

(ii)

In order to prevent fraudulent transactions through impersonation of depositors, whether thebank has developed an appropriate security management system based on the continuous
monitoring and evaluation of the status of the verification of service users at the time oftransaction and confirmation of the identity of the depositors implemented by the linked service
provider. Also, whether the bank cooperates in confirming the identity of the depositors
conducted by the linked service provider as necessary.

(iii) Whether the bank has implemented measures to prevent impersonation of depositors byintroducing multi-factor authentication that combines effective factors, such as the use of variable
passwords using hardware and software tokens and the use of public personal authentication, in
addition to identity authentication using fixed IDs and passwords when linking with deposit
accounts.
(Note) Refer to III-3-7-1-2 (5) ⑦ for eﬀective authentication methods.
It should be noted that security measures such as effective authentication methods need to bereviewed periodically or as needed, as various methods are being newly developed due to theprogress of information and communication technologies.
(iv) In the monitoring of fraudulent transactions related to linked services, whether the bank has
established a monitoring system that enables early detection of fraudulent transactions, by setting
appropriate scenarios and thresholds based on environmental changes, including the287sophistication of criminal methods, and the occurrence of fraudulent transactions. Also, whether
the bank has developed a system for promptly notifying users when it detects fraudulent
transactions.
(v) In cases where it is difficult for the bank to monitor transactions by users of linked services, suchas linked services in which funds are charged in advance, whether the bank has developed acontrol environment for preventing the spread of customer damage, by confirming the control
environment for monitoring fraudulent transactions by the linked service provider andappropriately sharing information on the occurrence of crimes and criminal methods.
(ⅵ) Whether the bank takes measures to enable customers to check the status of transactions in atimely manner by, for example, notifying customers at the time of the conclusion of an accounttransfer contract for linked services, in order to enable customers to recognize damage in an earlystage.
(ⅶ) In the process described above, if vulnerabilities are found in the entire linked service, whether
the bank takes measures such as suspending the linked service, and is prepared to resume theservice after resolving the vulnerabilities.
(ⅷ) Whether the bank in light of changes in the environment, including the sophistication of criminal
methods, and the state of crime occurrences, has continuously identified and evaluated risks andimproved measures to prevent fraud as necessary.
(Reference)"Guidelines for Linking Accounts with Funds Transfer Service Providers, etc. (November 30, 2020:
Japanese Bankers Association)"(3) Customer Protection(i)

Although linked services are provided by linked service providers directly to users, since the usersof the linked services are depositors and the services are provided in conjunction with theirdeposit account, whether the bank has established a system to explain to customers the mattersto be noted when using the services and to receive consultations from users related to the linked
services.

(ii)

Assuming the occurrence of fraudulent transactions in linked services, whether the bank has
established an appropriate control environment for preventing the spread of damage, such as theestablishment of a communication system with linked service providers and the formulation of apolicy to disclose damage.

(iii)

Whether an agreement is made with the linked service providers in advance to share
responsibilities arising from business operations. In particular, given that it is necessary topromptly compensate for losses in the event of customer damage due to fraudulent transactions,
whether the bank has agreed in advance with linked service providers regarding compensation
policies and the sharing of compensation.

Note: Since victims of fraudulent transactions related to linked services are not necessarily limited to288

users of the relevant linked services, it should be noted that in cases where consultations or
notifications related to fraudulent transactions are received from customers, even if they are not
attributable to the bank, it is necessary to take prompt and sincere actions and to cooperate withlinked service providers as necessary.
(Reference)"Measures on Illicit Deposit Withdrawals (February 19, 2008, Japanese Bankers Association)""Guidelines for Linking Accounts with Funds Transfer Service Providers, etc." (November 30, 2020:
Japanese Bankers Association)
III-3-9-3

Supervisory Method and Actions(1) When crime occurred
Promptly after recognizing a fraudulent transaction arising from the linked services, the bank shallbe required to make a report to the authorities in the form of a “crime report.”(2) When a problem is foundIf inspection results, crime reports, etc. reveal doubts over the sound and appropriate managementof services related to linked services, additional reports shall be requested under Article 24 of the
Banking Act, as needed.
In addition, if a problem is still found from the viewpoint of user protection, such as when necessary
review has not been conducted on crime prevention measures and action after the crime occurs, orwhen many crimes are reported, measures such as issuing a business improvement order under
Article 26 of the Banking Act shall be taken.
III-3-10
III-3-10-1
III-3-10-1-1

System Integration Risk and Project Management
Purpose and Significance
System Integration Risk

IT systems of major banks, which are originally large and complex, have become more and more
complicated in configuration and operational structure due to multiple management restructuring of banks.
In addition to this, because of the increasing dependency on information and communications technology
in banking operation and expansion of online real-time networks, ensuring that IT systems are safe andstable is an important management issue for banks.
Specifically, there was a case where the management of a bank was held responsible for a major system
failure occurring in association with the bank’s management restructuring, such as a merger. Therefore,
the establishment of a control environment for IT system integration risk is one of the most critical issues.
(Reference) “Supervisory Viewpoints concerning System Integration Risk Control Environment (Detailed

289

Version),” Appendix of the Discussion Paper on Dialogues and Practices Regarding Financial
Institutions’ IT Governance (June 6, 2019)(i)“System integration” means that banks integrate or split their IT systems or establish new IT
systems (including joint development or operation of the system) due to management
restructuring, including merger, business transfer, transformation to a holding company or asubsidiary company, or business alliance (“management integration”).

(ii)“System integration risk” means risk caused by IT system integration of multiple financial
institutions subject to management integration and suffered by them or their customers, suchas risk caused because inadequate preparation for the system integration and related
administration work, combined with unaccustomed clerical work, would cause bank’s officers
and employees to mishandle clerical jobs, or lead to system failures or malfunctions, and thencause confusion regarding customer service, shake the foundation of financial institutions, orultimately have a material effect on settlement systems.

III-3-10-1-2

Risk Characteristics of System Integration Risk and Risk Mitigation Measures(1) Risk arising from system integration by major banks affects various areas, and it is particularly
important to enhance the management of administrative risk and system risk from the following
reasons:(i)

it is necessary to operate IT systems in a stable and reliable manner in order to ensure thattransactions are properly processed via ATM or telephone banking tools, etc. that are used by awide range of individual customers;(ii) system failure, etc. may have extremely serious impact under the circumstances that financialtransactions and remittance of salaries are widely implemented through IT systems; and(iii) while management integration will significantly change the structure of sales branches andadministrative work performed there, the bank is not able to provide customers with sufficient
service without developing a control environment for managing the administrative work thatwould serve as a sales base thereof.
In other words, “system integration risk” is not a mere risk just associated with IT systemdevelopment but a risk widely covering the scope of “ administrative risk, ”

such asadministrative work processed at the administrative divisions and customer responses atbranches. Therefore, it is important that banks are required to manage risk while putting theutmost importance on “customer convenience” under the responsibility of its management.
(2) Key principles for risk mitigation
The scale of the system integration risk should be recognized as a product calculated by multiplying
the probability of occurrence of a risk event by the impact thereof. Therefore, it is necessary torecognize that major banks are required to prepare the following in-depth risk mitigation measures290judging from the size and content of their business operations.
(i)

As the basis of the risk mitigation, the bank should focus on an event that has little probability tooccur but has an extremely huge impact if it actually occurs, which cannot be controlled by theactivation of a contingency plan and may result in a huge and serious impact on customers andthe settlement system, and should try to exhaustively find IT systems, operations, andadministrative work that would be involved in such risk event and then prevent the event fromoccurring by conducting thorough tests and rehearsals, etc.

(ii) In addition, the bank should control the probability of other risk events than those mentioned
above to occur at least under a certain level by taking similar measures.
(iii) The bank should prepare a contingency plan commensurate to the risk mitigation measures
mentioned above and develop a control environment to prevent a huge impact on customers evenwhen multiple risk events appear at the same time (when failures occur concurrently).
III-3-10-1-3

Importance of Project Management

In the IT system integration associated with a merger, due to merger-specific circumstances such as
mentioned below, establishment of an effective control environment for project management (so-called
implementation of “project management”) is considered essential, not only for an IT systems development
contractor but also for the bank.
(1) Seeing IT system integration associated with a merger, the management teams of banks subject tomerger need to promptly make important management decisions on (i) establishment of the
management strategy and business model after the merger, (ii) planning of the HR system andcutback and (iii) merger ratio, within a limited schedule and under competitive circumstances withother bank groups.
Amid this situation, the date of merger is often decided not only by taking the period required for
preparation of IT system integration into consideration but is affected by various factors surrounding
the management of the banks subject to merger. As a result, there are some cases where a major
failure occurred because the banks had not taken enough time to test the new system and to have theemployees learn the new tools and work at sales branches.
(2) The basic pattern of merger processes is (i) basic agreement between banks, (ii) conclusion of amerger agreement (including merger ratio), (iii) approval at the general shareholders meeting, (iv)application and acquisition of permission or approval from relevant authorities, and (v) completionof the merger. The management of banks subject to merger needs to obtain approvals from theirshareholders and from relevant multiple authorities (*).
Note: Relevant authorities include the financial supervisory authority, the Fair Trade Commission, andoverseas supervisory authorities.

291

(3) In case of IT system integration of major banks associated with a merger, the project is assumed to
be a long-term and complicated one, and the following are typical patterns thereof;(i)

IT system integration is often implemented in the following two stages, and there may be a casewhere it takes a long time (three years or more) from the execution of the basic merger
agreement until the full integration of IT systems.
(A) First stage: At the time of merger (change of a bank name, branch name, and branch code
number), the bank continues to use the existing system and launches a relaying system toconnect the systems between banks subject to merger.
(B) Second stage: The bank launches a completely integrated IT system and provides uniform
products and services of the new bank while closing or consolidating sales branches asneeded.

(ii) Even in the second stage, in some cases, the bank may prefer “step-by-step system integrationby each branch group” to one-time system integration in all branches.
(iii) In some cases, IT system integration is performed in parallel with a merger by a holding
company of a bank, trust bank, and financial instruments business operators belonging to thesame group.
III-3-10-2

Major Supervisory Viewpoints

While basic supervisory viewpoints are shown in the “Approaches and Viewpoints concerning System
Integration Risk Management Structure (Detailed Version), Appendix of the Discussion Paper on
Dialogues and Practices Regarding Financial Institutions’ IT Governance (June 2019),” the following are
examples of more specific supervisory viewpoints reflecting lessons learned from past cases.
(1) Allocation of responsibilities among directors and clarification of management philosophy
Whether the representative directors of banks subject to management integration (hereinafterreferred to as the “integrated banks” in III-3-10-2) correctly recognize characteristics of the system
integration risk and the importance of project management as mentioned in III-3-10-1 above.
Whether the representative directors of the integrated banks have clarified the allocation of
responsibilities relating to the system integration among directors and officers as well as their
management philosophy.
(2) Rationality of management decisions on the system integration method
In selecting the system integration method, whether the boards of directors of the integrated banks
eliminate friction between them and have held sufficient discussions. Whether they secure enoughtime to prepare for the system integration and apply a rational decision-making process according to
the schedule until the merger and the management strategy after the merger.

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(3) System integration plan and adequacy thereof(i)Thorough identification of risks from both the administrative aspect and IT system aspect, andmitigation measures thereof
Whether the boards of directors of integrated banks have developed the system integration
plan by thoroughly identifying risks from both the administrative aspect and IT system aspect
and taking mitigation measures thereof according to III-3-10-1 above from the viewpoints of
not causing any damage or trouble to customers in the course of the system integration, taking
into account the actual status of IT systems of each bank before the integration and lessons
learned from past cases of system failure.
Whether they have prepared sufficient and conservative items and criteria for judgments withregard to system transition from both the administrative aspect and IT system aspect.

(ii) Adequacy of system integration plan
Whether the system integration plan does not excessively prioritize adherence to thepredetermined schedule while downgrading risk management. Whether the bank evaluates theadequacy of the plan objectively and reasonably by using the evaluation of a third party
organization.
Also, whether the plan contains clear items and criteria for judgments with regard to systemtransition as to who should do what and by when, among all directors, officers, and employees.
(4) Establishment of control environment for conducting sufficient test and rehearsal in bank
Based on reflections of past cases of failure in which most failing banks mentioned that “test andrehearsal were not sufficiently conducted,” the following points should be checked.
(i)Whether the bank has developed a sufficient testing and rehearsal framework for preventing any
failure affecting customers and significant miscalculations in the materials that the bank’s
management uses in decision-making for risk management purposes due to lack of reviews or
tests. Specifically, whether a framework has been developed to formulate review implementationplans in which the implementation status of reviews in each process is examined in order tomanage the quality condition, as well as testing plans suitable for the development associatedwith the system integration.
In particular, whether the testing plans take into account the fact that the final quality oftransition of files, etc. cannot be determined until checking the functions at all the branches
and with all the data. Also, whether the schedule is managed by reflecting additional
administrative burden such as cleansing of inconsistent data unexpectedly detected in thecourse of the test period.

(ii) Whether the bank plans testing as much as possible to make sure that even a part deemed not
to be affected by the system integration is not affected in actual situations, considering there
are some cases that even a part unrelated to the system development would cause a completely

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unpredicted risk event, such as a case that potential failure of a vendor’s package software used
for external connection would become apparent at the time of the system integration and would
result in a major failure, etc.
(iii) Whether training and rehearsals are conducted assuming actual environments to verify thebusiness operation after the system integration in such environments that are as faithfully close
as possible to actual situations, for example, by imposing load during the peak period on all
possible sales divisions and branches (including ATMs) and external channels (such as the
Zengin system, the integrated ATM switching system, exchange of bills and BOJ’s RTGS (RealTime Gross Settlement) etc.) simultaneously.
(iv) At sales branches where the operation processing will completely change due to the integration,
whether education and training are conducted to learn new operation procedures and to copewith system failure in a sufficient manner including response to increase of administrative workburden in association with the decision not to work on so-called “following-up development toincorporate functions of the old system to the surviving system” or “derivational development.”
Also, whether the bank developed a framework for grasping and evaluating the progress thereof.
(5) Establishment of control environment for customer explanation and implementation of connecting
test
(i)

Whether the bank verifies the adequacy of dissemination and explanation to customers and thefeasibility of relevant training and manuals including the customer communication plan anddetailed plan for training officers and employees, etc. in such communication skills, in a specificand concrete manner.

(ii) When the financial services handled by the bank change due to the system integration (e.g., amethod to collect banking charges or the date when a customer is required to deposit funds tobank accounts, etc.), whether the bank informs customers of such change in a proper manner
upon giving consideration to customer convenience.
(iii) For transactions directly involving customers such as account transfers or electronic banking,etc., whether the bank prepares the connection test schedule considering customer convenienceand gives sufficient explanation to them.
In particular, as reflection of past failure cases, “ connection test was not conductedsufficiently” is given, whether the bank plans to implement the connection test with customers
on the assumption that the test should be actually done covering all areas to the extent possible.
Even for cases where the connection test is not conducted or where the connection test does
not need to be conducted, whether the bank confirms as much as possible that no failure or
problem will occur from real data, etc.
(iv) Whether the bank has developed a framework for grasping and evaluating the customer
explanation and the progress of the connection testing mentioned above.

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(6) Development of basic system for project management(i)Whether the boards of directors of the integrated banks, based on sufficient recognition thatsystem integration is not just an issue merely of IT systems but is inseparable fromadministrative risk such as business operations and customer response and that a risk arising in
one area may spread to other areas, resulting in a significant obstacle to the whole management
restructuring, cooperate in appointing officers and establishing divisions responsible for thesupervision and management of plans and operations of the system integration (hereinafterreferred to as the ''supervising officers and divisions'').

(ii) Whether a framework has been established for ensuring adequate communications among the
integrated banks, among directors and the supervising officers and divisions, amongdevelopment divisions and user divisions, and within the same divisions or sales branches.
(iii) Whether the board of directors and the supervising officers and divisions of the integrated banks
have collaboratively developed a control environment for properly grasping the progress of
integration projects. Whether a reporting system is in place within the bank and between the
integrated banks so that the information on the system integration will not be kept only by somedirectors and officers of the integrated banks.
(7) Project management from design and development phases
In the course of alignment and integration, etc. of financial products of the integrated banks, there
may arise some differences in perception between administrative (user) divisions and IT system
divisions, omission in identifying requirements or in aligning specifications, from the design anddevelopment phases. These events may often result in failure at the time of the integration. Therefore,
it is important to conduct quality control for each phase and process of design and development.
Considering the above, whether the quality of each process is properly managed, for example, by
clarifying rules for verification and approval of each process, etc. In particular, whether the
integration project excessively prioritizes the schedule while sacrificing quality and advances fromone process to another without satisfying the completion criteria of each process.
(8) Control environment for outsourcing contractors
When the bank has outsourced to contractors its system development work relating to theintegration, whether the bank has established a framework for ensuring adequate communications
between such contractors and the supervising divisions.
Whether the bank properly grasps the content and progress of the outsourcing work performed byoutsourcing contractors while understanding that failure of early-stage detection and correction of aproblem in the outsourcing work may require additional tests and cause delay in the schedule.
In particular, when such outsourcing work involves the integrated banks and two or more
outsourcing contractors, whether the banks have designed a framework for enabling the integrated
banks to be actively involved based on the understanding that the risks of control environment are295becoming more complicated.
(9) Project management concerning progress, delay, and adequacy validation of schedule
In managing the progress of the system integration project, whether the bank has developed acontrol environment enabling the board of directors and the supervising officers and divisions of theintegrated banks, to collaboratively grasp remaining challenges and problems including to-bedetermined items and to determine the plan to solve them in a sufficient manner.
In managing the progress of the project, whether the bank always verifies the adequacy of the plan
retroactively.
Whether the bank has established a framework to properly and collaboratively respond to
unexpected events, if they occur, such as delay of the system integration project for whatever reason.
Specifically, when the system integration project falls behind schedule, whether a framework is inplace to make proper response based on the criteria to review the schedule, which obtained approvalof the board of directors.
Also, whether a framework is in place to seek and cope with fundamental causes of the delay
collaboratively.
(10) Project management concerning resource allocation, plan change, etc.
(i) Whether the integrated banks check the progress of each phase of the integration collaboratively,
for example, as to whether the management resources are appropriately allocated. If any
problem is found, whether they promptly take proper measures to solve it. Whether the projectis properly managed so that related tasks will not be concentrated in a specific division or person.
(ii) When reviewing the project plan, whether the bank has fully evaluated and discussed theadequacy of the revised plan or the impact the revision would have on the whole project.
(11) Implementation of strict judgments with regard to system transition(i)Whether the supervising officers and divisions of the integrated banks judge the feasibility oftransition to the post-integration operational system including IT systems, obtain approval of
the board of directors, and carry out the transition in accordance with the judgement criteria on
operational transition (including IT system transition) that have been appropriately formulated
to secure safety and stability based on III-3-10-1 and were approved by the board of directors.
Whether the schedule and plans are designed to complete necessary tests, rehearsals,
education, and training (including training for the contingency plan and review of plans basedon the results thereof) and to provide all the factors essential for the management to makedecision until the time of the transition judgment.
Whether the time to make judgment on transition is determined sufficiently early from thescheduled integration date so as to allow smooth fallback including external connection andcustomer response.

296

(ii) In case of a so-called “ step-by-step system integration/transition by each branch group, ”
whether the bank conducts a transition judgment, at every transition, considering theimplementation status of the responses to failure cases in previous transition (e.g., failure
arising from the IT system or operation with regard to the processing involving an alreadytransited branch and a not-yet transited branch, or secondary failure arising from the response
to such failure, etc.) and the characteristics of a branch subject to transition (e.g., major
customers to whom it provides specific services such as customer-specific account transfer andemployees’ asset formation services, etc.).
(12) Establishment of a framework to cope with fallback
When it is judged that the system integration cannot be completed (it should be restored to its
former condition or postponed, etc.) at the time of the transition judgment, whether a framework isin place to make smooth responses in terms of IT systems, internal administrative work, customer
response, etc.
Whether the plans to cope with unexpected situations before or after the system integration date(including a suspension of the system integration) have been collaboratively formulated and approvedby the board of directors.
(13) Establishment of contingency plan
Whether the existing contingency plans are reviewed based on the system configuration andorganizational structures after the system integration and are subsequently approved by the board of
directors.
Also, whether the contingency plan for the system integration has been formulated in the samemanner. Specifically, based on past cases:(i)

In preparation for occurrence of an unexpected event such as a system failure, whether the banks
have discussed and developed an alternative method until the system is completely recovered.

(ii) In preparation for a case where delay of account transfer or ATM failure falls on a peak date oftransaction, whether the banks have developed a control environment to secure a proper manual
response or training at a sales branch to prevent any secondary damage such as double
withdrawal or wrong recording in a bankbook, etc.
Also, whether the banks have developed a framework to prevent deterioration in customer
services due to confusion, etc. in the over-the-counter operation by sales branch staff who areinexperienced in new administration work after the system integration.
In preparation for a case where administrative work must be processed manually until thesystem is completely recovered, whether the banks have developed a framework enabling themto properly grasp the work volume and to arrange necessary personnel in consideration of theprobability that even small failures may occur simultaneously in a short period of time.
(iii) When an unexpected event such as system failure, etc. occurs, whether the banks have made297

public the details and causes of the failure, expected recovery time, etc. and open a call centerto properly respond to inquiries from customers.
(iv) Whether the banks actually conduct a sufficient amount of training, rather than leaving it as apaper plan, and revise it as needed based on the results thereof to ensure the effectiveness ofthe plan.
(14) Effective internal audit and third-party evaluation(i)Whether a framework has been developed wherein divisions in charge of internal audit of theintegrated banks (hereinafter referred to as “internal audit division”) are designed not only to
conduct mere monitoring and verification of the progress of the project but also to audit fromthe perspective of evaluating the impact that each problem would have on the whole integration
plan and the effectiveness of the system integration risk management structure, and, for this,conduct operational audits and system audits in cooperation with each other. Also, whether staff
members thoroughly knowledgeable about audits on processes, including system development
processes, are secured.

(ii) In making decisions relating to important matters on the system integration, whether the bankmakes effective use of evaluation by a third-party organization such as system auditors whileassessing the limits of the third-party evaluation.
(15) Overall management function by bank holding company
In the case where banking subsidiaries integrate their systems under a bank holding company,
whether their system integration risk management function (including project management
function) properly works as a part of the business management function of the bank holding company.
(Refer to IV-4)
III-3-10-3

Supervisory Methods and Measures(1) In the case where banks are to integrate their systems in the wake of a merger, the FSA, following theannouncement of the basic agreement thereon, asks them, pursuant to Article 24 of the Banking Act,to submit regular reports on their system integration plan (including the schedule) and its progress
as well as their system integration risk management and project management status, and inspect
whether or not a serious problem exists.
(2) In the case where a notice of inspection results is made with regard to the system integration risk
management structure, etc., the FSA asks the banks to make further reporting pursuant to Article 24of the Banking Act, concerning fact-checking, cause-analysis, improvement measures, and other
responses to the FSA’s findings. The FSA also asks for a report on measures to appropriately control
risks (such as a measure to accurately implement the relevant plan, and the internal governance298

structure including internal audit). Based on these reports, the FSA verifies whether there is aproblem with the system integration risk management structure (including the project management
structure; the same applies hereinafter).
In addition, the FSA regularly asks for follow-up reporting, and checks the progress in improvement
measures, the effectiveness of the project management structure, etc.
(3) If the transition judgment is made with regard to system integration, the FSA asks the bank forreporting, pursuant to Article 24 of the Banking Act, mainly on such judgmental grounds.
In case of the “step-by-step system integration by each branch group” wherein the transition ofexisting IT systems to the integrated system is conducted step by step by a group of branches, the
FSA asks the bank for similar reporting when they make every transition judgment. Also, the FSA
asks for reporting on the evaluation thereof at every time of transition to be submitted before thetiming of the next transition judgment.
(4) If any of the above inspections from (1) through (3) uncovers a problem, the FSA will ask for reporting
pursuant to Article 24 of the Banking Act, and if a serious problem is identified, the FSA will issue,
pursuant to Article 26 of the Banking Act, a business improvement order concerning the system
integration risk management structure.
(5) In the case where the management integration involving the system integration requires approval of
authorities (e.g., merger), the FSA will, with respect to the application for such approval and within
the scope of its examination criteria in accordance with laws and regulations, order the submission ofmaterials regarding the policy for implementing the system integration plan precisely, the relevantinternal control environment including internal audits and matters under III-3-10-2, and assess
whether there is any problem in the system integration risk management structure. The FSA willsubsequently give approval through predetermined procedures and arrangement, as needed, orconditionally pursuant to Article 54 of the Banking Act.
Also, the FSA will ask the banks for regular reporting based on Article 24 of the Banking Act forthe period from the grant of the approval for the merger, etc. until the completion of the system
integration.
(6) For the supervisory viewpoints and responses when IT system failure occurs, also see sections III-37-1-2(10) and III-3-7-1-3(1), etc.
(7) In the case where there is a specific concern about the operation of outsourcing contractors
Also refer to III-3-7-1-3(4), etc.
III-3-11

Management of Overseas Operations299

III-3-11-1

BackgroundNowadays, as shown in the past cases of massive loss by domestic and overseas financial institutions, etc.,banks’ business operations and financial services are developed globally and associated with various risks.
In this context, it is all the more important for divisions in charge of business management and operational
management of the HQ in Japan to develop and maintain control systems to comprehensively supervise
and manage business operations of their overseas bases (branches, local subsidiaries, etc.). Also, in orderto make the measures for anti-money laundering and countering the financing of terrorism based on the
Financial Action Task Force (FATF) Recommendations, etc. effective, banks are required to develop ascheme to properly respond to these measures not only in their domestic operations but also in overseas
bases in accordance with Article 32(2) of the Enforcement Regulation of the Banking Act on Preventionof Transfer of Criminal Proceeds and guidelines for measures for anti-money laundering and countering
the financing of terrorism.
III-3-11-2

Major Supervisory Viewpoints(1) Appropriate management of business and operations of overseas business bases by the managementof HQ and that of overseas business locations, including personnel affairs management(i)Whether the management of the overseas base and the dispatched staff from HQ at the overseas
base are appropriately appointed and placed, with sufficient knowledge about the local
management and operations(ii) Whether the staff in charge of internal audit or compliance at each overseas business base havesufficient knowledge and experience about the actual status of the operation and local regulatory
matters. Whether the person in charge of internal audit is independent from the line manager
and directly reports to the internal audit division of HQ. Whether the bank places a person in
charge of compliance with laws and regulations in each country where the bank has its overseas
business bases.
(iii) Whether the bank regularly provides local staff or employees with training, etc. to ensurecompliance with laws and regulations and internal rules necessary for the business operation.
(2) Inspection, improvement, and enhancement of the risk management and internal control systems atoverseas business bases(i)Whether inspection systems are organized and inspections are conducted in line with the actual
situation and the risks of the business operations of overseas business bases(ii) Whether the overseas business location undergoes an external audit by an outside expert, etc.
according to its operational risk or in times of need(iii) Whether the results of inspection and internal (external) audits are properly reported to the300management(iv) Whether control systems are put in place to manage the various risks in the local business base,including market risk and IT system risk. Also, whether enhanced risk management measures are
implemented according to the level of risk.
(v) In particular, considering past cases of massive losses by domestic and overseas financial
institutions, etc. and the causes of those cases, whether the control system is designed to secure
effective risk management and internal control by clarifying the role and mandate of each division
manager of the front, middle and back office.
(vi) In the case where the overseas business base outsources part or all of its clerical work to
outsourcing contractors, whether the business base puts into place an appropriate management
framework in line with the actual state of its outsourcing and risks, with reference to the above
III-3-3-4 titled “Outsourcing.”(3) Development and enhancement of reporting and monitoring scheme of overseas business bases(i)Whether reporting systems are appropriately developed, in line with the actual situation and risksof the business operations of overseas business bases. In particular, whether timely andappropriate reporting systems are appropriately established between the business base and the
HQ of the bank (in Japan) in case any misconduct or other serious issues occur.

(ii) Whether measures are implemented to enable appropriate initial response to the overseas
business bases when misconduct or other serious issues occur. Also, whether the bank has
established or enhanced the business management and operational management functions toenable the overseas business base and the bank HQ (in Japan) to quickly and appropriately
respond to the reported issues, etc.
(iii) Whether the divisions in charge of business management and operational management analyze
and monitor the above reports and/or events occurred and share the information gathered.
(iv) Appropriately responding to foreign supervisory authorities(A)

Whether the overseas business base has developed and maintained a personnel structure andscheme necessary to quickly and appropriately respond to the regular inspections andsupervisions conducted by the foreign supervisory authority(B)

From the viewpoint of enabling direct dialogue and smooth communications with the foreign
supervisory authority, whether the reporting system in place is necessary to promptly andappropriately explain the situation even when issues occur.

(C)

Whether assignments of responsibilities are clearly developed through control systems,
enabling the management of the bank HQ (in Japan) and the business management andoperational management divisions to intervene or make judgments in a timely and proper
manner when issues, cases, or misconduct are reported to the foreign supervisory authority.

(4) Development of systems in response to the measures for anti-money laundering and countering thefinancing of terrorism at overseas business bases

301

(i)

Whether the overseas business base implements measures regarding anti-money laundering andcountering the financing of terrorism appropriately at the same level as in Japan, to the extent
permitted by local applicable laws and regulation

Note:

In particular, it should be noted that, even at overseas business bases in countries or regions
where the FATF Recommendation is not applied or is insufficiently applied, control systems
at a similar level as in Japan are required.
(ii) In the case where the country where the overseas business base is located applies stricter criteria
for the measures regarding anti-money laundering and countering the financing of terrorism
than in Japan, whether the overseas base takes measures corresponding to such stricter local
criteria(iii) In the case where the overseas business base is unable to take measures regarding anti-money
laundering and countering the financing of terrorism properly at the same level as in Japanbecause it is prohibited by local laws and regulations, whether it promptly provides the following
information to the FSA or the local Finance Office of the region where the bank HQ is located・ Name of country or region where it is located;・ Speciﬁc reasons why it cannot take measures regarding anti-money laundering and countering
the financing of terrorism; and・ If it takes alternative measures regarding anti-money laundering and countering the ﬁnancing
of terrorism, the content of such alternative measures.

III-3-11-3

Supervisory Methods and Measures(1) The FSA may request submission of the filing of misconduct submitted to the foreign supervisory
authority by the overseas business bases and the results of the inspection conducted by the foreignauthority. In cases where problems are found in control systems of the supervision and managementof Japanese banks’ overseas business bases as a result of the FSA’s review, the FSA will consider
collaborating with the relevant foreign supervisory authority, taking into account that the necessity ofstrengthening partnerships with overseas regulatory authorities is increasing as internationalizationand financial conglomeratization progresses, and the movement towards the convergence ofregulation and standards is accelerating.
(2) Through the exchange of information, etc. with the relevant foreign supervisory authority, the FSA
will share awareness of issues while confirming the status of operation at the overseas business baseand, if necessary, will require the bank to submit a report based on Article 24 of the Banking Act and,in case of a serious issue, the FSA will issue a business improvement order based on Article 26 of the
Banking Act.
III-4
III-4-1

Exercise of Finance Facilitation Function
Basic Roles

302

Financial institutions, including banks, are expected to understand in detail the situations of individual
borrowers, such as small and medium-sized enterprises (including micro businesses; the same applies
hereinafter until III-5) and housing loan borrowers, and to strive to facilitate smooth funding (including
new credit granting; the same applies hereinafter) and to adjust lending conditions, etc. (Note 1) whilesufficiently cooperating with related financial institutions and other financial business operators.
In particular, it should be noted that financial institutions are expected to sufficiently take an appropriate
and active part in the vitalization of the regional economy and the facilitation of regional finance,
considering the purpose of Article 64 (Note 2) of the Banking Act on Regional Economy Vitalization
Corporation of Japan (the “REVIC Act”, Act No.63 of 2009).
From the perspectives discussed above, financial institutions are required to not only act as a fundprovider but to also provide maximum support without procrastination to the business improvement effortsof customer enterprises, such as SMEs, by exercising their consulting function, etc. (for their consulting
function toward customer enterprises, see III-5-1).
In particular, regarding the support to enterprises that require capital injection due to rapid changes inthe business environment, it is strongly expected to not only make changes in loan terms, but also to utilize
capital loans (Note 3) and investments to improve the soundness of client enterprises.
Furthermore, in line with the purpose of the Guidelines for Personal Guarantee Provided by Business
Owners (the “Personal Guarantee Guidelines”), financial institutions should further promote the provisionof financing that does not rely on personal guarantees by the business owners, and also work to provide
financing based on a reasonable guarantee agreement as specified in the Personal Guarantee Guidelines.
(See III-9-2).
Note 1:“Adjustment of lending conditions, etc.” refers to adjustment or change in loan conditions,refinance of existing loans, DESs (debt-equity swaps), and other measures taken to reducethe borrower’s burden for debt repayment.

Note 2:

Article 64 of the REVIC Act stipulates that “REVIC and financial institutions shall, when
supporting business owners in revitalizing their businesses or business activities expected tocontribute to the vitalization of the regional economy, cooperate with each other to contributeto the vitalization of the economy in the region, and facilitate regional finance bystrengthening the overall economy.”

Note 3:“Capital loan” refers to loans whose terms are equivalent to capital and which are recognized
as having a sufficient capital nature and can be treated as capital in the evaluation of theborrower. The capital similarity is basically determined from the viewpoints of theredemption conditions, interest rate setting, and subordination, without being limited by theattributes of the borrower (size of the enterprise, etc.), the attributes of the lender (financial
institutions, business corporations, individuals, etc.), or the purpose of use of funds. In
general, capital loans should have the following aspects:(i) The redemption period at the time of the contract shall be more than 5 years, and a lump303

sum redemption period or a long grace period equivalent to the redemption period shallbe set.
(ii) Regarding the setting of interest rates, the interest rates shall be set according to theamount of distributable profits in accordance with the amount of capital. (For a period
when the borrower is in a difficult situation, a mechanism such as performance-linked
interests shall be implemented to reduce the interest burden accordingly.)(iii) Subordination at the time of legal failure shall be ensured (or at least a mechanism shallbe provided to ensure that the subordinated loan is not collected prior to other loans
until the legal failure occurs).
III-4-2

Major Supervisory Viewpoints

Taking into account the basic roles of financial institutions discussed above, the FSA needs to monitor
financial institution’s measures, including the development of its control systems, for the financeinstitutions to continuously serve as finance facilitators as a whole organization. Therefore, the FSA will
examine the financial institutions based on the following major supervisory viewpoints. (For the exerciseof the consulting function to customer enterprises, see III-5-2.)(1)

Whether the bank understands detailed situations of individual borrowers such as SMEs and housing
loan borrowers and strives to facilitate smooth funding and adjust lending conditions, etc. Also, if
there are other financial institutions or other financial business operators involved, whether the banksufficiently cooperates with them in facilitating smooth funding or adjustment of lending conditions,
etc.

(2)

Based on the purpose of Article 64 of the REVIC Act, whether the bank, when supporting businessowners in revitalizing their businesses or business activities expected to contribute to the vitalizationof the regional economy, cooperates with the Regional Economy Vitalization Corporation of Japan(REVIC) to contribute to the vitalization of the economy in the region and facilitate regional financeby strengthening the overall economy.

(3)

Whether the bank makes efforts to broaden the choice of loan programs to substitute personal
guarantee provided by business owners through options such as guarantee contract with a suspension
or cancellation clause, asset-based lending (ABL), additional interest, etc.

(4)

In the case where the bank is asked for a loan by a principal borrower who has separated or tries toseparate his/her business assets from his/her personal household, whether the bank makes efforts toconsider the possibility not to require a personal guarantee for him/her provided by business owners
or the possibility to make use of an alternative means like those listed in (3) above in the course of304

comprehensively evaluating the management conditions, use of funds, and collectability of theborrower based on the “Guidelines for Personal Guarantee Provided by Business Owners.”(5)

In the case where the bank enters a guarantee contract, whether the bank explains what part isinsufficient and requires the conclusion of the guarantee contract, and what improvements may
increase the possibility of modification or cancellation of the guarantee contract while giving
objective and reasonable reasons to get understanding and consent from the customer, dependingon the customer’s knowledge and experience, etc.

III-4-3

Supervisory Methods and Measures

Taking opportunities of various dialogs or interviews, the FSA will encourage financial institutions tosufficiently exercise their finance facilitation function while following up on their efforts based on the
supervisory viewpoints mentioned above.
In this context, at a hearing with top management, the FSA will confirm how the management has
demonstrated leadership in exercising the finance facilitation function.
Also, when necessary, the FSA will confirm with managers in sales divisions, etc., in depth, how they
have exercised the function in individual cases, including in contact with customer enterprises (including
challenges at sales scene and coordination with headquarters).
III-5
III-5-1

Exercise of Consulting Function to Customer Enterprises
Key Principles

Basically, in cases of business expansion or management improvement of customer enterprises(including sole proprietors; the same applies hereinafter), it is important for the management of theenterprises to identify the goal and challenges of their business operations and to actively address them toattain the goal and to solve the challenges.
Financial institutions are required, in addition to the role of a fund provider, to provide maximum
support for the active efforts of customer enterprises by exercising the consulting function, including
support for formulating a turnaround management plan, continuous monitoring after adjustment, etc. oflending conditions, management consultation and instruction, etc., as necessary, through networks withexternal professionals and organizations, etc.
In particular, main banks providing large amounts of loans to customer enterprises are expected not only
to serve as a consultant but also to further exert their consulting function more proactively and to provide
maximum support so that customer enterprises can identify their business challenges and make efforts for
management improvement, business reorganization, etc.
It is important to establish a scheme where these efforts from both sides; i.e., customer enterprises and305main banks, generate synergetic effects, ensuring that the business expansion and management
improvement of the customer enterprise progresses steadily, thereby improving the collectability of loans
and expanding future fund demand, which at the same time results in improvement in profitability andfinancial conditions of financial institutions.
Generally, major banks should exercise their consulting function by understanding and analyzing themanagement challenges of customer enterprises, providing appropriate advice for customers to gain indepth awareness of their own challenges, encouraging them to make active efforts, and, at the same time,
proposing and implementing optimal solutions. On such occasions, from the viewpoint of preventing
business conditions from worsening or making improvements earlier, it is important for major banks to
identify a sign of change in situations surrounding customer enterprises timely and appropriately andencourage them to take action ahead of time. The following are examples of the consulting functions ofmajor banks that are expected by customer enterprises.
These examples are just shown in a comprehensive manner so that the FSA, major banks, and customer
enterprises can share a common recognition about general cases, as the consulting function, in reality,
varies according to the status of customers and the size and characteristics of banks. The specific content
of the consulting function should be determined by each financial institution based on its own management
decision according to its size, characteristics, and user expectations and needs. It should be noted that the
FSA does not require them to follow these examples uniformly and comprehensively.
(1) Strengthen daily and continuous relations, and understand and analyze management goals andchallenges(i)Understand and analyze customer’s management goals and challenges, and identify its life stage
and practice predictive management
Banks should understand management goals and challenges of the customer enterprise basedon its financial information and various qualitative information.
Then, they should analyze the management goals and challenges of the customer enterprise
while comprehensively considering the following points, and identify the life stage(development phase) and the degree of business sustainability (hereinafter referred to as the“life stage”) of the customer enterprise.
・Management resources of the customer enterprise, its motivation towards businessexpansion and management improvement, and capacity to realize and solve themanagement goals and challenges;

・Prospect of its surrounding environments;

・Collaboration of relevant parties of the customer enterprise (business partners, Credit
Guarantee Corporations, other financial institutions, external professional andorganizations, etc.);

・The bank’s position in transactions with the customer enterprise (its share in thecustomer enterprise’s total borrowings) and the content of transaction (funds for capital306

investment or working capital, length of transaction periods, etc.); and・

Perspectives of securing the ﬁnancial stability of the bankIn addition, it is important for major banks, etc. to have dialogues with customer enterprises
in a respectful manner from the standpoint of the management of the enterprises andsupport their management decisions while many solutions are still available for customer
enterprises. Accordingly, major banks, etc. should also strive to continuously ascertain
whether there is any sign of a customer enterprise shifting to a situation where its businessis in trouble or may get in trouble owing to decreasing profitability, worsening financial
positions such as excessive debts or worsening cash management (hereinafter referred toas “contingency” in III-5). The shift from usual conditions to contingency may well happen
to customer enterprises not only suddenly owing to natural disasters or bankruptcy of theirbusiness partners, etc. but also gradually through changes in business or social
environments. Accordingly, major banks, etc. should, as needed, encourage customer
enterprises, including those who are not aware of being amid such a gradual shift, to deepen
their awareness that they are in the process of such a shift toward contingency.
(ii) Facilitation for the customer enterprise to recognize its management goals and challenges andto make active efforts towards themBanks should give appropriate advice to a customer enterprise so that it can deepen its
awareness of its management goals and challenges even in a case where the customer enterprise
has not been able to recognize its management goals and challenges clearly and sufficiently,
encouraging it to make active efforts to achieve the goals and solve the challenges. In a casewhere the customer enterprise has insufficient recognition, banks should encourage thecustomer enterprise to gain a deeper understanding and take proactive efforts in collaboration
with other financial institutions, Credit Guarantee Corporations, external professionals andorganizations, etc., if necessary.
(Reference) When a bank gives advice to a customer SME to support its accurate and sufficient
recognition of the management goals and challenges, it is effective to encourage the SME
to apply "Guidelines on the Accounting of Small and Medium Enterprises" and “Basic
Guidelines for SME Accounting (Chusho Kaikei Yoryo).”(2) Proposal of optimal solutions
Banks should properly and carefully identify the respective life stages of the client companies
towards realization and solution of their management goals and challenges, and then propose optimal
solutions from the viewpoint of the client companies according to their respective life stages, in atimely manner. In doing so, banks should cooperate with other financial institutions, Credit
Guarantee Corporations, external professionals and organizations, etc. and use the national or local
government’s SME support measures.
In addition, assuming that situations surrounding the customer enterprises will change, banks

307should identify any sign of change in such situations and encourage them to take action ahead of time.
As part of such initiatives, banks should also proactively provide information about available solutions
at the time of shifting to contingency.
In particular, in the case where the client companies need support due to business rehabilitation,change, succession, or discontinuance, or where some coordination is necessary among creditors ingiving support to the enterprise, banks should make active use of third-party viewpoints, professional
knowledge and functions of external professionals and organizations, etc. in order to make thesupport more effective.
When banks propose a relevant solution to a client company, it is also effective to collaborate withcertified agencies supporting SMEs’ business innovation (meaning those which are certified pursuant
to Article 31(1) of the Small and Medium-sized Enterprises Business Enhancement Act; the same
applies hereinafter.)(Reference) Solutions proposed according to the life stage of the client company (examples)
Types of life stages ofclient companies

Solutions proposed by financial
institutions

Client companies
aiming at start-up anddevelopment of new
business・ To judge the value of the new
business based on the quality of thecompanies’ technology, sales force,and management.
To respond to fund needs at the timeof business start-up, including
introduction of public subsidy
programs and making use of publicfunds.

Client companies withpotential for further
expansion in growingphase・ To support the companies inacquiring new sales channels
through business matching andsupport for technology development
・ To provide information and advice
towards new business development,
including overseas promotions
・ To respond to fund needs forbusiness expansion. At the sametime, to make use of financing tools
based on the business value(financing tools that do notexcessively depend on collateralized

308

Collaboration with external
professionals/organizations, etc.
・ Supportfortheclientcompanies
intechnology
evaluation
andcommercialization of products
in cooperation with publicorganizations
・ Introduction of public subsidies
and funds programs to theenterprise・ Coordination with REVIC・ Formation and making use of
local revitalization funds andbusiness development funds
・ Businessmatching
incoordination
with
local
governments,
SME-relatedorganizations, other financial
institutions, and industrialorganizations, etc.
・ Support for the companies intechnology development byindustry/academia/government
cooperation
・ Provisionofoverseas
information and consultation incooperation with JETRO, JBIC,

real property or personal guarantee.)

Client companies which
need management
improvement(Client companies thatare expected to
improve their business
management on theirown, etc.)

To support the companies inacquiring new sales channels
through business matching andsupport for technology development
To adjust or change lending
conditions
To grant a new credit line if it isjudged that it may allow thecompanies to get new profit
occasions and reduce costs on a
medium-to-long-term basis, thereby
improving the debtor’s business andfinancialconditions
andcollectability. At the same time, tomake use of financing tools based on
the business value (financing toolsthat do not excessively depend on
collateralized real property or
personal guarantee.)
To support the companies informulatingabusinessreorganization plan including theabovementioned
measures(including financial institutions’preparation of materials necessary
for formulation of the businessreorganization plan based on theactual status of the companies whileobtaining the understanding of thecompanies). When it is difficult toformulate a quantitative businessreorganization plan, to propose analternative direction to solve
challenges that are simple and309

etc. and introduction of funding
tools in overseas countries

・ Making use of advice andproposalsfromSME
management
consultants,
certified public tax accountants,
management
instructors,
Yorozu Support Centers, SME
Revitalization Support Council,
General IP Help Desks, etc. (useof third party knowledge)
・Review of the repayment plan incooperation with other financial
institutionsandCreditGuarantee Corporations
・Business
matching
incoordination
with
local
governments,
SME-relatedorganizations, other financial
institutions,andindustrialorganizations, etc.
・ Support for the companies intechnology development byindustry/academia/government
cooperation

qualitative but effective.
・

Client companies which
need businessrehabilitation andchange of business type
(Client companies thatare expected to recover
the business throughdrastic businessrehabilitation andchange of business
type, etc.)

Client companies whosebusiness seems
unsustainable(Client companies
whose purposelessbusiness continuation
would presumably
hinder the livelihood
rehabilitation of theowners of the clientcompanies or toadversely affect theirbusiness partners’
operation, etc.)

Client companies which
need business・ To change the lending conditions,etc. and to consider use of DES,
DDS, or DIP finance or debt waiveraccordingtothefinancial
institution’s share in the total lendingbalance of the enterprise andtransaction status
・ To support the companies informulatingthemanagement
reorganization plan including theabovementioned measures

・ When asked by the companies forchange in lending conditions, etc.,
not to mechanically respond to, but
to give careful and sufficientconsideration by comprehensively
judging the motivation of thebusinessownertowards
thecontinuation of the business, his/herlivelihood rehabilitation, impact on
trading partners, etc., the bank’s
share or transaction status, and focus
of securing financial stability・ And then, to properly implement
solutions that are truly favorable tothe client companies and theirrelated parties, including proper
advice towards the rehabilitation of
the client companies subject to debtworkout and cooperation in smoothprocessing and customer response in
the case where the customer chooses
voluntary liquidation.
・ In addition, to endeavor to give
sufficient explanation to gain greater
understanding from the clientcompanies.
・To conduct M&A matching support
and countermeasures for inheritance

310

Formulationofbusiness
revitalization
measuresincooperation with REVIC, theCorporation for Revitalizing
Earthquake affected Businesses,
SME Revitalization Support
Council, etc.
・Implementation of revitalizationtype
privateliquidation
procedures pursuant to Part 3 of
Guidelines
forBusiness
Revitalization, etc. of Small- andMedium-sized Enterprises
・Formation and use of business
revitalization funds
・ Use of revitalization-oriented
servicers

・

Implementationof
discontinuance-typeprivateliquidation procedures pursuant
to Part 3 of Guidelines for
Business Revitalization, etc. of
SmallandMedium-sizedEnterprises
・After giving careful and sufficientconsideration
andfull
explanation to deepen the clientcompanies’ understanding, tostudy reorganization measuressubject to debt-workout incooperation
withtax
accountants, lawyers, servicers,
etc.

・Business Transfer & Succession
Support Centersuccession

Note 1:

tax taking into account the existenceof the successor and business owner’s
intentions for business continuation
・To respond to fund demands at thetime of business succession such as
stock purchase funds in the case of
MBO or EBO

・Use of M&A support company,etc.
・ Evaluation of own stocks andcalculation of inheritance tax bypublic tax accountant
・Establishment of the trust by willwith the help of a trust business
operator,administrative
scrivener, and lawyer

In some cases, other responses than those mentioned in the above table are required. For
example, in the case of a client company with whom it is difficult to establish a trust
relationship required for a bank to establish a proper credit line (such as a client companies
which do not faithfully disclose their financial conditions despite honest efforts from thebank, or client companies which are suspected to have a relationship with an antisocial force,etc.), the bank should make proper and prompt response in cooperation with tax
accountants and lawyers, as needed, while considering the necessity of debt protection andbeing mindful from the viewpoint of securing the financial stability and proper operation of
the bank.

Note 2:In the table above, when the bank provides consulting to “Client companies which needbusiness rehabilitation and change of business type,” it should be noted that the range ofsolutions to be provided becomes wider because the following special tax treatments are
introduced to support the rehabilitation of SMEs:
・ Special provisions for facilitating corporate reorganization through the corporate
reorganization tax system (Application of the corporate reorganization tax system to thedebt work-out through the business revitalization funds); and・ Tax-relief treatment of capital gains relating to provision of personal property by abusiness owner who is a guarantor based on a reasonable rehabilitation plan

(3) Points to note concerning client companies which need support for the management improvement
and business reorganization(i)

Support for formulating a management reorganization plan
In the case where, with regard to a solution under (2) above that requires formulation of amanagement reorganization plan, an agreement is reached between the bank and the clientcompanies and, if needed, with other financial institutions, Credit Guarantee Corporations,external professionals and organizations, etc., (including the case where an agreement is reachedwith regard to a solution that was first proposed by the bank and then revised throughconsultation with other financial institutions, Credit Guarantee Corporations, and external
professional and organizations, as needed), a management reorganization plan, containing such
solution, needs to be promptly formulated.

311

It is preferable that the client companies formulate the management reorganization plan bythemselves to the extent possible so that they will recognize their intrinsic management
challenges and address them proactively. For this, the financial institution should endeavor tocooperate with the client companies in checking whether or not the management reorganization
plan is adequate and feasible and properly contains the solution under (2) above.
In the case, however, where the client companies are not able to formulate the management
reorganization plan by themselves, or in the case where it is judged that the major financial
institution’s active involvement will be effective, the financial institution will support them informulating the management reorganization plan while obtaining their understanding(including the financial institution’s preparation of necessary materials for formulation of the
management reorganization plan based on the actual situation of the client companies). In doing
so, the financial institution should fully consider the situation the client companies are facing sothat the management reorganization plan can contribute to management improvement.
Moreover, even in the case where it is deemed that the client companies have difficulty
formulating the management reorganization plan by themselves, it should be noted that thefinancial institution needs to actively support the client companies in formulating the plan bymaking positive use of a third party’s viewpoints, professional knowledge and functions ofexternal professionals and organizations, etc.
In formulating business revitalization plans of a client company that is an SME, the financial
institution should consider the human resources and ability to prepare financial statements of
the SME and aim at, rather than adhering to formulation of so large and very detailed a plan asthat of a large company, proposing a direction to formulate a simple, qualitative, but effective
plan to solve challenges towards management improvement and business reorganization of theclient company. In the case where a major bank or the like uses the national or local
government’s SME support measures and the relevant financial institutions support a client
enterprise in formulating a basic management improvement plan such as cash management andgrasping the enterprise’s own management conditions (hereinafter referred to as the “basic
management improvement plan”), it is necessary to check whether the use of these support
measures match the client enterprise’s needs while also paying attention to preventing the abuseof its superior bargaining position.
Note 1:

Even in the case where the financial institution changes the lending conditions of the clientcompany, when the business revitalization plan or the direction to solve the challenges
falls under the scope of a highly feasible radical management reorganization plan (forapplicable conditions thereof, refer to III-3-2-4-3 Disclosure of risk management loans
based on the Banking Act and the Financial Reconstruction Act in these Supervisory
Guidelines), the loan based on such plan or the direction is not considered to be a
restructure loan.

Note 2:

Even in the case where the SME has not formulated a business revitalization plan, etc.,

312when “materials are prepared by a financial institution relating to the management
improvement of the SME” in line with the debtor’s real management situation bycomprehensively considering its technology, sales capacity, and growth potential, therelevant loan does not fall under the scope of the “restructured loan,” as these materials
are considered a “highly feasible radical management reorganization plan.” (Refer to III3-2-4-3 Disclosure of risk management loans based on the Banking Act and the Financial
Reconstruction Act.)(ii) New credit granting
In the case where a bank is asked to grant new credit by a client company for which the bankhas changed the lending conditions from the viewpoint of exercising its active and proper financial
facilitator function and when it is expected that the client company can enjoy new profit occasions
and cost reduction on a medium-to-long term basis and improve its business or financial situation,
which is judged to finally contribute to improvement in its recoverability, the bank should
endeavor to actively grant a new credit line to the client company in a proper and timely manner.
(iii) Proactive involvement, etc. in management improvement and business revitalization support
In the case where a major bank or the like itself is a main financial institution of a client
enterprise, the major bank or the like should have dialogues with the client enterprise in a
respectful manner and then proactively get involved in management improvement and business
revitalization support based on the actual situation.
In addition to the above, even in the case where the outstanding loan amount is small or thecollateral ratio is high, or the guaranteed ratio by a Credit Guarantee Corporation is high, the mainbank or the like should, as needed and as early as possible, cooperate with other financial
institutions, Credit Guarantee Corporations, and external professionals, other externalorganizations, etc. and get involved in management improvement and business revitalization
support based on the actual situation of the client enterprise while also taking account of its own
management resources.
In the case where a major bank or the like is a main financial institution with which a client
enterprise does business, when such major bank uses the function of REVIC or the Corporation
for Revitalizing Earthquake affected Businesses in supporting the business rehabilitation of suchclient enterprise, the major bank or the like will be actively and continuously involved in the
support.
(4) Implementation of solution and progress management in collaboration with client companies
The bank should verify and check whether or not the solution is adequate and feasible together
with the client company and other related entities, and then implement it in collaboration with them.
The bank should, after launching the solution, properly manage the progress thereof in cooperation
with the related parties as needed, while continuously monitoring and giving management advice andinstructions, etc. to the client company.

313

In particular, in the case where a financial institution has supported a client enterprise informulating a basic management improvement plan using the national or local government’s SME
support measure, the financial institution should take the initiative in appropriately monitoring the
progress status of the said plan.
In addition, when knowing that there are two or more financial institutions that provide loans tothe client company, the bank will manage the progress of the solution in coordination with thesefinancial institutions and Credit Guarantee Corporations.
If, in the course of managing the progress, it finds a major change, etc., in external circumstancesof the client company that could not be expected at the launch of the solution, the bank should
consider whether or not to revise the ongoing solution together with the related entities. When it isnecessary to revise the solution, the bank should make a proposal of revision (including reformulation of the business revitalization plan) upon giving proper advice so that the client company
can understand the change and the necessity of the revision, and then implement the revised solution
with coordination with the related entities.
Note: In implementing the solution, attention should be paid to (3)(iii) above.
III-5-2

Major Supervisory Focus

Based on the above, the FSA will examine how each major bank has established a control environment
for continuously promoting efforts to exercise its consulting function to client companies as the wholeorganization focusing on the following major supervisory focus.
The specific content and level mentioned in the following supervisory focus should be determined byeach major bank based on its own management decision according to its size, characteristics, and user
expectations and needs. It should be noted that the FSA does not require the bank to follow these examples
uniformly and unconditionally.
(1) Whether the management of the banks actively promote the evaluation and improvement of the efforts
to exercise its consulting function to client companies. Also, whether the management endeavors toestablish a necessary control environment to ensure that the bank fulfills requirements under theseSupervisory Guidelines as the whole organization while revising the relevant internal rules whenneeded, including dissemination thereof to its employees.
(2) Whether the banks endeavor to establish a control environment wherein HQ supports sales branches
to supplement their lack of human resources and knowhow and to make effective use of the
management resources of the entire bank. For example, whether the banks endeavor to develop
relevant environments so as to provide optimal solutions depending on management challenges ofcustomer enterprises under an appropriate division of roles. As part of such efforts, whether sales
branches and HQ share client enterprises’ management conditions and challenges (including a sign314

of shifting to contingency) and any other information that sales branches have obtained through their
daily and continuous relations with such enterprises, and whether HQ and sales branches, as needed,
work on effective support in an integrated manner.
(3) In supporting the management improvement and business revitalization of a client company, whether
the bank, while keeping a close relationship with it, proposes an optimal solution according to the
management challenges from the viewpoints of the client company and supports it in implementing
the solution. In addition, whether the bank endeavors to develop relevant environments so as to
identify any sign that a client company may shift to contingency and encourage the client company totake action ahead of time. In such case, if there are other financial institutions or other financial
business operators involved, whether the bank endeavors to form an alliance and cooperate with themsufficiently such as by holding a joint meeting with them.
(4) Based on the viewpoints of complementing lack of professionals and expertise and developing humanresources and accumulating relevant knowhow within the bank on a medium-to-long term basis,
whether the bank endeavors to develop the liaison environment at its HQ and sales branches in order
to cooperate with external professionals (tax accountants, lawyers, SME management consultants,
certified public accountants, and management instructors, etc.), external organizations (local
governments, the Bureau of Economy, Trade and Industry, chambers of commerce and industry,
commercial and industrial associations, the Federation of Small Business Associations, Yorozu
Support Centers, JETRO, JBIC, Regional Economy Vitalization Corporation of Japan, Corporation
for Revitalizing Earthquake affected Businesses, SME Revitalization Support Council, Organizationfor Small & Medium Enterprises and Regional Innovation, certified agencies supporting SME business
innovation, business revitalization funds, regional revitalization funds, etc.), Credit Guarantee
Corporations, and other financial institutions, etc.
In particular, in the case where the client company needs support due to business rehabilitation,change, succession, or discontinuance, or where some coordination is necessary among creditors ingiving support to the company, whether the bank makes active use of a third-party viewpoint,
professional knowledge and functions of external professionals and organizations, etc. without
postponing necessary judgment. When the bank, as a main financial institution with which the clientcompany does business, uses external professionals and organizations, or the Guidelines for Business
Revitalization, etc. of Small- and Medium-sized Enterprises, etc. in supporting the businessrehabilitation of the client company, whether it is actively involved in the support. In addition, in
judging that it is presumably difficult for the client company to revitalize its business, whether themain bank fully considers third-party opinions from external professionals and organizations fornecessary support. Also, when other financial institutions support the business rehabilitation of theclient company by using external professional and organizations, whether the bank endeavors toactively form an alliance and cooperate with them.

315

In addition, when the bank, as a main financial institution with which the client company does
business, uses the function of the Regional Economy Vitalization Corporation of Japan or the
Corporation for Revitalizing Earthquake affected Businesses, and supports a client company inrevitalizing its business, whether the bank has been actively and continuously involved.
Note:

Specific entities with which each financial institution forms an alliance should bedetermined by it based on its own management decision according to its size, characteristics,
and user expectations and needs. It should be noted that the FSA does not intend to require
each financial institution to form alliances with all the entities mentioned in the parentheses
or to exclude alliance with any other entity.
In addition, it is necessary to note that, when the financial institution shares informationof the client company it keeps with other relevant entities, the approval of the clientcompany is required.

(5) Whether the bank endeavors to develop competent human resources who have professional knowledge
and knowhow including specialized financial methodologies to support the framework to exercise its
consulting function. In addition, whether the bank collects and accumulates these kinds of knowhow
and various information. And whether it endeavors to share the knowhow and information within thewhole organization by proper coordination between sales branches and HQ.
(6) Whether the bank properly reflects each employee’s efforts to exercise the consulting function to theclient company in their performance evaluation (including the evaluation of sales branches) tocontribute to improving employees’ motivation.
(7) Whether the bank confirms that a control environment to exercise the consulting function is properly
established by conducting internal audits periodically and as needed. And whether the bank has acontrol environment in place to make effective use of the audit scheme by improving and enriching
the promotion of the consulting function based on the results of the audit, as needed.
(8) In the case where a main bank or the like supports a client company in formulating a basic management
improvement plan using the national or local government’s SME support measure, whether the mainbank or the like has established an environment to check whether the use of this support measure truly
matches the client company’s needs while also paying attention to preventing the abuse of its superiorbargaining position. Moreover, whether the basic management improvement plan to be formulated
takes full account of the situation the client company is facing so that the plan can be effective toimprove the client company’s management.
III-5-3

Supervisory Approaches and Actions

316

The FSA will grasp the bank’s efforts in exercising its consulting function based on these Supervisory
Guidelines through supervisory activities, including hearings, interviews, etc.
In this context, at an interview with top management of the bank, the FSA will hear their efforts toexercise the consulting function, how they have developed the control environments mentioned in theseSupervisory Guidelines, and how the management has shown its leadership relating thereto, and willencourage the bank to implement these efforts steadily.
At each hearing, the FSA will confirm with managers in sales divisions, etc., in depth, how they exercise
the consulting function in individual cases including contact with customer enterprises (including problems
at sales scene and coordination with HQ).
III-6

Provision of Various and High-Quality Financial Instruments and Services Suitable to User Needs

III-6-1

Outline(1) Major banks that are large in size, having great influence on Japan’s economy and developing financial
businesses globally, are expected to provide users with various and high-quality financial instruments
and services suitable to their needs and to contribute to the development of Japan’s economy and theimprovement of people’s lives.
(2) What kinds of financial instruments or services banks provide to customers should be chosen by eachbank among from various products and services based on its own business model and management
decision. The following are specific examples of efforts that major banks are expected to make.
(i)Efforts towards market-oriented indirect financeFor example,
・ Project ﬁnance・ Non-recourse loan
・ Syndicated loan
・ Securitization of loans
・ Support for issuance of customer enterprise’s bonds, etc.
(ii) Efforts towards new SME financing
For example,
・ Eﬀorts towards the ﬁnancing that emphasizes cashﬂow rather than excessively depending on
security or guarantee (in particular, a third party guarantee)
・ Development of ﬁnancing programs for an SME whose ﬁnancial statements are relatively precise
・ Development, enhancement, and use of a credit risk database, etc. (improvement of the quality
in loan assessment, setting of proper loan interest, introduction of proper portfolio, etc.)(iii) Efforts toward personal financing (retail financing)For example,

317

・ Provision of ﬁnancial instruments and services that meet individuals’ risk appetite and needs
according to the life cycle
・ Credit granting to individuals, etc. by means of housing loans and the scoring system(iv) Efforts focusing on growth potential
See III-6-2 for efforts that banks are expected to make.
(Reference)(i)“Future Vision of Japan’s Financial System with Medium-term Outlook” (September 30, 2002, by
the Financial System Council)(ii) “Enhancement of Relationship Banking Functions” (March 27, 2003; the Financial System Council)(iii) “Evaluation of Efforts in Region-based Relationship Banking and Future Response - to Establish a
Sustainable Business Model to Utilize the Accumulated Local Information” (April 5, 2007; by the
Financial System Council)(3) Supervisory Approaches and Actions
The FSA will check a bank’s framework and actual situations to make these efforts throughinterviews with the bank on the occasion of settlement and financial reporting and the hearing on therisk management or internal audit. Based on that, the FSA will consider supervisory response asneeded.
It is also necessary for a bank, in making these efforts, to assume accountability for thecharacteristics of risk or returns of the financial instruments and services, and the risk associated withchange of loan interest and income of a borrower, etc. See ”III-3-3 Provision of Information andConsultation Function, etc. for Protection of Users” for banks’ accountability.
III-6-2

Efforts towards Financing, etc. Focusing on Growth Potential

III-6-2-1

Background

In order for the financial industry to support and back-up the real economy and corporations and to be,itself, a growing industry to lead the economy, it is important that financial institutions engage in efforts
to supply funds for growth that are suitable to the characteristics of entities they support. From theviewpoints for promoting these efforts, the FSA summarizes and clarifies major principles as follows;(Reference)“New Growth Strategy: Blueprint for Revitalizing Japan” (the Cabinet Decision of June18, 2010)
III-6-2-2

Key Principles on Efforts towards Financing Focusing on Growth Potential

Banks’ efforts towards the financing focusing on growth potential of customer enterprises should bedetermined by each bank based on its own management decision. As an example, they are expected to make318

the following and develop the financing scheme emphasizing on borrowers’ strength in technology and sales
and their growth potential as well as the profitability and the future potential of the businesses they are
engaged in (hereinafter referred to as “borrower’s growth potential”).
(Reference)Specific examples of developing the above-mentioned schemes(It should be noted, however, that the following are merely examples and each bank should
determine its efforts toward the financing focusing on the growth potential based on its own
management decision.)(i)

The management of the bank should define and position the efforts towards the financing while
focusing on the borrower’s growth potential, etc. in its financing policy.

(ii) The bank should develop a framework for promoting the efforts towards financing focusing on
the borrower’s growth potential, etc. by establishing a division in charge or appointing a person
in charge for that purpose.
(iii) The bank should fully examine, analyze, and discuss the borrower’s growth potential, businessenvironment by sector, and information of partner companies (trend of needs) and share theinformation within the whole organization through proper combination between sales branches
and HQ and make effective use of the information in the course of sales activities (including
management consultation with partner companies) and loan assessment.
Also, as needed, the bank should evaluate the borrower’s growth potential in an objective andreasonable manner in the course of sales activities (including management consultation with partnercompanies) and loan assessment.
(iv) The internal rules on loan assessment should stipulate that the bank evaluates the borrower’s growthpotential properly and sufficiently in the course of loan assessment.
(v)

The bank should disseminate the importance of the efforts towards financing while focusing on
the borrower’s growth potential to a person in charge of financing and a person in charge ofloan assessment, and endeavor to improve their ability to properly evaluate the borrower’s
growth potential through training, education, etc.

III-6-2-3

Supervisory Approaches and Actions

The FSA will grasp the bank’s efforts towards financing focusing on the borrower’s growth potential
through ordinary supervisory activities including hearings, interviews, etc.
III-6-3
III-6-3-1

Points to Note in Granting Consumer Loans
Background

From the viewpoint of making Japan’s consumer finance market sound and stable on a medium-to-longterm basis, banks are expected to actively participate in the market, especially with regard to loaning to319

individuals (excluding housing loans; hereinafter referred to as “consumer loans”) and also to assume theirsocial responsibility.
On the other hand, when banks grant consumer loans, it is important for them to establish a relevant
control environment based on the intent of the prevention of multiple debts under the amended Money
Lending Business Act (enacted in June 2010) and user protection, including proper loan assessment andprevention of forced collection.
Although the provisions of the amended Money Lending Business Act including a so-called “restriction
on loan amount” under Article 13-2 thereof do not apply to a bank’s loan guaranteed by a money lender, it
is important for banks to develop a relevant control environment mentioned in this section from theviewpoints of customer protection and risk management.
III-6-3-2

Major Supervisory Viewpoints(1) Establishment of a proper assessment scheme based on the intent of the amended Money Lending
Business Act(A)

Whether the bank has established a proper loan assessment environment considering the actual
situations of customers so that a customer loan by the bank will not be excessive for thecustomer, by inserting the mechanism to make sure that the customer can pay more thanhe/she borrows based on his/her borrowing status, repayment schedule and results, annual
income and property, etc.

(B)

There are processes specific to consumer loans, including assessment using the information ofa credit bureau, credit management, and collection. Whether the bank identifies the risk
associated with these specific processes and manages it properly. And whether the
management of the bank understands the situation and gives necessary instructions.

(2) Use of credit information owned by a third party in the assessment
In the case where a bank has too little credit information on the borrower’s repayment capacity to
conduct the assessment or credit management for a customer loan (hereinafter referred to as the“assessment” in this section), the bank may obtain the information from a credit bureau or ask a
Credit Guarantee Corporation for a guarantee assessment as a supplementary means thereof.
In this case, whether the bank has established the risk management environment paying attention
to the following.
(A) Whether the bank has a control environment in place to properly judge the status of a borrower
when conducting the loan assessment by, rather than merely depending on the results of credit
assessment of a credit guarantee company or information from a credit bureau, using them
together with its own information.
(B) Whether the bank has developed a control environment wherein it grasps change in the default
rates and the subrogated performance rates by a credit guarantee company so that it can verify

320the adequacy of the results of credit guarantee assessment as credit information on a continuous
basis.
(C) In particular, when the bank uses a credit guarantee company, whether the bank has developed
a control environment for checking the financial situations and the guarantee capacity of suchcredit guarantee company.
(D) In addition to developing the control environment under (B) and (C) above, whether the bankdiscusses with the credit guarantee company and the credit bureau the adequacy of their credit
guarantee assessment and credit information processing, as needed.
(E) Whether the bank confirms with the credit guarantee company and the credit bureau that they
have formulated proper rules and procedures for credit guarantee assessment and credit
information processing and that they have a control environment in place for properly operating
their business in accordance with such rules and procedures.
(3) Compliance, etc.
(i)

Response in line with the intent of the amended Money Lending Business Act
When the bank grants consumer loans, whether the bank has established a proper control
environment such as following from the consumer protection viewpoint considering the intent
of restriction under the amended Money Lending Business Act.
(A)

Matters relating to collection
Whether the bank has a control environment in place to, in collecting claims of customer
loans, prohibit intimidating persons or harming the tranquility of a person’s personal life
or business operations. In addition, whether the bank has a control environment in place
to check the collection procedures of the credit guarantee company in advance so that thecredit guarantee company will not engage in excessive demand or forced collection in
exercising the right of reimbursement after subrogation performance.

(B) Control environment for complaint processing
In establishing the internal control for complaint processing, whether the bank has
designed it to include not only responses to the debtor but also responses to the ex-debtor
in case of subrogation performance by a credit guarantee company.
It is preferable that banks should prepare a scheme such as, according to the content ofconsultation and complaints from debtors, properly introducing them to a consultation
center of external organizations or local governments or the bar association, etc. from theviewpoints of consumer protection and rebuilding their lives.
(ii) Ban on relationship with antisocial forces
Whether the bank has a control environment in place to ban any relationship with antisocial
forces even in case of consumer loans that are not designated for specific purposes of use. Also,
whether the bank has a control environment for recommending a customer who is found to haveborrowed money from an underground money lender to consult with relevant institutions.

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(iii) Others
In the case where the bank grants a loan guaranteed by a credit guarantee company that is
any of the bank’ subsidiary companies, etc. (meaning subsidiary companies, subsidiary entities,
or affiliated companies, etc. of the bank or its holding company), whether the transaction withsuch credit guarantee company substantially supports the credit guarantee company and,
therefore, violates Article 13-2 of the Banking Act (the so-called “Arm’s Length Principle”.)
III-6-3-3

Supervisory Approaches and Actions

If a problem is found in a bank’s consumer loan business from the various hearings and inspection results,
etc., the FSA will require the bank to submit a report based on Article 24 of the Banking Act. If a serious
problem is found with respect to the appropriateness of the business operation and customer protection,
the FSA will issue a business improvement order based on Article 26 of the Banking Act.
If an inspection has found any serious violation of laws or conduct detrimental to public interests, suchas repetition or continuity of an act of intimidating persons or harming the tranquility of a person’s personal
life or business operations, in collecting claims of loans caused because the management of the banks fails
to comply with Article 12-2(2) of the Banking Act and Article 13-7 of the Regulation for Enforcement of
the Banking Act, which stipulates that “A Bank (partially omitted) must stipulate internal regulations, etc.
(partially omitted) concerning measures (partially omitted) in order to secure sound and appropriate
business management (partially omitted), and must develop a sufficient system to manage its businessbased on training employees and other said internal regulations, etc.,” the FSA should consider thenecessity of issuing a business suspension order under Article 27 of the Banking Act.
In making an administrative decision, the FSA needs to fully consider the supervisory viewpoints,
methods, and responses relating to other supervisory activities including “Grievance and Consultation
concerning Banks,” ”Credit Risk Management,” “Prevention of Damage that May be Inflicted by AntiSocial Forces,” “Provision of Information and Consultation Function, etc. for Protection of Users,”“ControlEnvironments

forManagementofInformation

RelatedtoCustomers,

etc.,”“Outsourcing,” ”Dealing with Complaints (including Financial ADR System),” “Scope of Business of
Subsidiary Companies, etc.” “Bank Agency Service,” etc. under these Supervisory Guidelines.
III-6-4
III-6-4-1

Provision of Finance Service with Consideration for Persons with Disabilities
Background

The Act for Eliminating Discrimination against Persons with Disabilities (Act No.65 of 2013) prohibits
a company from engaging in unfair discriminatory treatment for persons with disabilities and requires it toimprove reasonable accommodation to implement elimination of social barriers, which banks are required
to comply with.

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In addition, banks need to give consideration to provide those who are able to express their intention not
subject to adult guardianship but have difficulty following procedures, etc. in banking transactions bythemselves due to visual, hearing, or physical disabilities (hereinafter referred to as the “persons withdisabilities”) with the same services as those for persons without disabilities.
For this, it is deemed important for each bank to comply with laws and regulations related to persons
with disabilities and to make efforts to proactively promote measures responding to needs of visuallydisabled persons, etc., including “introduction of an ATM machine for visually disabled persons” and“making a rule that bank employees (more than one) should assist visually disabled persons in conducting
the banking procedure by writing or reading on behalf of them and smooth implementation of the rule”
mentioned in the request statement issued by Director-General of the Supervision Bureau of the FSA to
financial industry organizations, etc. on August 26, 2010 titled “Active Promotion of Measures with
Consideration to Persons with Visual Disabilities.”
III-6-4-2

Major Supervisory Viewpoints(1) Outline(i)

Whether the bank makes proper responses in accordance with each provision of the “Guidelines
concerning Promotion of Elimination of Discrimination on the Basis of Disability in Business
Fields under the FSA’s Jurisdiction” (Public Notice No. 3 of 2016, hereinafter referred to as the“Public Notice on Guidelines for Eliminating Discrimination against Persons with Disabilities.)(ii) Whether the bank makes efforts to improve accommodation and convenience for persons withdisabilities in the financial transactions at its sales branches, facilities, transaction procedures,etc.
Also, when introducing new facilities in its sales branches or new procedures in its
transactions, does the bank consider the introduction of a specification or design friendly topersons with disabilities, as needed.
(iii) When promoting the measures giving consideration to persons with disabilities, whether thebank checks the national or local government’s related measures and applies them also tobanking services, as needed.
(iv) When receiving opinions or requests (including consultation and complaints) from persons withdisabilities, whether the bank makes efforts to take measures responding to them. Also, when
the bank is not able to satisfactorily respond to the opinions or requests from persons withdisabilities, whether it considers alternative measures.
(2) Business operations(i)

Writing on behalf of those who are not able to write themselves
When the bank receives from a person with a disability who is not able to write themself(hereinafter referred to as a “person having difficulty writing”) an application for opening an323

account or for borrowing a loan, whether the bank, upon taking the following measures to fully
protect them, formulates internal rules allowing the bank’s employees to write on behalf of theperson having difficulty writing to sufficiently respond to his/her needs.
Since such application by a person having difficulty writing is deemed as an “oral expressionof one’s intent,” it should be noted that writing on behalf of a person having difficulty writingin transaction documents is limited within the scope of the expression of his/her intent relating
to such request.
(A) In case of deposit transactiona.

Whether the bank has established rules allowing any of the persons mentioned below,
when asked by a person having difficulty writing, to write his/her intent with regard
to the deposit transaction on his/her behalf.
i)A person who accompanies the person having difficulty writing (*1, *2, *3)ii)Bank employees (more than one employee must attend to check)

Note 1:In the case where a person having difficulty writing does not appear and only aperson who is asked by the person having difficulty writing comes to the bank,whether the bank confirms with the person having difficulty writing his/her
intent to grant the authority to represent him/her to such person coming to thebank and his/her intent to conduct the relevant transaction.

Note 2:In the case where a person having difficulty writing comes to the bank alone,
whether the bank allows any of its employees to write on his/her behalf rather
than asking the person having difficulty writing to come again to the bank
together with the person under i) above.

Note 3:In the case where a person having difficulty writing does not intend to ask the
person accompanying him/her, such as a caregiver, to write on his/her behalf,
whether the bank allows any of its employees to write on behalf of the person
having difficulty writing rather than asking the person accompanying him/her
to write on his/her behalf.

b.

Whether the internal rules under a. above set forth at least the following as therelevant procedure.
i)

The content of the expression of intent of the person having difficulty writing
should be kept as a record;ii)

When a relative or accompanying person has written on behalf of the person
having difficulty writing, more than one bank employee should confirm thecontent of such writing and keep the fact that they confirmed it as a record;
and

iii)

When a bank employee writes on behalf of the person having difficulty writing,more than one bank employee should confirm the content of such writing andkeep the fact that they confirmed it as a record.

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(B) In case of a loan transaction
Whether the bank has established rules allowing those who have the possibility to takeover the repayment obligations of a person having difficulty writing who intends to apply
for a loan transaction, including a presumptive heir or a provider of a third party guarantee(limited to those who are accompanying the person having difficulty writing andhereinafter referred to as the “accompanying presumptive heir”), when asked by the
person having difficulty writing, to write his/her intent with regard to the loan transaction
on behalf of him/her.
Whether such internal rules set forth at least the following matters.
i)

The content of the expression of intent of the person having difficulty writing should
be kept as a record;ii)

When the accompanying presumptive heir has written on behalf of the person having
difficulty writing, more than one bank employee should confirm the content of such
writing and record the fact that they confirmed it as a record; andiii)

When the bank allows a person other than the accompanying presumptive heir towrite on behalf of the person having difficulty writing, more than one bank employee
should confirm the content of such writing and keep the fact that they confirmed it
as a record (*).

Note:

If the bank refuses an application for loan transaction from a person having
difficulty writing only on the grounds that there is no accompanying
presumptive heir for him/her, this may make it difficult to ensure that theperson having difficulty writing can live independent daily and social life.
It is, therefore, important for banks to consider proper solutions including
use of the notary public system or attendance by a lawyer, etc. from theperspective to secure independent daily and social lives of persons having
difficulty writing. When granting a loan to a person having difficulty writing
with such solutions, banks need to be careful not to cause any trouble ordispute as to existence of claim between parties, etc. later, by introducing acontrol environment wherein a manager having relevant authority in HQ or a
local head, etc. checks relevant contracts.

(ii) Reading on behalf of visually disabled persons
Whether the bank has formulated internal rules, when asked by a visually disabled person,
allowing banks employees to read his or her transaction documents on behalf of him/her. In thiscase, whether the bank prevents any disclosure of personal information. And whether more than
one bank employee confirm the content of such reading and keep the fact that they confirmed
it as a record.
(iii) Confirmation of matters to identify a principal
In the case where a person with disabilities uses the disability certificate as an identification325

document, refer to “III-3-3-3 Control Environments for Management of Information Related
to Customers, etc.” in these Supervisory Guidelines.
(iv) Disseminating information
Whether the bank makes efforts to disseminate the information on its branches taking
measures giving consideration to persons with disabilities or on the location of ATMs withfunctions enabling completely blind persons to use them by themselves (hereinafter referred toas the “accessible ATMs”) and the content thereof (including whether or not they have a voice
guidance system) in such a manner that persons with disabilities can recognize and understandit with their visual or hearing ability, etc.
When the bank and its branches take measures giving consideration to persons withdisabilities, it is preferable that such fact should be actively disclosed and disseminated as its
CSR approaches. (Refer to “III-7 Information Disclosure Regarding Corporate Social
Responsibility (CSR)” in these Supervisory Guidelines.)(v) Handling complaints
See “III-3-5-2

Establishment of Internal Control Environment for Handling

Complaints” in these Supervisory Guidelines.
In particular, when the bank receives requests and complaints from persons with disabilities
with regard to the bank’s services and procedures necessary to secure their independent dailyand social lives, whether the bank makes efforts to consider or take actions to improve them.
(vi) Training, etc.
Whether the bank disseminates the control environment giving consideration to persons withdisabilities to all employees who contact customers, via training or other means (including
delivery of manuals, etc.) to make such control environment effective.
(3) Branches and facilities(i)

Whether the bank gives consideration to introduce disabled-friendly specification into its
branches and facilities. Even in the case where its branch is located in a building or a land leased
from another entity, whether the bank endeavors to ask the landlord of such building or land forcooperation when it receives a request from persons with disabilities.

(ii) Whether the bank makes efforts to improve convenience for persons with disabilities in thefinancial transactions at each sales branch, as needed.
(iii) Specifically with regard to responses to visually disabled persons, whether the bank makes thefollowing efforts, for example.
(A) Whether the bank gives consideration to visually disabled persons by installing accessible
ATMs (ATMs that have the functions to make remittance and to change passwords are
more preferable) and to make the screen of the ATMs have greater contrast and flexibility
in size of letters. (Screens that are big in size and have no touch panel function are more
preferable.)326

(B) Whether the bank gives consideration to visually disabled persons, for example, by placing
blocks guiding them (hereinafter referred to as “braille blocks”) from the entrance of the
branch to the accessible ATM. (In the case where its branch is located in a building or
land leased from another entity, whether the bank endeavors to ask the landlord of suchbuilding or land for cooperation when it receives a request from visually disabled persons.)
Assuming the case where installation of the braille blocks may hinder access or mobilityof wheelchairs, etc., banks need coordination or arrangements in placing braille blocks, insecuring the walking space and in introducing a guiding by their employees, etc.
(C) In the case where the bank uses an ATM installed and operated by a non-financial
institution, such as a convenience store, whether the bank seeks information as to whether
or not an accessible ATM is installed, on a periodic basis. In particular, when requested
by visually disabled persons for installation of an accessible ATM, whether the bankendeavors to convey such request to an entity who has installed an ATM, in a timely
manner.
(D) Whether the bank gives consideration to visually disabled persons, for example, by placing
braille blocks from the pavement in front of the branch to the entrance of the branch.
When it is impossible to install braille blocks, whether the bank gives consideration so thata visually disabled person can visit the bank alone, for example, by promoting the
installation of a voice guiding system. Also, whether the bank endeavors to encourage theroad administrator to install braille blocks guiding a visually disabled person to the bank.
Assuming the case where installation of the braille blocks may hinder access or mobilityof wheelchairs, etc., banks need coordination or arrangements in placing braille blocks, insecuring the walking space and in introducing a guiding by their employees, etc.
(E) When providing an Internet banking service or telephone banking service, whether thebank gives consideration to visually impaired persons by establishing a system enablingthem to use such services.
(F) Whether the bank endeavors to make cash cards, bank books, and transaction records
available to visually disabled persons in a manner that enables the persons to recognizethem.
III-6-4-3

Supervisory Approaches and Actions

Whether the bank has taken measures based on the Guidelines concerning Promotion of Elimination ofDiscrimination on the Basis of Disability in Business Fields under the FSA’s Jurisdiction, measures giving
consideration to persons with disabilities, and has developed a control environment relating to theconsultation and complaint handling function to supplement them relates to the base of the bank’s soundand appropriate business operation, as well as to the viewpoints of customer protection and userconvenience. Therefore, associated internal control environments need to be highly effective.

327

Upon receiving opinions from persons with disabilities to a bank, the FSA will convey these opinions tothe bank and check the status of relevant internal controls to establish.
Also, when any doubt arises regarding the development of the bank’s internal control environments, the
FSA will inspect the bank by requiring it, as needed, to submit a report (including those under Article 24of the Banking Act). If any problem is found in such development, the FSA will encourage the bank to
improve.
III-7

Information Disclosure Regarding Corporate Social Responsibility (CSR)

III-7-1

Background(1) CSR is generally interpreted as corporate responsibilities in economic, environmental, and social fields
that a company recognizes through its relationship with various stakeholders and its efforts based
thereon. CSR is considered to have significance in that the company can enhance its sustainability byfulfilling those responsibilities.
(2) CSR of each bank including relevant efforts and information disclosure should be conducted by thebank, which is a private company, based on its own management decision in line with the principle ofself-responsibility, while evaluation of the bank’s CSR should be made by users and other stakeholders
under the principle of market discipline.
(3) However, if a bank discloses CSR information in an easy-to-understand and timely manner, it may
enable users who intend to choose a bank with which they conduct transactions to obtain useful
information more easily in judging the sustainability of the bank’s business operation and financial
products and services. From this viewpoint, the FSA encourages banks to make appropriate and useful
information disclosure to users by clarifying supervisory viewpoints regarding CSR information
disclosure and showing the minimum standards to banks.
III-7-2

Major Supervisory Viewpoints

Whether the bank makes proper information disclosure from the following viewpoints so that its various
stakeholders, including users, can appropriately evaluate the bank’s CSR, thereby contributing to
improvement of the convenience of users.
(1) Suitability with objective
Whether the bank’s CSR report comprehensively covers the fields of the economy, environment,
and society. Also, whether it meets the objective of accurately responding to the needs of various
stakeholders, including users, by including comprehensive content and reflecting the prevailing social

328

backgrounds. Whether the disclosure is made in a timely and effective manner.
(2) Reliability
Whether the bank compiles its CSR report using correct, neutral, and verifiable data and information
through a transparent process, thereby ensuring that the report is highly reliable and widely acceptable.
(3) Readability
Whether the bank strives to make its CSR report as easy to understand as possible so that various
stakeholders, including users, can understand it. Whether the bank pays sufficient attention incompiling the CSR report so that readers can compare it with the bank’s past report, for example,
maintaining consistency of the content.
III-7-3

Supervisory Approaches and Actions

A bank’s CSR efforts and relevant information disclosure are its voluntary activities conducted based on
its management decision in line with the principle of self-responsibility. Therefore, even if the bank fails
to make information disclosure in compliance with the above supervisory viewpoints, the FSA will not takesupervisory measures.
However, in cases where its disclosure practice is so imprecise and inappropriate that may mislead users,
the FSA will examine it from the viewpoint of the appropriateness of its business operations.
III-8
III-8-1

Business Continuity Management (BCM)
Background

Given the increased diversity and complexity of risks faced by banks and changes in the businessenvironment for them in recent years, such as the increasing use of information technology systems, thepossibility cannot be denied that a crisis that cannot be dealt with by ordinary methods of risk management
will occur, which means that crisis management has become more important than ever. Specifically, formajor banks, which are located in the same areas and play fundamental roles in Japan’s financial system, it
is extremely important for the people’s lives and the economy that they act in an appropriate manner in theevent of an emergency, by, for example, taking recovery measures quickly and ensuring that the minimum
necessary operations and services are maintained. Therefore, banks need to make appropriate preparations
in normal times, such as establishing Business Continuity Management (BCM) systems and formulating
Crisis Management (CM) manuals and a Business Continuity Plan (BCP).
As the crisis management relating to reputation risk and information technology system risk may
significantly affect the bank’s cash management and society, the FSA will separately define the supervisory
viewpoints for them.

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III-8-2

Actions in Normal Times(1) Actions
Based on the recognition that proactive and preventive measures in preparation for crisis in normal
times are vital for crisis management, the FSA will check whether or not there is a serious problem inthe bank’s crisis management system in the course of offsite monitoring including the early warning
system and a hearing or interview on filing of misconduct notifications, or when it receives complaints
or information relating to the bank. Also, the FSA will verify the adequacy of the bank’s BCP througha hearing and interview. For this, the FSA will pay attention, in particular, to the following points.
(2) Major Supervisory Viewpoints(i)Whether the bank recognizes what constitutes an emergency and whether it striving as much as
possible to prevent or guard against any emergency (prepare countermeasures against an
emergency that may be unpreventable) by, for example, conducting inspections and anti-crisis
practices periodically in normal times.

(ii) Whether the bank has formulated a crisis management manual. Whether the bank revises thecrisis management manual in light of the actual state of its business operations and its risk
environment, etc. on a continuous basis. It is desirable that the bank should use objective
benchmarks as a basis for formulation of its crisis management manuals.
(Reference) Examples of conceivable emergency(A) Natural disasters (earthquakes, wind or flood damages, abnormal weather, epidemics ofinfectious diseases, etc.)(B) Acts of terrorism and wars (including those that occur outside Japan)(C) Accidents (large-scale power failures, technology failures, etc.)(D) Unfounded/harmful rumors (word-of mouth rumors, Internet messages, e-mail messages,
news articles based on speculation, etc.)(E) Crimes committed against banks (cyberattack, intervention by anti-social forces, data
theft, and abduction of officers or employees)(F) Problems involved in business processes (responses to complaints and inquiries, errors indata entry, etc.)(G) Problems related to personnel management affairs (accidents and crimes involving
officers and employees, internal disputes, sexual harassment cases, etc.)(H) Problems related to labor affairs (cases of whistle-blowing, deaths from excessive
workloads, occupational diseases, drain of human resources, etc.)(iii) Whether the crisis management manual notes the importance of initial responses, such as
accurate identification and objective judgment of the situation and dissemination of informationin the period immediately after the occurrence of the emergency.

330

(iv) Whether the crisis management manual clarifies the allocation of responsibilities in the eventof an emergency and specifies arrangements and procedures for reporting the occurrence of theemergency throughout the organization and to other parties concerned (including the relevant
authorities). Whether the crisis management manual specifies arrangements and procedures forreporting the occurrence of an emergency to relevant overseas supervisory authorities,
depending on the extent of its possible impact abroad as well as its level and type. It is desirable
that anti-crisis arrangements and procedures be established under the supervision of the crisis
management headquarters that oversees organization-wide response in light of the levels andtypes of emergencies assumed for each division and branch.
(v)

Whether the business continuity plan (BCP) provides for measures to enable early recovery
from damage caused by terrorism, large-scale disasters, etc. and continuance of the minimum
necessary business for the maintenance of the functions of the financial system. For this,whether the bank has developed a scheme to cooperate with the Japanese Bankers Associationand other major banks, etc. Whether the BCP enables the bank to deal with international
disruptions of business operations in a manner suitable to the actual state of its own business
operations.
For example,(A) Whether measures are taken to secure the safety of customer data and the like in the event ofdisasters, etc. (storage of information printed on paper in electronic media, creation of backups of electronic data files and programs, etc.)(B) Whether measures are taken to secure the safety of computer system centers, etc.
(allocation of back-up centers, securing of staff and communication lines, etc.)(C) Whether the above back up measures have been taken in ways to avoid geographic
concentration.
(D) From the viewpoints of securing the operations vital for the maintenance of the functionsof the financial system, such as acceptance of individual customers’ requests for cash
withdrawal and remittance and processing of large-lot, large-volume settlements
conducted through the interbank market and the interbank settlement system, whether
the bank specifically sets a target period for recovery through provisional measures, suchas manual operations and processing by back-up centers. Whether operations areespecially vital for the maintenance of the functions of the financial system, such asprocessing of large-lot, large-volume settlements conducted through the interbank market
and the interbank settlement system, scheduled to recover within the same day when thebusiness disruption occurs.
(E) Whether the bank obtains approval from the board of directors when it adopts the BCP
and makes important revisions. Whether the BCM is checked by independent entities,
such as internal and external audits.
(Reference)“Development of BCM at Financial Institutions” (Bank of Japan, July 2003)

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“Basic Principles on Business Continuity” (Joint Forum, August 2006)(vi) Whether the bank makes daily efforts to disseminate and collect information in a conscientious
manner. Whether a scheme and procedures for communicating and collecting information in
the event of an emergency are sufficient in light of the level of crisis envisioned and typical casesof emergency assumed.
(3) Points to Note concerning BCP using Overseas HQ or Branches
In the case where a bank assumes in its BCP that it will temporarily conduct its operations fromabroad when its business continuity becomes difficult at home owing to a large-scale disaster, etc., inaddition to the supervisory viewpoints listed (2) above, the following points should be noted.
(i)With regard to the operations assumed to be conducted from abroad, whether the BCP specifies
the types of critical incident, scope of business operations, scale, places to conduct suchoperations, and the period, etc.

(ii) Whether the scope of operations to be conducted from abroad, the scale and the period are
confined to the requisite extent depending on the critical incident and are also based on theseriousness of the critical incident as well as its impact on operations.
In addition, in cases where part of internal management operations or back office operations
are outsourced to the group’s overseas branches under normal circumstances, whether the
impact on such operations conducted from abroad is assessed.
(iii) In the case where the BCP assumes that domestic customer information will be accessed fromabroad, whether the bank has put a proper environment in place to comply with the Personal
Information Protection Act and other laws and regulations, etc. For example, whether the rightof access is granted only to the officers and employees who need such information, and whether
the scope of accessible customer information is limited to the minimum necessity.
(iv) When implementing the BCP, whether the bank has put in place an environment where theinternal control department verifies whether or not there are any violations of laws or
regulations or any problems in the protection of users, etc. If such a violation or problem isfound in any relevant overseas place, whether the bank clarifies where the responsibility lies.
(v)

With regard to all operations to be conducted from abroad, whether the bank has properly
established a reporting system with the FSA and any other relevant organizations.

(Note)It should be noted that in the case where a bank conducts overseas operations based on
the BCP of its group’s overseas branch, it needs to comply with the local laws andregulations as well as the Japanese related laws and regulations.

III-8-3
III-8-3-1

Actions to Emergencies
Outline332

When the FSA has recognized the occurrence of an emergency or the possibility of an emergency
occurring, it should hold hearings periodically and check the situation first hand so that it can identify andkeep track of how the bank is responding to the emergency, including whether the response (status of thedevelopment of a control environment for crisis management, recovery status, continuity of business
operations, communications with relevant parties and dissemination of information) is sufficient in lightof the level and type of the emergency, until the situation is stabilized. In addition, the FSA will require thebank to submit a report based on Article 24 of the Banking Act when necessary.
III-8-3-2

Measures Regarding Financial Services Support in Event of Disasters (relating to theDisaster Countermeasures Basic Act, etc.)(1) Financial services support measures for disaster-stricken areas
The FSA disaster prevention/mitigation plan based on Article 36(1) of the Disaster
Countermeasures Basic Act and the FSA plan for the protection of the people based on Article 33(1)and Article 182(2) of the Banking Act on the Protection of the People in Event of Armed Attacks(hereinafter referred to as the “People Protection Act”) provides for measures regarding financial
services support in the event of disasters and other emergencies. In light of this, when a disaster(meaning a disaster as specified under Article 2(i) of the Disaster Countermeasures Basic Act, an armed
attack specified under Article 2(4) of the People Protection Act or an emergency as specified under
Article 183 of the People Protection Act; the same applies hereinafter) has occurred or may occur, the
FSA will, while maintaining close contact with relevant organizations, ensure that banks quickly
implement the following measures in an appropriate manner within limits deemed necessary, in lightof the extent of damage and other circumstances of the affected areas and the demand for funds in suchareas.
(i)

Financing at the time of disasterBanks are required to, taking account of the disaster situation and the demands of emergency
funds, take timely and proper measures that accommodate disaster victims such as opening ofa consultation center for financing, easing loan assessment criteria and procedure, speedy cash
lending, additional grace period of loan, etc.

(ii) Withdrawal and cancellation of deposit accounts(A) Banks are required to provide as much convenience as possible to disaster victims whose
bankbooks or registered seals, etc. have been destroyed by fire or flood by accepting theirrequest for withdrawal of deposits via presentation of disaster certification or other simple
manner of identification in line with the actual situation.
(B) Banks are required to take appropriate measures to allow disaster victims who are deemed
to need funds due to inevitable circumstances to cancel their fixed deposits or installment
savings before their maturity or provide them a loan against such deposits, etc.
(iii) Exchange of bills and operation on holidays, etc.

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Banks are required to give appropriate consideration with regard to exchange of bills,
handling of dishonored bills, and operation on holidays or outside of ordinary working hours.
Also they are required to, even in the case where it is not able to offer teller services, provide
as much convenience as possible to disaster victims such as by operating cash withdrawal
services via ATM, etc. while fully considering the safety of customers and employees.
(iv) Response at the time of suspension of operation, etc.
Banks are required to, when it suspends teller services, ensure that all customers know atwhich branches services have been suspended and at which branches ATM service is available,
and through means such as notices indicated at branches, newspaper advertisements, andnotices posted on the Internet.
(2) Various financial services support measures in Advance Evacuation Areas related to a Nankai TroughEarthquake or other areas
Pursuant to the Basic Plan to Advance Countermeasures against a Nankai Trough Earthquake
Disaster, the national government is required to establish its principle of guidance, etc. regarding
measures to be taken by financial institutions, such as the withdrawal of deposits and savings, andoperation on holidays or outside of ordinary working hours, in the case where a special bulletin on a
Nankai Trough Earthquake or other related information (hereinafter referred to as the “megaearthquake alert”) is issued.
However, it is difficult to manage administrative processes related to banking services on an areaby-area basis, given the advanced automation and the expansion of networks of unmanned services
operations; therefore, regarding a possible Nankai Trough Earthquake, the FSA will ask banks to takethe following measures, etc. in an appropriate manner in light of the fund demand in the affectedareas while maintaining close contact with relevant organizations.
(i)

Response to the issuance of a mega earthquake alert by banks with HQ, sales branches, andbusiness offices in Advance Evacuation Areas(A) In cases where a mega earthquake alert is issued during business hours, the FSA will
request the bank to suspend all teller services at HQ, sales branches, and business offices
except for withdrawal of ordinary deposits (including general accounts; the same applies
hereinafter), to accurately capture how crowded branches are with customers, todiscontinue teller services for withdrawal of ordinary deposits in a safe manner and toensure that users know of the suspension of the teller services. However, even in this case,
the FSA will request banks to take measures such as operating ATMs for cash withdrawal
service upon fully considering the safety of customers and employees in close cooperation
with HQ and branches of the BOJ and the police office, etc. in the affected area so that theordinary life of people who live there is not damaged to the extent possible.
(B) With regard to the means to ensure that all customers know at which branches services
have been suspended and at which branches ATM service is available, etc., the FSA will334

request the bank to make notices indicated at branches, newspaper advertisements, andnotices posted on the internet.
(C) In cases where a mega earthquake alert is issued on a holiday or before or after the businesshours of sales branches, the FSA will request banks to refrain from resuming teller services
so as to enable the smooth implementation of financial business, in case an earthquake
actually occurs, provided, however, that even in this case, the FSA will request banks to takemeasures such as continuing operation of ATMs upon fully considering the safety ofcustomers and employees in close cooperation with HQ and branches of the BOJ and thepolice office in the affected area so that the ordinary life of people who live there is notdamaged to the extent possible.
(D) Othersa.

In cases where an evacuation directive due to a mega earthquake alert is removed,
the FSA will request banks to resume normal operations and services as soon as
possible.

b.

The FSA will request banks to take appropriate emergency measures based on “III8-3-2(1) Financial services support measures for disaster-stricken area” above if anearthquake actually occurs.

(ii) Response to the issuance of a mega earthquake alert by banks with HQ, sales branches, andbusiness offices outside Advance Evacuation Areas(A) In cases where a mega earthquake alert is issued during business hours, the FSA will
request the bank to suspend the clearing bill work such as bill collection involving HQ,
sales branches, and business offices located in the Advance Evacuation Areas, and to notify
customers of such fact by posting it at HQ, the branches, and business offices to ask fortheir cooperation.
(B) Even if banks have suspended business operations and services at HQ, sales branches, andbusiness offices located in the Advance Evacuation Areas, the FSA will request them toconduct business and provide services as usual at HQ, sales branches, and business offices
in other areas.
III-8-4

Post-Crisis Actions

In cases where the FSA has concluded, after the emergency has been brought under control, that it isnecessary to examine the bank’s response to the emergency, the FSA will require the bank, under Article
24 of the Banking Act, to submit a report regarding the outline of the crisis, the bank’s response, andanalysis of causes and preventive measures for recurrence thereof.
III-8-5

Crisis Management System against Reputation Risk

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(1) Whether the bank has developed a control environment for managing reputational risk. Also, whether
it has specified rules on how the HQ, divisions, and sales offices should respond to the circulation of
unfounded/harmful rumors. It is desirable that the bank consider how to respond when
unfounded/harmful rumors regarding other banks or their business clients, etc. are circulated.
(2) Whether the bank regularly checks whether there are unfounded/harmful rumors circulating in each
media category (e.g., internet messages, news articles based on speculation).
(3) Whether the bank has established rules on the initial responses in the case where an
unfounded/harmful rumor leads to withdrawal or cancellation of deposits by customers, including
grasping of situations of sales branches and in-branch and external ATMs, customer responses, how
to secure cash for withdrawal, public announcement of the situation, etc.
(4) Whether the bank has a control environment to promptly notify the FSA, the BOJ, other banks,business partners, and security companies when case (3) occurs.
Under such control environment, whether the bank also communicates with the local government
and the police department as needed.
(5) When receiving a notice under (4) above, the FSA should hold a regular hearing with the bank tocheck on the situation until it deems that the situation has stabilized.
III-9

Dissemination and Establishment of the “Guidelines for Personal Guarantee Provided byBusiness Owners” as Loan PracticeIII-9-1

Purpose and SignificanceA personal guarantee provided by a business owner of a small and medium-sized enterprise, etc. (“SME”)(hereinafter referred to as the “personal guarantee provided by business owners”) may contribute to smoothfinancing for the SME because it disciplines its management and enhances its credibility. It may, on theother hand, become a factor hindering the business owner of the SME from developing the businessdrastically, launching a new business, or recovering the management if it worsens after the guarantee isprovided, which may result in restraint of vital activities of the SME. These issues cause concerns at thetime of entering a contract for personal guarantee provided by business owner and performing theguarantee obligations.
In light of these situations, the “Guidelines for Personal Guarantee Provided by Business Owners”(published by the “Working Group of the Guidelines for Personal Guarantee Provided by Business Owners”
on December 5, 2013; hereinafter referred to as the “Guidelines”) were established to serve as selfregulation and self-discipline rules for the SMEs, business owners and financial institutions.

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The Guidelines, which were formulated by members from SMEs’ organizations and financial institution
associations through deliberation with independent and relevant experts, are designed to show what areasonable contract should be for the personal guarantee provided by business owners, as well as to be usedas rules to promote the fair and prompt settlement of guarantee obligations at the time of performance ofprincipal debts, and are expected to be voluntarily respected and complied with by principal obligors,
guarantors, and creditors.
Financial institutions are required to disseminate and establish these Guidelines as a prevailing loan
practice for the personal guarantee provided by business owners by conducting proper actions fully basedon the purpose and content of the Guidelines, and it is desirable for these institutions to announce theirpolicies and initiatives, etc.
III-9-2

Major Supervisory Viewpoints(1) Whether the management of the bank has clearly established the policies and initiatives, etc. on the
personal guarantee provided by business owners while recognizing the importance to respect andcomply with the Guidelines and taking full initiative. Whether the management has communicated tothe employees the rules on the personal guarantee provided by business owners indicated in the
Guidelines and the following matters.
(i)Further promotion of loans that do not depend on the personal guarantee provided by businessowners (including study of possibilities not demanding business owners’ personal guarantee
when their business assets and personal household are clearly separate, etc.);(ii) Action at the time of entering into a contract for personal guarantee provided by business owner(including setting of a proper guarantee amount, and in the case where the bank enters into aguarantee contract, the bank should explain what part is insufficient and requires the conclusionof the guarantee contract, and what improvements may increase the possibility of modificationor cancellation of the guarantee contract while giving objective and reasonable reasons to obtainunderstanding and consent from the customer, depending on the customer’s knowledge andexperience, etc.);(iii) Proper review of existing guarantee contracts (including handling at the time of succession ofbusiness, and proper review of each personal joint and several guarantee from a third party otherthan the business owner (see III-10-2 (2));(iv) Action at the time of settlement of guarantee obligations (including the business owner’s
management responsibility, the scope of residual assets, and how to treat the guarantee
obligations left after the obligations are partially performed); and(v)

Others (including how to handle information on guarantors who settle debts according to the
Guidelines).

(2) Whether the bank endeavors to develop a necessary environment to ensure that actions based337

on the Guidelines are properly performed by preparing internal regulations and manuals(including the requirement that, after referring to Item (iv)(2) of the “Guidelines for Personal
Guarantee Provided by Business Owners,” the bank should show, to the extent possible, itsqualitative standpoint as for the debtor’s assets and earning power, and its objective and specificstandpoints as for any other relevant factors), contract templates, or introducing a support
scheme by HQ towards sales branches, etc.
(3) Whether the bank has an environment in place to properly respond to a consultation made by aprincipal obligor and guarantor in connection with the personal guarantee provided by businessowners.
(4) Whether the bank endeavors to enrich the choice of loan programs to substitute the personal
guarantee provided by business owners such as a guarantee contract with a suspension orcancellation clause or asset-based lending (ABL), etc. Whether the bank endeavors to explainthese programs to customers.
(5) When being asked by a principal obligor who is an SME for loans, whether the bank, after
analyzing the management conditions of the SME, conducts review as to whether the obligor
separates or tries to separate his/her business assets from his/her personal household. And when
it is recognized that the obligor separates his/her business assets from his/her personal
household as a result of the review, whether the bank has an environment in place to study thepossibility not to require the personal guarantee provided by business owners for the SME uponhearing the intention of the obligor.
(6) In the case where the bank enters a guarantee contract, whether the bank has developed anenvironment where the bank explains what part is insufficient and requires the conclusion of
the guarantee contract, and what improvements may increase the possibility of modification orcancellation of the guarantee contract while giving objective and reasonable reasons as well to
get understanding and consent from the customer, depending on the customer’s knowledge andexperience, etc. In addition, whether the bank has developed an environment where the bankrecords the results, etc. in writing or in electronic form.
(7) In settling guarantee obligations, whether the bank respects the purpose of the Guidelines andendeavors to fully coordinate and cooperate with other financial institutions involved, outside
experts (CPAs, tax accountants, and lawyers, etc.) and external organizations (SME
Revitalization Support Councils, etc.).
(8) Whether the bank makes sure that actions based on the Guidelines are properly performed, by338

conducting internal audits periodically and as needed. And whether the bank has anenvironment in place to make more use of the audit scheme as needed by improving andenriching it based on the results thereof.
III-9-3

Supervisory Methods and Measures

Financial institutions need to address the abovementioned issues properly based on the purpose of therelevant policy; “It is important that these Guidelines are disseminated and established as a prevailing loan
practice through active use by financial institutions so that faithful cooperation among a principal obligor,
guarantor, and creditor in the actions based on the Guidelines will build and reinforce a continuous andgood relationship of trust among them, increase the motivations of many SMEs or those who intend to starta business at each stage of their life, and further bring out the vitality of SMEs through the smoothprocessing of SME-oriented finance, thereby contributing to revitalizing Japan’s economy.”Taking into consideration these initiatives and the situations of banks, the FSA will encourage financial
institutions through various hearing opportunities, etc. to announce their policies and initiatives, etc. todisseminate and establish these Guidelines as a prevailing loan practice.
Moreover, in cases where any doubt arises regarding the effectiveness, etc. of the bank’s internal control
environments, the FSA will, as needed, require the bank to submit a report pursuant to Article 24 of the
Banking Act, and if a serious problem is deemed to exist, the FSA will issue a business improvement order
based on Article 26 of the Banking Act.
III-10Establishment of loan practice that does not, in principle, demand a personal joint and several
guarantee of a third party other than the business owner

III-10-1

Purpose and SignificanceSome point out that many SMEs (including sole proprietors) do not separate their business assets andaccounting from their household and that their financial statements are not always reliable. Therefore, whengranting a loan to an SME, banks often ask the business owner of an SME to provide a personal guarantee fromthe viewpoint of corporate credit enhancement and discipline for management. On the other hand, others saythat, although a personal guarantee by a third party other than a business owner is expected to work in
supplementing credit and ensuring the morals of the business owner, there is a concern about whether it isproper to impose the same guarantee obligation as the business owner on a third party who does not have any
direct responsibility in business operations.
In addition, other concerns arise in that, depending on the action by the bank at the time of performing theguarantee obligations, the guarantor may lose an opportunity to restart as a business owner and the base of
his/her social life. In light of this, financial institutions are required to make detailed responses upon
performance of the guarantee obligations considering the property and income of the guarantor.

339

Under these circumstances, the policy “to establish a loan practice that does not, in principle, demand apersonal joint and several guarantee of a third party other than business owner and to promote actions
considering the guarantor’s assets and income at the time of performing the guarantee obligations” wasintroduced by the ”Action Plan for the New Growth Strategy” (published on December 24, 2010), and financial
institutions need to take actions by following the purpose thereof.
With regard to personal guarantee by a third party not involved in relevant business, procedures to confirm
the will of the third party should be required under the revised Civil Code, which came into effect on April 1,
2020. Accordingly, financial institutions need to follow the procedures pursuant to the revised Civil Code when
they enter into guarantee contracts, while also following the purpose mentioned in the above paragraph.
III-10-2

Major Supervisory Viewpoints(1) Establishment of loan practice that does not, in principle, demand a personal joint and several guaranteeof a third party other than the business owner
Whether the bank has determined a policy not to, in principle, demand third party guarantee other thanbusiness owner with respect to the personal joint and several guarantee contract. Also, in addition toentering into relevant contracts only after following the procedures to confirm the will of the third party
as stipulated in the Civil Code, whether the bank follows the policy mentioned in “Credit Guarantee
Corporations are prohibited, in general, from requiring a third party guarantee” as needed when
determining its policies and entering into a personal joint and several guarantee contract with a third party
other than a business owner in exceptional cases. In particular, when concluding a personal joint andseveral guarantee contract with a third party other than business owner in an exceptional case, despite athird party not being substantially involved in the business, whether it is ensured that the third party enters
the contract of his/her own will and is not forced to do so by the financial institution.
(Reference 1) “Credit Guarantee Corporations are prohibited, in general, from demanding a third party
guarantee.” (March 31, 2006, extracted from the website of the Small and Medium
Enterprise

Agencyhttps://www.chusho.meti.go.jp/kinyu/2006/060331daisanshahoshou_kinshi.html(Japanese).)(Omitted) The Small and Medium Enterprise Agency prohibits the Credit Guarantee Corporations
from demanding a third-party guarantor other than the business owner in general with respect toloan guarantee applications submitted in or after FY 2006; provided, however, that this will not
apply in the case of special circumstances as described below: (Partially omitted)
1. when a person who has substantial control in the business, a person who has a business license,or the spouse of the business owner (limited to a spouse who engages in the business together
with the owner) becomes a joint and several guarantor;
2. when a successor to the business becomes a joint and several guarantor due to the businessowner’s health reasons; or340

3. where comprehensively judging the financial and other business situations of the SME, theamount of guarantee requested by the SME exceeds the risk allowance generally acceptable by
the bank, but where a collaborator or supporter of the business of the SME actively offers toassume the guarantee obligations (however, limited to cases where it is recognized objectively
that the collaborator, etc. has made such offer of his/her own will.)(Reference 2) Handling of Guarantee Contracts under the Civil Code
Article 465-6(Preparation of Notarial Instrument and Effect of Guarantee)
A guarantee contract under which the principal obligation is a loan obligation assumed forbusiness or a contract for a revolving guarantee under which the scope of the principal obligation
includes a loan obligation assumed for business does not become effective unless the person thatwill become a guarantor manifests, prior to the conclusion of the contract, the intention to performthe guarantee obligation by means of a notarial instrument prepared within one month prior to
the day of conclusion of the contract.
Article 465-9(Exclusion from Application of Provisions Concerning Preparation of Notarial Instrument andEffect of Guarantee)
The provisions of the preceding three Articles do not apply to a guarantee contract under which
the person that will become a guarantor is any of the following persons:(i)if the principal obligor is a corporation, its managing administrator, director, executive
officer, or any person equivalent thereto; or(ii) if the principal obligor is a corporation, any of the following persons:(a) a person that holds the majority of voting rights of all shareholders (excluding voting
rights in respect of shares that do not allow voting rights to be exercised for all mattersthat may be resolved at a shareholders meeting; hereinafter the same applies in thisitem) of the principal obligor;(b) if the majority of voting rights of all shareholders of the principal obligor is held byanother stock company: a person that holds the majority of voting rights of allshareholders of that other stock company; or(c) if the majority of voting rights of all shareholders of the principal obligor is held byanother stock company and a person that holds the majority of voting rights of allshareholders of that other stock company: a person that holds the majority of voting
rights of all shareholders of that other stock company;(d)if the principal obligor is a corporation that is not a stock company: a person

equivalent to the person set forth in (a), (b) or (c); or(iii) a person that conducts business jointly with the principal obligor (excluding one that is a
corporation; hereinafter the same applies in this item) or the principal obligor’s spouse who
actually engages in the business conducted by the principal obligor.

341

(2) Development of environments to respond when being consulted by a third-party guarantor about
termination of the guarantee
In the case where a bank is consulted by a third-party guarantor about termination of the guarantee,
whether the bank has put in place environments to respond properly by considering the points
mentioned in the Purpose and Significance in III-10-1 and taking into full account the history of why theguarantor has assumed the guarantee, his/her payment capacity, and his/her actual living situations.
(3) Promotion of actions considering guarantor’s capacity to perform guarantee obligations at the time thereof
When requiring a guarantor (including a principal obligor who is a sole proprietor) to perform his/herguarantee obligations (including obligations of such principal obligor), whether the bank has a control
environment to make detailed responses to the guarantor by considering the points mentioned in the
Purpose and Significance in III-10-1, paying attention to the status of the guarantee obligor in performing
the obligations, the history of why the obligor assumes the guarantee and the degree to which the obligor
is responsible, and offering the obligor to perform the guarantee rationally according to his/her payment
capacity judged properly based on his/her actual living situations.
Whether the bank has a control environment to consider use of the “Guidelines for Personal Guarantee
Provided by Business Owners” and take actions based thereon in cases where a third party performs
his/her personal joint and several guarantee, as needed, keeping in mind that the Guidelines also apply tothat case. (See III-9-2.)
Note:
III-10-3

See also III-3-3-1-2 (1), (2), (3), (6), and (7).
Supervisory Methods and Measures

Financial institutions need to properly address these issues considering the purpose of the policy ”to establish
a loan practice that does not, in principle, demand a personal joint and several guarantee of a third party otherthan business owner and to promote actions considering the guarantor’s assets and income at the time of
performing the guarantee obligations.” It is also necessary to uphold proper accountability in addressing theseissues. (See III-3-3-1.)
In addition, when a bank enters into a personal guarantee contract with a third party not involved in relevantbusiness, the bank needs to follow the procedures to confirm the will of the third party as stipulated in the Civil
Code.
Taking into consideration these initiatives and the situations of the banks, the FSA will study how to supervise
them, and when any doubt arises regarding the effectiveness of a bank’s internal control environment, the FSA
will examine the bank by requiring it, as needed, to submit a report (including those under Article 24 of the
Banking Act). In cases where a problem is found in the appropriateness or soundness of the bank’s business
operations, the FSA will require the bank to submit a report pursuant to Article 24 of the Banking Act and if a342

serious problem is deemed to exist, the FSA will issue a business improvement order based on Article 26 of the
Banking Act.
III-11
III-11-1

Ensuring Smooth Implementation of Orderly Resolution, etc.
Purpose and SignificanceBased on reflections on the global financial crisis that occurred in the recent past, international efforts
have been made to develop a new framework to resolve global systemically important financial institutions
in a prompt and orderly manner.
This framework is intended to end the so-called “too big to fail” problem, which refers to the issue
whereby national authorities are not able to resolve globally active banks and have no option but to rescue
them by injecting public funds due to the concern that unorderly failure of such financial institutions would
have an extremely serious adverse effect (the “systemic risk”) on financial and economic systems in eachcountry.
At the G20 Cannes Summit in November 2011, the “Key Attributes of Effective Resolution Regimes for
Financial Institutions (the "Key Attributes") submitted by the Financial Stability Board (FSB) was
endorsed as a new international standard for resolution regimes. The Key Attributes require that financial
institutions that could be systemically significant or critical if they fail to develop a recovery plan be subject
to an effective resolution regime that meets certain conditions. Furthermore, at the G20 Antalya Summit
in November 2015, the “Principles on Loss-absorbing and Recapitalization Capacity of G-SIBs in
Resolution” submitted by the FSB (together with the “Guiding Principles on the Internal Total LossAbsorbing Capacity of G-SIBs” which was released by the FSB in July 2017, hereinafter collectively referred
to as the “TLAC Term Sheet”) was endorsed.
Based on these international agreements, authorities in major jurisdictions have been taking necessary
steps to build legal frameworks for orderly resolution of financial institutions. In Japan, with theamendment of the Deposit Insurance Act (hereinafter referred to as the “DIA”) in June 2013 (enforced in
March 2014), the “Measures for Orderly Resolution of Assets and Liabilities of Financial Institutions for
the Purpose of Ensuring Financial System Stability” were newly introduced. The FSA released its approach
to introduce the TLAC framework for Japanese G-SIBs in the “The FSA's Approach to Introduce the TLAC
Framework (published in April 2016 and revised in April 2018)” and subsequently published relevant
policies including the “FSA Pubic Notice on Capital Adequacy Rules for Bank Holding Companies
pursuant to Article 52-25 of the Banking Act” (hereinafter referred to as the "Public Notice on TLAC Pillar1"). Finally in March 2019, the FSA started applying the TLAC requirements in Japan.
However, in order to solve the “too-big-to-fail” problem, not only the regulatory framework but alsofinancial institutions’ own efforts in normal times are essential. The efforts in normal times include
formulation of a plan preventing disruption from a bank facing a crisis and development of a control
environment to increase the resolvability (*1) of a bank if it fails (hereinafter referred to as “preparation343

for resolution”).
In this regard, the “Key Attributes” above stipulate that a regulatory authority of each country should
evaluate the resolvability of financial institutions and have the power to require them to take actions toincrease resolvability when necessary. In Japan, the revised DIA introduced a new provision; “The Prime
Minister (partially omitted) may, when a need for orderly resolution of assets and liabilities of the financial
institution, etc. arises and they find that measures necessary for the smooth implementation thereof havenot been taken, order the financial institution, etc. to take the relevant measures to the extent necessary bya specified time.” (Article 137-4 of the DIA)
Considering the intent of the provision above, financial institutions are required to take measures toensure smooth implementation of orderly resolution, etc.(*2) The FSA will supervise these efforts andmeasures of financial institutions taking into account that the priority in preparation for resolution and thetimeline for development of the control environment therefor vary depending on the importance of suchfinancial institutions in the finance system. In addition, the FSA will require them to take other measuresin addition to those mentioned below based on relevant international discussions, when necessary forsmooth implementation of orderly resolution.
Note 1:“A financial institution is resolvable” means the state in which it is feasible and credible for the
resolution authorities to resolve it in a way that protects systemically important functions
without severe systemic disruption and without exposing taxpayers to loss.

Note 2:In III-11, “orderly resolution, etc.” includes, but is not limited to, the resolution of a financial
institution through the specified measures under item (ii) as defined in Article 126-2(1)(ii) of
the Deposit Insurance Act.

III-11-2
III-11-2-1

Development of Recovery and Resolution Plans
Purpose and SignificanceIf major banks, in particular large and complex financial institutions face a crisis, not only the financial
institution itself but also the financial system as a whole is likely to face a severe disruption. It is therefore
important to prevent such crises to the greatest extent possible, as part of crisis management through thesupervisory processes.
In view of the above, Global Systemically Important Financial Institutions (G-SIFIs) and financial
institutions deemed by the home authority to have a potential impact on financial stability in the event of
their bankruptcy are globally required to develop robust and credible “Recovery and Resolutions Plans(RRPs)” based on an agreement reached at the Financial Stability Board.*
Taking into account those developments at the international level, it is necessary to continue the ongoing
efforts to develop and maintain RRPs in Japan.
Note:“Key Attributes of Effective Resolution Regimes for Financial Institutions,” the Financial
Stability Board (November 2011)344

III-11-2-2

Viewpoints and Supervisory Method and Actions(1) Based on an agreement reached at the Financial Stability Board, etc., the FSA will require, pursuant
to Article 24 or Article 52-31 of the Banking Act, the G-SIBs designated by the Public Notice, andwhere necessary, other systemically important banks to develop and submit a recovery plan once a
year or when important changes have been made to its business and group structure. Taking note thatthe contents of a recovery plan could vary depending on each bank’s group structure or business model,
the FSA will check whether it covers at least the following items, taking into account relevant
agreements reached and discussions held at the Financial Stability Board.
(i)Outline of the recovery plan(A) Positioning of the recovery plan in the bank, etc.; and(B) Control environment to develop the recovery plan(ii) Preliminary information for developing the recovery plan(A) Overview of the business and the group structure; and(B) Control environment for managing capital adequacy and liquidity in normal times(iii) Triggers for the implementation of the recovery plan(A) Triggers sufficiently early enough for the bank to respond to the crisis preemptively(including quantitative and qualitative triggers with respect to both capital adequacy andliquidity);(B) Stress tests and reverse stress tests with severer stress than for usual stress testing(including both market-wide and bank specific stress scenarios);(C)

Internal decision-making processes concerning both a judgment of the trigger(s) being
hit and actions to be taken thereafter; and(D) Relationship between risk management operations based on the degree of crisis in normal
times and those at the time of implementing the recovery plan(iv) Overview of subsidiaries, foreign branches, and business divisions in the group(A) A profile of each subsidiary and foreign brancha.

Business overview, financial information, and importance of the financial system(analysis for importance of the businesses and subsidiaries, etc. in the group (degreeof core business operations) and the financial system (criticality) based on themarket shares, etc.); andb.

Positioning of the foreign subsidiaries and branches on the business strategy(B) Interconnectedness among main subsidiaries, foreign branches, and business units
Intra-group capital relations, intra-group fund transactions, intra-group guarantees,
and interdependency of IT systems, identification of subsidiaries which provide services
to business units providing critical functions, and personnel relations(v)

Analysis of recovery options

345

(A) Effectiveness, appropriateness, and adequacy (including quantitative assessment) ofrecovery options (measures to improve liquidity and financial soundness) for each stressscenario; and(B) Assessment for considerations and feasibility of the recovery options to be implemented(vi) Others(A)

Management information systems
List of information necessary for formulation of the recovery plan and implementationof the recovery options, as well as the time needed to gain the information(2) Based on the agreements reached at the Financial Stability Board, the FSA will develop resolutionplans for th G-SIBs designated by the Public Notice and where necessary, other systemicallyimportant banks. The FSA will review the resolution plans and assess the resolvability once a year orwhen important changes have been made to the bank’s business operations and group structure, etc.
III-11-3
III-11-3-1

Measures to Ensure the Effect of a Stay Decision in Contracts Governed by Foreign Laws
Purpose and SignificanceBy the amendment of the Deposit Insurance Act (DIA) in June 2013, the Prime Minister has been authorized
to make a decision to the effect that a clause providing for specified cancellation, etc. of a contract (“specified
cancellation, etc.” is defined in Article 137-3(2) of the DIA) based on the reason that a related measure, etc.
defined in Article 137-3(1) of the DIA has been taken does not become effective during the period for
implementing a measure as set forth in Article 137-3 (1) of the DIA (such a decision is hereinafter referred toas a “stay decision”). In the above conjunction, the 2013 amendment revised the provisions in Article 131 of the
DIA with respect to special provisions for procedures of creditor protection in the transfer of business. In order
to avoid a severe disruption to Japan’s financial system, the financial institutions to which the confirmation set
forth in Article 102 (1) of the DIA is applicable or the financial institutions to which the specified confirmation
set out in Article 126-2 (1) of the DIA is applicable are required to develop a control environment to ensurethat the effect of a stay decision and special provisions for procedures of creditor protection set out in Article
131 of the DIA (hereinafter collectively referred to as the “effect of a stay decision”) extends to contracts
governed by foreign laws.
III-11-3-2

Major Supervisory Viewpoints

Based on the development of the global discussion for ensuring the effect of a temporary stay on earlytermination rights in contracts governed by foreign laws, the following items should be noted in examining thebanks’ control environment on contracts governed by foreign laws,* taking into account the circumstances ofindividual transactions.

346

Note:

Banks are required to take necessary measures at their group level.

(1) Points to consider concerning the execution of contract, etc.
Whether the bank has taken necessary actions* to ensure, regardless of the counterparties’ jurisdictions,that the effect of a stay decision applies to the contract, in cases where the bank concludes a new contract(including cases where the bank materially amends the content of an existing contract) or enters into a
new transaction based on an existing contract with respect to, among the “transactions of instrumentsthat have a market price at an exchange or other markets and their equivalent transactions” under Article
35-18 of the Enforcement Regulation of the DIA, over-the-counter derivative transactions, financial andother derivative transactions, the sale or purchase of securities on condition of repurchase or resale, thelending and borrowing of securities, the trading of bonds with options, forward foreign exchangetransactions, over-the-counter commodity derivative transactions, and similar transactions (includingtransactions entered into for the purpose of collateralizing these transactions; and hereinafter referred toas the “subject transactions”), when such new or existing contract is governed by foreign laws, contains aclause on specified cancellation and is agreed with any counterparty other than central counterparties(CCPs).
Note:

Necessary actions may include the following;(i)Adhering to an internationally common protocol aimed at ensuring the effect of a stay decision
on contracts governed by foreign laws and confirming that the counterparty has adhered tosuch a protocol; and(ii) Indicating clearly in the contract that the effect of a stay decision applies to the subject
transactions.
(2) Points to consider concerning existing contracts
It is desirable that banks should take actions under (1) above, as necessary, with respect to an existing
contract of the subject transactions which include a clause on specified cancellation and are governed byforeign laws (excluding the cases where the bank enters into a new transaction based on such existing
contract), taking into account the significance of the potential systemic impact that may be caused by the
non-enforceability of the effect of a stay decision on the contract.
III-11-3-3

Supervisory Methods and Measures

Based on the supervisory viewpoints above, the FSA will conduct in-depth reviews on the relevant
management and control of the bank group. Where necessary, the FSA will also require the bank to submit areport pursuant to Article 24 or Article 52-31 of the Banking Act and Article 136 of the DIA.
If any material impediment to ensuring smooth execution of orderly resolution is identified as a result of thesubmission of a report, the FSA will consider issuing a business improvement order pursuant to Article 26 or
Article 52-33 of the Banking Act and an order pursuant to Article 137-4 of the DIA.

347

III-11-4

Measures to Ensure the Continuity of Systemically Important Functions in Orderly Resolutions

III-11-4-1

Purpose and SignificanceIn the resolution of a financial institution, it is essential to maintain the continuity of systemically importantfunctions performed by it in order to implement an orderly resolution and to avoid systemic risk. Discussions
with an emphasis on this issue have been made internationally. In Japan, with the amendment of the DIA in
June 2013, the specified measures under item (ii) were introduced, which is a mechanism enabling a failed bankto transfer its systematically important functions to a successor organization, etc., from the viewpoint of avoiding
a severe disruption in Japan’s financial market, thereby securing the continuity thereof.
Under the current situation where functions provided by financial institutions are interconnected with various
services supplied by inside and outside group entities, it is also necessary to maintain access to the IT
infrastructure services, etc. and the financial market infrastructures by clearing organizations, etc. which arevital for its operations throughout an orderly resolution, in order to ensure the continuity of such functions inresolution.
Based on the above purpose and the guidance* issued by the Financial Stability Board, financial institutions
are required to take measures to secure the continuity of their systemically important functions in an orderly
resolution.
Note:“Guidance on Arrangements to Support Operational Continuity in Resolution” (August2016); ”Guidance on Continuity of Access to Financial Market Infrastructures (FMIs) for a Firm in
Resolution” (July 2017), etc. by the Financial Stability Board

III-11-4-2

Major Viewpoints and Supervisory Method and Actions

The FSA will require the G-SIBs designated by the Public Notice and, where necessary, other systemicallyimportant banks to take the following measures for maintaining the continuity of systemically importantfunctions in the process of an orderly resolution while considering their systemic importance. For this, the same
supervisory methods and measures as specified in III-11-3-3 will apply.
(1) Identification of critical functions
Banks are required to identify critical functions (meaning activities performed for third parties outsideof the group; the failure of which would lead to a severe disruption of the financial system) provided bygroup entities based on the Guidance of the Financial Stability Board* and the analysis of the subsidiaries,
etc. conducted as part of the formulation of the recovery plan under III-11-2-2(1)(iv)(A).
Note:“Guidance on Identification of Critical Functions and Critical Shared Services,” the Financial Stability
Board (July 2013)348

(2) Ensuring continuity of critical shared services (CSS)
Banks are required to take the following measures in order to continue the critical shared services that
support the continuity of the critical functions in orderly resolution.
(i)

To identify critical shared services (meaning services provided to a financial institution that provides
critical functions or its group entities, the failure of which would lead to the inability or material
hindrance to perform critical functions; hereinafter referred to as “CSS”) based on the in-depth
analysis of each critical function identified in (1) above or the identification of legal entities thatprovide services to departments having critical functions that is conducted as part of the formulationof the recovery plan under III-11-2-2(1)(iv)(B).

(ii) In the case where, with respect to each CSS identified in (i) above, the supply contract concluded
between the financial institution that receives such CSS and the provider thereof may discontinue
the provision of the CSS if the financial institution or any of its group entities is subject to orderly
resolution or relevant measures including change of parent company, the financial institution musttake contractual measures to ensure provision of the CSS continues even when such measure is taken.
Such contractual measures may include inserting a provision in the contract or executing aseparate memorandum containing a provision to that effect that the contract may not terminate forcauses of cancellation or termination even when the abovementioned measures are taken except forbreach of payment obligation under the contract.
(iii) To take financial measures to maintain the continuity of the provision of CSS. Such measures may
include development of a control environment to financially secure the following;(A) CCS provided by group entities: to ensure that CSS providers continue to provide the CSS inorderly resolution.
(B) CSS provided by non-group entities: to ensure that payment obligations to CSS provider are
performed in orderly resolution.
(3) Maintaining access to critical FMI services
Banks are required to take the following measures to maintain access to critical FMI in order to secure
the continuity of critical functions in orderly resolution.
(i)

To identify critical FMI services (meaning clearing, payment, securities settlement and custody
activities, functions or services provided by finance market infrastructures including, but not limited
to, clearing organizations, fund settlement organization, securities settlement organizations, transferorganizations or custodians, the discontinuance of which could lead to the inability or material
hindrance to provide critical functions; including services in which the bank participates indirectly
via direct participation inside or outside of the group) based on the in-depth analysis of each critical
function identified in (1) above.

(ii) With regard to each critical FMI service identified in (i) above, to grasp existence of financial orother requirements necessary for maintaining access to such critical FMI service (including
requirements arising relating to the relationship with direct participants in case of indirect349

participation) and credit line provided relating to such critical FMI service (including credit line
provided by direct participants in case of indirect participation) and the content thereof.
(iii) In cases where a participant of the critical FMI service within the group or other legal entity within
the group is subject to measures for an orderly resolution or relevant measures, including a changeof parent company through consultation with the critical FMI service providers, to grasp themeasures assumed to be taken by the critical FMI service provider against such participant (if there
are measures relating to the continuance or discontinuance of access and additional requirements,
including additional contributions of deposits, etc., the contents thereof should be also grasped).
(iv) To develop a plan to maintain access to the critical FMI services in orderly resolution (contingencyplan). It should be confirmed that the contingency plan contains at least the following items;(A) Information grasped in (i), (ii), and (iii) above;(B) If there are additional requirements assumed to be required by the provider of the critical FMI
service under (iii) above, the countermeasures against it;(C) Measures to meet financial requirements for maintaining access to the critical FMI services;(D) Decision-making process when the measures under the contingency plan are implemented;and(E) Analysis of the impact on the continuity of the critical functions arising when access to thecritical FMI services discontinue despite the measures taken under (B) or (C) above, and if
alternative measures are assumed to be taken to mitigate such impact, the content thereof.
III-11-5

Liquidity Monitoring and Reporting System for Ensuring Smooth Implementation of Orderly
Resolutions

III-11-5-1

Purpose and SignificanceFor smooth implementation of an orderly resolution, etc., it is important to conduct liquidity monitoringwith sufficient granularity, including grasping of the required liquidity amount throughout resolution
processes and available liquid assets to cover the required liquidity amount. For example, for ensuring thecontinuity of the critical functions in an orderly resolution, it is important to grasp available liquid assetsthat can be allocated to the payment obligation to CSS providers and margins to critical FMI service
providers. It is also important that a financial institution can report the degree of shortage of liquid assets,
if any, to the authorities in a prompt and timely manner when the regulatory authorities judge and confirm
that such financial institution is insolvent.
Based on the above intent and the guidance* issued by the Financial Stability Board, financial institutions
are required to develop the liquidity monitoring and reporting framework for ensuring the smooth
implementation of orderly resolutions.
Note:“Guiding principles on the temporary funding needed to support orderly resolution of a global
systemically important bank (“G-SIB”)” (August 2016) and “Funding Strategy Elements of an350

Implementable Resolution Plan (June 2018)” by the Financial Stability Board
III-11-5-2

Major Viewpoints and Supervisory Method and Actions

The FSA will require the G-SIBs designated by the Public Notice and, where necessary, othersystemically important banks to develop a control environment for liquidity monitoring and reporting tograsp liquid assets available in an orderly resolution in a timely manner while considering their systemic
importance.
As an example of relevant measures, it may be considered to develop a control environment to grasp
eligible liquid assets that are freely transferable among legal entities and jurisdictions (referred to the“eligible liquid assets” as defined in Article 1(xiv) of the Public Notice on Liquidity Coverage Ratio, etc.)
by each major legal entity, business location, and major currency in a timely manner, taking into accountthe regulations in each jurisdiction and internal control limitations, and to report the information gained
there to the regulatory authorities.
For this, the same supervisory methods and measures as specified in III-11-3-3 will apply.
III-11-6
III-11-6-1
III-11-6-1-1

Enhancement of Loss Absorbing Capacity
Adequacy, Sufficiency, and Correctness of Loss Absorbing Capacity
Purpose and SignificanceThe FSB TLAC Term Sheet requires G-SIBs to have sufficient total loss-absorbing capacity (TLAC).
The purpose of the TLAC Term Sheet is to facilitate an orderly resolution of a G-SIB when it fails, in amanner that minimizes the impacts on financial stability without exposing taxpayers to loss and ensuresthe continuity of its critical functions by imposing the losses on shareholders and creditors, in addition tomeeting the recapitalization needs of the G-SIB.
More specifically, under the resolution regime envisaged by the TLAC Term Sheet, an entity to which
resolution powers and tools are assumed to be applied by the relevant authority (hereinafter referred to as
the "resolution entity") is supposed to raise loss-absorbing and recapitalization capacity from externalsources (hereinafter referred to as "the loss absorbing capacity") and distribute it to its material subsidiaries
in the group during normal times. At the time of stress, following the relevant authority's determinationthat one or more of the material subsidiaries have reached the point of non-viability (PONV), losses
incurred to them would be passed on to the resolution entity. While this could lead to a resolution of theresolution entity, the material subsidiaries are expected to continue their business as usual. Under thisresolution regime, in cases where cross-border resolution plans are executed, close co-operation between
the local (where the subsidiary incurring losses locates) and the home (where the resolution entity locates)
authorities would be essential.

351

The following is the FSA’s approach to the TLAC requirements as a home authority.
III-11-6-1-2(i)Major Viewpoints and Supervisory Method and Actions

Financial institutions subject to TLAC requirements
Based on the FSB TLAC Term Sheet, the G-SIBs designated by the Notice will be subject to the
TLAC requirements in Japan. In addition, for internationally active financial groups, entry into theresolution of one or more of their foreign subsidiaries could result in their losses being passed on
to the parent entity in Japan, potentially leading to a resolution of the group as a whole. Assumingthat such financial groups have particular systemic significance to the Japanese financial system ifthey fail, a sufficient level of loss absorbing capacity available at the time of resolution should beensured, as the need for addressing the so-called "too big to fail" problem is markedly high for suchfinancial groups, regardless of whether they are designated as G-SIBs or not.
Accordingly, the FSA intends to apply the TLAC requirements to the D-SIBs designated in the
Notice that are deemed of particular need for a cross-border resolution arrangement and ofparticular systemic significance to the Japanese financial system if they fail, in addition to G-SIBs
designated in the Notice (hereinafter collectively referred to as “Covered SIBs”). The FSA will, forthe financial groups designated as Covered SIBs, in line with the preferred strategy for resolution
mentioned below, designate their resolution group in Japan (hereinafter referred to as a “Domestic
Resolution Group”) and the resolution entity in Japan to which losses are concentrated inresolution (hereinafter referred to as a "Domestic Resolution Entity") based on the Notice on
TLAC Pillar 1, and then require them to issue and maintain the External TLAC and distribute theInternal TLAC.
In newly choosing and designating a Covered SIB, the FSA will give sufficient consideration inadvance, reviewing the adequacy of equity capital and finding structures of a candidate financial
institution. In addition, considering the period needed for the candidate financial institution toissue the required External TLAC in the market, the FSA will make a public announcement to theeffect that the candidate financial institution will be newly designated as the Covered SIB, together
with the preferred strategy for it, in advance.
Note:

In the case where it is agreed through discussion with overseas competent authorities
that, with regard to an overseas G-SIB group whose preferred strategy for resolution is
the MPE approach, its holding company or subsidiary bank, etc. located in Japan isdeemed as a single resolution entity, it is expected that the FSA considers designating a
Domestic Resolution Entity and Domestic Resolution Group based on the Notice on
Pillar 1 by applying (i) above mutatis mutandis.

(ii) Choice of preferred strategy for orderly resolution
The resolution strategies for systemically important financial institutions that are being
developed internationally are broadly based on two stylized approaches: (i) SPE (Single Point of352

Entry) resolution, in which resolution tools are applied to the ultimate holding company by a single
national resolution authority, and (ii) MPE (Multiple Point of Entry) resolution, in which
resolution tools are applied to different parts of the group by two or more resolution authorities
acting in a coordinated way. (Recovery and Resolution Planning for Systemically ImportantFinancial Institutions: Guidance on Developing Effective Resolution Strategies by the Financial
Stability Board, July 2013)
In determining the preferred strategy for a Covered SIB, the FSA will choose whether the SPE
approach or the MPE approach will apply to it, taking into account resolvability based on its
organizational structure as a financial group (including interconnectedness and interdependency
within the group). When the SPE resolution strategy is chosen for the Covered SIB, its ultimate
holding company is considered the Domestic Resolution Entity, while such bank group is
considered the Domestic Resolution Group.
Regardless of which strategy is chosen for a Covered SIB as the preferred strategy for resolution,
the FSA should determine how the Covered SIB is actually resolved, taking its real situation into
consideration on a case by case basis.
(iii) Enhancement of External TLAC
To execute the preferred strategy effectively in resolution, a resolution entity and its group
entities need to build a structure to raise and distribute funds during normal times that ensuresthat the resolution entity absorbs the losses of its subsidiaries and then enables such losses toultimately be absorbed by the resolution entity's shareholders and creditors.
For this, the Notice on TLAC Pillar 1 requires the Domestic Resolution Entity of the Covered
SIBs to meet a minimum requirement for instruments (including capital instruments, debt
instruments,

liabilities,

or

other

items)

whicharerecognized

to

have

a

loss-

absorbing/recapitalization capacity.
(A) Minimum requirementa.

Timing of implementation
For a financial institution group that becomes a “G-SIB designated in the Notice” onor after April 1, 2019, TLAC requirements will apply to its Domestic Resolution Entity
approximately three years after such designation as a G-SIB. In this case, at the launchof the application, the Domestic Resolution Entity must maintain an External TLAC of
18% of the group’s consolidated RWAs and 6.75% of the Basel III leverage exposure(full application).
In the case where a financial institution group that becomes a “D-SIB designated in
the Notice” on or after April 1, 2019, is newly designated as a Covered SIB, theDomestic Resolution Entity of such financial institution must maintain, at the
beginning of implementation of TLAC requirements, an External TLAC of 16% of thegroup’s consolidated RWAs and 6% of the Basel III leverage exposure (partial
application), and must meet the minimum External TLAC requirements of 18% of the353

consolidated RWAs and 6.75% of the Basel III leverage exposure approximately 3 years
later (full application).
If the Commissioner of the FSA designates a different ratio for the minimum required
total exposure based External TLAC ratio pursuant to the provisions of Article 1, Item
11 of the Notice on TLAC Pillar 1, such ratio shall apply.
However, the FSA should not implement these requirements in a mechanical or
uniform fashion, but rather should take account of the period required for the financial
institution to respond to the TLAC requirements, the details and effect of the measurestaken by the Domestic Resolution Entity in trying to maintain the minimum External
TLAC ratio, and the potential impact on the financial system from the effects of suchmeasures.
b.

Assessment of sufficiency of External TLAC
i)

When evaluating the sufficiency of the External TLAC, the Covered SIBs need toanalyze not only its quantity but also its quality, including at least the following:・ Other TLAC-eligible instruments should meet all the requirements under the
Notice on TLAC Pillar 1 and respond in a satisfactory manner to the purposeof the TLAC Term Sheet.
・ The Domestic Resolution Entity has not provided holders of other TLACeligible instruments with any funds, either directly or indirectly. Those
instruments have not been obtained by any of subsidiaries or affiliates of theDomestic Resolution Entity.
・ For the period until March 30, 2022, with regard to Additional Tier 1
instruments and Tier 2 instruments that were issued by overseas subsidiaries
or that were issued by major subsidiaries and contain a special provision of
being transferred to common shares under predetermined conditions or any
similar provision, the inclusion of such instruments to External TLAC must be
approved by the relevant authority.

ii)

External TLAC is just a tool for absorbing losses and recapitalizing in resolution,and it is more important for financial institutions to maintain sufficient equity
capital in normal times for their stability. It would be, therefore, putting the cart
before the horse if too much focus on enhancement of External TLAC would leadto deterioration of the equity capital in terms of both quality and in quantity,
which must be avoided.
In cases where a Covered SIB were likely to fail, it is assumed that Tier 1 capital,such as common shares, and Additional Tier 1 instruments (hereinafter referred
to as “going-concern capital”) would not be expected to function as loss-absorbing
and recapitalization capacity any longer. It is, therefore, favorable that the
Covered SIB should maintain sufficient Tier 2 capital instruments and other354

TLAC-eligible instruments (hereinafter referred to as the “gone-concern
capital”) rather than relying on the going-concern capital only.
Losses incurred by a shareholder of a financial institution in case of failure arelimited to the amount invested based on the principle of limited liability ofshareholders. In particular in the time of crisis, as this may cause a moral hazard,
it is necessary to check the decision-making of the financial institution throughoversight and supervision by creditors. In addition, as the more likely to fail an
issuer becomes, the more its bond costs increase, a financial institution is
expected to enhance an incentive not to fail by issuing bonds in normal times.
Sufficiency of External TLAC should be, therefore, evaluated considering thesufficiency of such gone-concern capital.
More concretely, a financial institution whose gone-concern capital exceeds
approx. 33% of the External TLAC requirements is evaluated as maintaining
incentives to mitigate the risk of failure in normal times and having sufficient lossabsorbing and recapitalization capacity against failure. On the other hand, for afinancial institution whose gone-concern capital is below that level, the FSA willcontinuously monitor it as to whether it takes sufficient measures to increase the
TLAC, including planning and implementation of external issuance of the goneconcern capital and building a governance framework to prevent a moral hazard.
c.

Measures to maintain sufficient External TLAC
・A Domestic Resolution Entity needs to take proper measures to maintain suﬃcient
External TLAC in terms of both quality and quantity based on the evaluation of
sufficiency in External TLAC above.
・A Domestic Resolution Entity needs to manage the structure of External TLAC
instruments so that it can maintain sufficient External TLAC even when access to thecapital market is temporarily hindered, in such a way that the maturity dates of theirbonds are arranged to fall on different days or periods.
・A Domestic Resolution Entity needs, in advance, to examine methods to raise capitaland estimate amounts that can be raised through other TLAC-eligible instruments
in case of the shortage thereof considering its reputation and evaluation in the capital
market, a greater likelihood of it being more difficult than usual to raise capital if thebank is in a slump due to unexpected losses, and other conceivable factors.

d.

Supervisory measures
When the External TLAC of the bank is below the minimum requirement of the Basel
III leverage exposure, the FSA will require the bank to promptly submit a report on thereasons thereof and measures to raise the External TLAC ratio based on Article 52-31
of the Banking Act. If a significant improvement is deemed necessary, the FSA will issue
a business improvement order based on Article 52-33(1) of the Banking Act.

355

In the calculation of the External TLAC of the RWAs, the capital buffer will first be
allocated to the External TLAC in case of a shortage in the External TLAC. Therefore,
if the External TLAC is below the External TLAC of the consolidated RWAs, the capital
buffer is deemed zero. In this case, the capital distribution constraints will be imposedon the bank (if its required capital equity is below the required level, a prompt corrective
action order is imposed at the same time), according to which, the bank is expected torecover its stability.
However, the FSA should not apply these supervisory measures in a mechanical or
uniform fashion, and should take account of the period required for the bank to respondto the TLAC requirements, the details and effect of the measures taken by the bank intrying to maintain the minimum External TLAC ratio and the gone-concern capital,
and the potential impact on the financial system from the effects of such measures.
(B) Confirmation of eligibility of External TLAC instruments
In connection with the evaluation of the degree of adequacy of External TLAC, when thebank makes a report on borrowings or issuance of corporate bonds according to the order for
submission of a report under Article 52-31 of the Banking Act, the FSA will check whether
or not they are eligible for other TLAC-eligible instruments, based on the Notice on TLAC
Pillar 1 and full consideration of the purport of the TLAC Term Sheet as well as the following
points:a.

With regard to other TLAC-eligible instruments as unsecured senior bonds under theproviso of Article 4(3)(ii) of the Notice on TLAC Pillar 1, attention should be paid tothe following points:
・ In order that creditors of the unsecured senior bonds issued by the Domestic
Resolution Entity (issuer) are recognized to be structurally subordinate to thecreditors of other entities of such Domestic Resolution Group (hereinafter referred
to as “structurally subordinate”), the ratio of the excluded liabilities that arecontractually or legally equivalent or subordinate to the unsecured senior bonds tothe total of the issuer’s non-consolidated existing External TLAC (the sum of theamount recorded on the net assets on the issuer’s balance sheet, the issuer’s liabilities
for TLAC eligible Additional Tier 1 instruments, those for TLAC eligible Tier 2
instruments and other TLAC-eligible instruments) (hereinafter referred to as the“excluded liabilities ratio”) must not exceed 5% in principle.
・The following excluded liabilities ratio may be used for such purpose.
i)

Excluded liability ratio on a consolidated basis provided in an annual financial
flash report or interim financial flash report;ii)

Excluded liability ratio reported in the annual business report or interim
business report;iii)

Excluded liability ratio reported to the regulator after public disclosure in356

accordance with the law or relevant regulations of a financial instruments
exchange, if applicable; orⅳ) Excluded liability ratio extraordinarily reported by the Domestic Resolution
Entity based on the FSA’s inspection in times other than (i) to (iii) above.
・In the case where once the Domestic Resolution Entity is deemed to be structurally
subordinate and thereafter its excluded liability ratio is likely to exceed 5%, the FSA
will require the bank to promptly submit a report on the reasons therefor andmeasures to reduce the excluded liability ratio based on Article 52-31 of the Banking
Act. Furthermore, when its excluded liability ratio actually exceeds 5%, upon
confirming whether or not such Domestic Resolution Entity continues to seek to be
structurally subordinate, the FSA will issue a business improvement order based on
Article 52-33(1) of the Banking Act.
・ To implement the orderly resolution smoothly, the Domestic Resolution Entity
should avoid as much as possible the issuance of unsecured senior bonds that neither
fall under the scope of the excluded liabilities nor are eligible for the External TLAC,
even when its excluded liability ratio is under 5%. And then, the FSA will ask theDomestic Resolution Entity to report its total liabilities owed to non-group third
parties that are not eligible for External TLAC recorded in an annual financial flash
report or interim financial flash report.
・As mentioned in III-11-6-2-2 (i)(C), other TLAC-eligible instruments that are seniorunsecured bonds entail the risk that the bond holders will not able to receive part or
the whole thereof in the orderly resolution. An issuer of senior unsecured bonds isrequired to appropriately describe such risk in a bond contract and attacheddocuments (prospectus, etc.) and provide possible bondholders with a sufficient
explanation of the risk according to their degree of understanding so that they willsubscribe to the bonds with a full recognition of such risk.
b.

When the bond contract has a redemption clause in accordance with Article 4(3)(viii)of the Notice on TLAC Pillar 1, the FSA will, in checking the optional redemption of
the Domestic Resolution Entity, pay attention to the provisions in the Notice on TLAC
Pillar 1, and in addition, the descriptions about equity capital in III-2-1-1-3(3) of theseSupervisory Guidelines with appropriate replacement of terms in a way to fit other
TLAC-eligible instruments.

c.

When the bond contract is governed by laws other than Japanese laws in accordancewith Article 4(3)(ix) of the Notice on TLAC Pillar 1, the FSA will require the bank tosubmit a written legal opinion by a lawyer or legal professional and relevant documents
to the effect that such bond can be effectively used for absorbing losses andrecapitalization of the Domestic Resolution Entity (the issuer of the bond), as needed.

(C) Cases to be judged as other TLAC-eligible instruments intentionally held within the financial

357

systemIf members in the financial system reciprocally hold other members’ External TLAC
instruments (including such equivalents; the same applies in this (C)) with the intention ofincreasing their respective External TLAC ratio, such instruments will eventually constituteunsubstantial total loss-absorbing capacity with regard to both the bank and the relevant
financial institution. Since such reciprocal holdings will make the financial system fragile, in
accordance with Article 8(6) and other capital adequacy ratio-related provisions of the Noticeon Standards for Banks' Capital Adequacy in line with the Basel Accords, a bank or its
consolidated corporations will be required to exclude the full amount of such other TLACeligible instruments from the bank’s equity capital (Tier 2 capital) as regulatory adjustments
or deduction if the relevant Japanese bank is recognized as reciprocally holding such other
TLAC-eligible instruments of such other financial institutions with the intention ofincreasing their respective External TLAC ratios between the relevant Covered SIBs and therelevant financial institutions, and if it is also determined that the relevant financial
institutions intentionally hold other TLAC-eligible instruments of the relevant Covered SIBs(“Intentional Reciprocal Holdings”). The sample cases illustrated below are considered toconstitute Intentional Reciprocal Holdings in this regard, given the above III-2-1-2-2 (2),which describes the Intentional Reciprocal Holdings of capital instruments.
・Covered SIBs and other ﬁnancial institutions (that are not conﬁned to deposit-taking
institutions in Japan) promised to mutually hold the other party’s other TLAC-eligible
instruments. The primary purpose of such cross holdings is to mutually cooperate on their
total loss-absorbing capacity reinforcement. To this end, the Covered SIBs hold such other
TLAC-eligible instruments of the other financial institutions, and these other financial
institutions hold such other TLAC-eligible instruments of the Covered SIBs.
(iv) Enhancement of Internal TLAC
As for a Domestic Resolution Entity, such firm is required to distribute its loss-absorbing
capacity secured by means of External TLAC to its major subsidiary company (including any groupof such subsidiary companies) based on size and other factors.
(A) Selection of a major subsidiary to which Internal TLAC is to be distributed
The purport of Internal TLAC is to secure the continuity of significant operations
undertaken by a major subsidiary company (including any group of such subsidiarycompanies; the same applies in this (iv) hereafter) of the relevant financial Domestic
Resolution Group even when the subsidiary company is in the process of resolution, byconsolidating the subsidiary’s loss into the holding company. In light of this, if the size of a
subsidiary company reaches a certain level that could incur loss which in turn might plunge
the entire group of the Domestic Resolution Entity into crisis, and if the domestic subsidiarycompany provides significant operations in the financial system, then the subsidiary company
should be recognized as a major subsidiary company and the ensuring of loss-consolidating358

capacity through Internal TLAC needs to be required.
Specifically, when selecting such a major subsidiary company, the following criterion (i) is
basically used, with criterion (ii) being used complementarily, based on the relevant TLAC
agreement document.
Criterion (i): Its risk assets, total exposure, or ordinary income exceeds 5% of the entire
group’s.
Note: If the accounting title of “ordinary income” does not exist in the adopted
accounting standards, the title that shows the total amount of income is
used.
Criterion (ii): The significance of the subsidiary company’s operations in the Japanesefinancial system and the likelihood of loss incurred to such a degree that
disturbs the continuity of significant operations in the Japanese financial
systemAny selected major domestic subsidiary company is designated as the entity to which
Internal TLAC is to be distributed by the relevant Domestic Resolution Entity, in accordancewith the Notice on TLAC Pillar 1.
In accordance with Article 52-31 of the Banking Act, such selected subsidiary company isannually reviewed and, in principle, is required to submit the relevant data as of the end of
March each year for reporting purposes. If there is a change in the group structure, thesubmission of post-change estimates is required as far in advance as possible.
As for any major overseas subsidiary company, such subsidiary will be selected by the local
authority. Accordingly, consultation will be made with the relevant foreign authority whennecessary.
(B) Required levela.

Timing of application to financial institutions designated as Covered SIBs on or after
April 1, 2019
With regard to domestic Material Sub-groups in the respective financial institutionsgroups of either “G-SIBs designated by the Notice” on or after April 1, 2019, or “DSIBs designated by the Notice” that have newly become Covered SIBs on or after April
1, 2019, the application starts on the same day as the minimum level of External TLAC
started to apply to the respective Domestic Resolution Entity in these financial
institutions groups.
As for domestic Material Sub-groups that were newly designated on or after April 1,
2019, the required amount of Internal TLAC will start to apply to them about three
years after the designation.

b.

Internal TLAC level adjustment factor
As for a domestic Material Sub-group, based on the capital adequacy ratio regulation
applied to the Material Sub-group, the required External TLAC level is calculated on359

the assumption that the Material Sub-group would be a Domestic Resolution Entity. In
addition, the required amount of Internal TLAC is determined by multiplying theabove-calculated level by an Internal TLAC level adjustment factor set by the FSA in arange from 75% to 90%.
In determining an Internal TLAC level adjustment factor for a domestic Material
Sub-group, the adjustment factor is in principle initially set at 75%, firstly because theprocessing is in principle domestically completed, and secondly because the Japanese
authority can generally supervise the domestic Material Sub-group as a group company
in an integrated manner, and ultimately because, for the above reasons, the requirement
is not high for the loss-absorbing capacity to be allocated in advance. Then, adjustments
are made according to the respective necessity of advance allocation, based on (i) the
financial institutions group’s desirable processing strategy and (ii) the Material Subgroup’s matters such as its significance in the financial system, its capital structure, andits business model.
The decided Internal TLAC level adjustment factor is prescribed in the Notice on
TLAC Pillar 1, and will be reviewed when necessary.
As for any overseas Material Sub-group, the local authority plays a leading role indetermining an Internal TLAC level adjustment factor. Accordingly, the Japanese
authority may consult with the relevant foreign authority when necessary. In the casewhere any local authority sets up and applies a certain required amount of Internal
TLAC without any involvement from the Japanese authority in advance, therequirement will not be deemed as a “quasi-requirement concerning the minimum
required amount of Internal TLAC” stipulated in Article 2 (3) of the Notice on TLAC
Pillar 1 until a consensus is built through consultations with the foreign authority
relevant for the financial institution’s crisis management group (CGM).
c.

Evaluation on the degree of enhancement of Internal TLAC and measures to maintainsufficient Internal TLAC
・With regard to the evaluation on the degree of enhancement of Internal TLAC andmeasures to maintain sufficient Internal TLAC, the descriptions about External
TLAC in the above (1) (iii) (A) b (i) and c will apply with appropriate replacementof terms in a way to fit Internal TLAC.
・If there are Basel III-qualiﬁed Additional Tier 1 instruments and Tier 2 capital
instruments held by a third party outside of the group, such instruments’ conversion
into shares, if any, would change the control structures in a Material Sub-groupwhereby the management control might be affected. Therefore, it is advisable tostructure such capital instruments so as to reduce the principal, instead of theconversion into shares, at the time of trigger.
・In the case where a Domestic Resolution Entity does not directly allocate Internal

360

TLAC to a Material Sub-group but does so indirectly through another subsidiarycompany, it is necessary, when the Material Sub-group reaches the point of nonviability (PONV) and the principal reduction of Internal TLAC (“triggering ofInternal TLAC” hereafter) is made, to ensure that the loss is ultimately transferredto the Domestic Resolution Entity. Except for the case where any change in thecontrol relationship due to the triggering of Internal TLAC is not conceivable, suchallocation through any party other than the parent company is, in principle, is notallowed.
・ When a Material Sub-group issues regulated capital with debt-like features forsubscription by a Domestic Resolution Entity, and if the Material Sub-group intends
to make such capital eligible for Internal TLAC, a special provision is required to theeffect that the Material Sub-group’s principal will be reduced in the case where theMaterial Sub-group reaches the PONV. In addition, from the viewpoint ofmaintaining the hierarchy of claims, when a Domestic Resolution Entity has held aMaterial Sub-group’s regulated capital with debt-like features that was issued before
application of the TLAC regulations, the relevant contract contents may be altered if
necessary so as to make the regulated capital subordinated to debts that constituteother Internal TLAC instruments in terms of the distribution of the Material Subgroup’s residual assets, or the repayment of or changes in its debts during bankruptcy
proceedings.
d.

Unallocated TLAC
Since the full amount of External TLAC procured by a Domestic Resolution Entity
does not need to be distributed, such Domestic Resolution Entity may have an
unallocated portion. Handling of such unallocated portion (so-called “Unallocated
TLAC”) has been and will continue to be discussed in light of the progress in therelevant international debate and each country’s implementation status.

e.

Supervisory measures
The FSA takes necessary measures if such Material Sub-group becomes unable tosustain itself. Specifically, if the loss-absorbing capacity is recognized as insufficient
after the consideration of the relevant issues such as whether or not the amount ofInternal TLAC meets the requirement, the FSA will promptly ask for report submission.
Subsequently, if further improvement is deemed necessary, the FSA will issue abusiness improvement order to the Domestic Resolution Entity and demand the firm
to additionally allocate Internal TLAC.

(C) Confirmation of eligibility of Internal TLAC instruments
In reference to evaluation on the degree of enhancement of Internal TLAC, eligibility ofother Internal TLAC instruments will be verified from the regulatory viewpoint, based on the
Notice on TLAC Pillar 1 and full consideration of the purport of the TLAC agreement361

document as well as the following point:・ When contract contents regarding reimbursements are stipulated in accordance with
Article 7(3)(ix) of the Notice on TLAC Pillar 1, in verifying an optional reimbursement by
the relevant Material Sub-group in advance, the FSA will pay attention to the stipulationin the Notice on TLAC Pillar 1, and, in addition, the descriptions about equity capital in
III-2-1-1-3(3) of these Supervisory Guidelines will apply with appropriate replacement ofterms in a way to fit other Internal TLAC.
III-11-6-2

Orderly Resolution Using TLAC

III-11-6-2-1

Purpose and SignificanceIf a Material Sub-group of a financial group to which TLAC regulations apply faces difficulty incontinuing significant operations in the financial system due to its worsening business conditions, andwhen the supervisory authority determines that countermeasures such as asset sales, capital reinforcementby the parent company, or other alternative measures are not feasible, the triggering of Internal TLAC
related to the Material Sub-group could, as a last resort, recover its soundness.
When losses are consolidated into a Domestic Resolution Entity, and as a result, if the authority
determines that the resolution of the financial group is necessary, then shareholders and creditors of theDomestic Resolution Entity will bear the losses while operations of the Material Sub-group itself willcontinue.
The following are specific examples of orderly resolution using TLAC in Japan where the FSA functions
as the supervisory authority.
III-11-6-2-2(i)Specific Examples of Procedures

In the case where a domestic Material Sub-group faces a crisis
Conceivable procedures using TLAC on the premise of taking the SPE approach include thefollowing flow from (A) to (D). As for (A) to (C), the implementation will be done promptly overa weekend; i.e., on non-business days, in order to avoid market disruption, and the Material Subgroup is assumed to continue operations as usual.
Note:

It is useful for the supervisory authority to announce its desirable resolution procedure
strategy in advance in order to enhance the transparency for market participants, elevatethe credibility of the resolution system, and make the resolution procedure timely. On
the other hand, how to actually carry out the procedure is a matter to be decided on acase-by-case basis after the concerned authorities consider the actual status of the
Covered SIB. Therefore, apart from the following Specified Measures Under Item (ii)applied to a Domestic Resolution Entity based on the SPE approach, there are other362

measures, such as: Based on the Deposit Insurance Act, the Prime Minister may take“Specified Measures Under Item (i)” for a Domestic Resolution Entity (Article 1262(1)(i) of the Deposit Insurance Act), and/or may take Specified Measures Under Item(i) or may take Measures Under Item (i) for a domestic Material Sub-group (Article
102(1)(i) of the same Act).
(A) Loss absorption through Internal TLAC of a domestic Material Sub-group
Inherently, the triggering of Internal TLAC may substantially affect the entire financialgroup. In light of this possibility, situations where the triggering of Internal TLAC for adomestic Material Sub-group is implemented are confined to the case where, even if thesupervisory authority issues a business improvement order to the Material Sub-group basedon Article 26 of the Banking Act, any improvement in its financial conditions is not expected
and there also seem to be no alternative measures, such as support from the group, that might
be effective for the recovery of the Material Sub-group’s soundness, and the case where there
is no time left to implement a business improvement order or any other alternative measure
due to its rapidly worsening financial conditions that require the emergency response.
When the triggering of Internal TLAC is forced to be selected, in terms of Internal TLAC
distributed to a domestic Material Sub-group that incurred loss, the loss of the Material Subgroup will be transferred to the Domestic Resolution Entity.
Specifically, when the FSA determines that a domestic Material Sub-group has (or is likely
to has) excess debt or insufficient liquidity resources (including the case where a Domestic
Resolution Entity and a Material Sub-group report to the FSA that the Material Sub-grouphas (or is likely to has) excess debt or insufficient liquidity resources), the FSA will consider
the emergency as well as whether or not alternative measures exist as mentioned above. And
then, if the FSA issues to the Domestic Resolution Entity an order concerning the Material
Sub-group’s soundness recovery by means of Internal TLAC, including capital reinforcement
and liquidity recovery, among the orders based on Article 52-33(1) of the Banking Act(“when a Material Sub-group reaches the PONV” hereinafter), principal reduction orconversion into shares will be implemented in accordance with the relevant Internal TLAC
conditions (such as a loan contract) (Note 1).
In issuing the order, the FSA will consider whether or not the soundness recovery of theMaterial Sub-group is difficult or unexpected even if it receives support from any of its groupcompanies. When the order is issued, the effect will be disclosed.
Even if the triggering of Internal TLAC is implemented, the resolution procedure of theentire group as stipulated in and after (B) below may not be implemented, depending on thefinancial conditions of both the holding company and the entire group (Note 2). In such acase, the FSA will pay careful attention to its communication with markets in order to avoid
the misconception that the resolution procedure of the entire group would start.
Note 1:

When a Material Sub-group is recognized as reaching the PONV, the FSA issues363

an order, based on Article 52-33(1) of the Banking Act, to the effect that it hasrecognized the cause of a specific domestic Material Sub-group’s financial crisis.
Such order includes the wording of “order concerning the Material Sub-group’s
soundness recovery by means of Internal TLAC.” (Therefore, even when an orderis based on Article 52-33(1) of the Banking Act, unless the order has the effectthat the FSA has recognized the cause of a specific domestic Material Sub-group’s
financial crisis or unless it includes the wording of “order concerning the Material
Sub-group’s soundness recovery by means of Internal TLAC,” the order is not
identified as having been issued “when a Material Sub-group is recognized asreaching the PONV.”)
Note 2:Conceivable cases may include the case where no more measures are taken forboth the Domestic Resolution Entity and the Material Sub-group within the legal
framework of the Deposit Insurance Act, and the case where the Specified
Measures Under Item (i) (Article 126-2(1)(i) of the Deposit Insurance Act) aretaken for a Domestic Resolution Entity, and the case where either the Specified
Measures Under Item (i) or the Measures Under Item (i) (Article 102(1)(i) of thesame Act) are taken for a domestic Material Sub-group.

(B) Specified Confirmation by the Prime Minister
When the triggering of Internal TLAC is implemented and the Domestic Resolution Entity
which absorbed the losses from the Material Sub-group fulfills the requirements for theapplication of Specified Measures Under Item (ii) as set forth in the Deposit Insurance Act,
the Prime Minister shall confirm the necessity to take Specified Measures Under Item (ii)
(Article 126-2(1)(ii) of the same Act) and issue an Injunction Ordering Specified
Management (Article 126-5 of the same Act) following deliberation by the Financial Crisis
Response Council with regard to the Domestic Resolution Entity (When a Domestic
Resolution Entity receives such order for Specified Confirmation, the firm hereafter isreferred to as the “Non-viable Holding Company.”).
When the Specified Confirmation is taken, Basel III-eligible Additional Tier 1 instruments
and Tier 2 instruments issued by the Non-viable Holding Company will be written off orconverted into equity under the terms and conditions of such instruments prior to otherliabilities including the External TLAC eligible debt liabilities.
In addition, a movable or claim pertaining to the business of the Non-Viable Holding
Company that shall be succeeded to by the Specified Bridge Financial Institution, etc. under(C) below (limited to those designated by the Prime Minister) may not be seized (Article
126-16 of the same Act).
Note:

In the case where any Covered SIBs have issued other Tier 1 capital instrumentswith debt-like features through its Domestic Resolution Entity on or after March
31, 2013, all or part of the principal reduction or the like will also be implemented364

if the consolidated Common Equity Tier 1 ratio (calculated in accordance with the
Notice) of the Domestic Resolution Entity falls below 5.125%.
(C) Transference of business, etc.
The Non-viable Holding Company transfers its business to the Specified Bridge Financial
Institution, etc. incorporated by the Deposit Insurance Corporation of Japan (DICJ) (Article
126-34(3) of the Deposit Insurance Act) with the permission of the court in lieu of theextraordinary resolution of the shareholders' meeting (Article 126-13(1)(iii) of the same Act),
under a decision by the Prime Minister that the Specified Bridge Financial Institution, etc.
should carry out the Specified Assumption of Business, etc. in order to succeed to thebusiness of the Non-viable Holding Company (Article 126-34(1)(ii) of the same Act).
At this point, it is expected that the obligation of the External TLAC eligible debt liabilities(including those with the remaining period of the claim being less than one year) will not betransferred to the Specified Bridge Financial Institution, etc., and the Non-Viable Holding
Company continues to be the obligor of such liabilities.
Note:

The Specified Bridge Financial Institution, etc. will transfer its business tofinancial institution(s) within two years in principle after the Specified
Confirmation with regard to the Domestic Resolution Entity by the Prime
Minister (Article 126-37, Article 96-1, and Article 126-3 of the Deposit Insurance
Act).

(D) Court Insolvency Proceedings of the Non-Viable Holding Company
After transferring its business, the DICJ files a petition for the commencement ofbankruptcy proceedings against the Non-Viable Holding Company. It is expected that the
Non-Viable Holding Company will enter into "liquidation proceedings" (in particular,bankruptcy proceedings) through which the company will be dissolved, not into
"reconstruction procedures" through which business continuity will be attempted.
In this case, creditors of the Non-Viable Holding Company, including the holders of theExternal TLAC eligible debt liabilities, will receive liquidating distributions within the scopeof the Bankruptcy Estate under the Bankruptcy Act or relevant laws, and thus will absorb thelosses in the bankruptcy proceedings.
(ii) In the case where an overseas Material Sub-group of any Covered SIBs faces a crisis
As for each overseas Material Sub-group of any Covered SIBs, the relevant local authority will
determine whether or not to implement the triggering of Internal TLAC. In making such decision,
the local authority might contact the Japanese authority to ask whether or not the latter agrees withthe former, within a certain period in accordance with the relevant TLAC agreement document. In
such a case, the FSA will consider whether or not the soundness recovery of the Material Sub-groupis possible through support from any of its group companies, and then will determine whether or
not to consent.
Even if the triggering of Internal TLAC is implemented for an overseas Material Sub-group, the365resolution procedure of the entire group as stipulated in and after (i) (B) may not be implemented,
depending on the financial conditions of both the holding company and the entire group. In sucha case, the FSA will pay careful attention to its communication with markets in order to avoid the
misconception that the resolution procedure of the entire group would start.
III-11-7
III-11-7-1

Valuation for Ensuring Smooth Implementation for Orderly Resolution, etc.
Purpose and SignificanceIn order to ensure smooth implementation of Orderly Resolution, etc., it is necessary for authorities totake timely and appropriate measures. To this end, financial institutions are required to evaluate their own
financial conditions, and assets and liabilities (hereinafter referred to as ”valuation”) in a timely andappropriate manner and to report to the authorities.
At the international level, the Financial Stability Board published the “Principles on Bail-in Execution”
in June 2018, which establishes the principles for valuations necessary to execute an orderly resolution.
Reflecting the international trend, authorities need to ensure that financial institutions develop valuation
capabilities necessary for smooth implementation of Orderly Resolution, etc.
The following sections describe the purpose, significance, etc. of valuations required in the process of anorderly resolution, based on the specific example of orderly resolution procedures of SIBs subject to TLAC
in Japan (III-11-6-2-2-2).
(1) Valuation 1 (Valuation for determination of non-viability of Material Subgroup)
When the FSA issues an order under Article 52-33, Paragraph 1 of the Banking Act to a domestic
resolution entity for recapitalization and soundness recovery, including liquidity recovery, of theMaterial Subgroup with the usage of Internal TLAC (determination of non-viability of Material
Subgroup), the FSA will need to (a) determine that the Material Subgroup has reached (or is likely
to reach) excess debt or insufficient liquidity resources, and (b) consider whether the soundness
recovery of the Material Subgroup is difficult or unexpected even if, for example, it receives support
from its group companies.
Specifically, corresponding to (a) aforementioned, it is necessary to ensure a timely andappropriate assessment of the financial condition including assets and liabilities of the Material
Subgroup. Corresponding to (b) aforementioned, for determining the possibility of restructuring theentire group, it is necessary to identify capital and assets (including unallocated TLAC) that are heldby the group as a whole and are transferable to the Material Subgroup, and their location, taking into
account intra-group support agreements, local regulations, etc.
(2) Valuation 2 (Valuation for Specified Confirmation of Domestic Resolution Entity)
In order for the Prime Minister to determine the Specified Confirmation for Specified Measure Item II366

against a domestic resolution entity that absorbed losses from its Material Subgroup by triggering internal
TLAC, the Domestic Resolution Entity needs to satisfy the applicable requirements for Specified Measure
Item II prescribed in the Deposit Insurance Act.
Namely, it is necessary for the Prime Minister to confirm that the Domestic Resolution Entity hasreached (or is likely to reach) excess debt or insufficient liquidity resources. As a precondition for suchconfirmation, the Domestic Resolution Entity shall report its financial condition to the FSA, including
reports in response to the FSA’s order.
Therefore, it is considered necessary for the Domestic Resolution Entity to assess its own financial
condition in a timely and appropriate manner in the case of triggering Internal TLAC of the Material
Subgroup, and to report to the FSA. The measures for such valuation include adjustments of assets andliabilities based on the most recent financial statements of the Domestic Resolution Entity, taking into
account the impact of the triggering of Internal TLAC.
(3) Valuation 3 (Valuation for calculation of consideration for transfer of businesses, etc.)
When businesses, etc. related to systemically important transactions are transferred from theDomestic Resolution Entity (i.e., Non-viable Holding Company) to the Specified Bridge Financial
Institution, etc. established by the DICJ, it is considered necessary for the Specified Bridge Financial
Institution, etc. to provide consideration for the transfer to the Non-viable Holding Company.
In calculating the consideration for the transfer of the businesses, etc., the appropriate calculation
method should be selected from widely used equity valuation methods such as the income approach,the market approach, and the cost approach, or a combination of these methods, taking into accountelements such as the business to be transferred and the availability of information.
In doing so, it is necessary to take into account, for example, (a) changes in the business and market
environment of the company to be transferred from the time of most recent financial statements tothe time of transfer, (b) information on the net asset value of the company based on such changes,(c) the details of the group-wide restructuring plan under the Specified Bridge Financial Institution,etc., and (d) future business forecasts including the timing of re-transfer. Therefore, it is desirable touse an objective and reasonable valuation method (e.g., obtaining opinions and assessments offinancial advisors and other external experts).
(Note)

It is, however, expected to be difficult to precisely calculate the fair share value of thecompany to be transferred at the time of transfer of businesses, etc. in a short period oftime.
Therefore, with respect to the consideration for the transfer of the business, etc., forexample, in petitioning the court for permission in lieu of a special resolution of theshareholders meeting (i.e., substituted permission), it may be considered to set a
provisional consideration with a price adjustment clause (e.g., calculated based on bookvalue/market value net assets). In this case, after the transfer of the business, etc., a third
party will be requested to calculate the value of the shares, taking into account elements367

such as the future business forecasts of the subsidiaries, etc. of the Non-viable Holding
Company, over a certain period of time. The petition for such substituted permission may
be filed on the premise that the ex post obtained value is used as the basis for calculating
the transfer consideration as a firm value.
The specific method of ex post adjustment should be handled flexibly in accordancewith each case.
III-11-7-2

Major Viewpoints and Supervisory Method and Actions

The FSA will, taking into account the systemic importance, etc. of the financial institutions, verify thecapabilities to conduct valuations for smooth implementation of Orderly Resolution, etc. (including
conducting testing exercises described in III-11-8) from the following viewpoints, regarding the G-SIBs
designated by the Public Notice and, where necessary, other systemically important banks, etc. To this end,
the same supervisory methods and measures as specified in III-11-3-3 will apply.
(1) Valuation 1(i)Whether financial institutions develop capabilities to identify transferable capital and assets,
including unallocated TLAC, taking into account local regulations, etc. in overseas jurisdictions, inorder to determine the possibility of restructuring the group as a whole;(ii) Whether financial institutions develop capabilities to identify and report on the financial conditionsof subsidiaries, including those overseas, in a timely manner, on the basis of appropriate
understanding of the regulations and approaches in overseas jurisdictions of valuation in times ofcrisis, and whether financial institutions develop capabilities to identify in a timely manner theamount of intra-group support from parent companies and other entities, including allocation ofunallocated TLAC, in case such support is necessary; and(iii) Regarding Material Subsidiaries, whether financial institutions develop capabilities to enable timely
calculation of assets and liabilities that require adjustments of market value from the viewpoint of
their impact on the amount of net assets after the most recent financial statements, and whether
financial institutions verify and confirm valuation assumptions, models, reporting periods, etc.
(2) Valuation 2(i)Whether financial institutions have capabilities to calculate the financial statements of the domestic
resolution entity on both standalone and group consolidated basis after principal write-down orequity conversion of Additional Tier 1, Tier 2 (as long as they are Basel III eligible instruments), andinternal TLAC; and(ii) Regarding the Domestic Resolution Entity (standalone basis), whether financial institutions develop
capabilities to enable timely calculation of assets and liabilities that require adjustments of market
value from the viewpoint of their impact on the amount of net assets after the most recent financial

368

statements, and whether financial institutions verify and confirm valuation assumptions, models,reporting periods, etc.
(3) Valuation 3(i)

As aforementioned, in calculating the transfer consideration, it is desirable to use an objective andreasonable valuation method (e.g., obtaining opinions and evaluations from financial advisors andother external experts); and(ii) Whether financial institutions develop capabilities to provide external experts, etc. with informationnecessary for calculating the consideration for the business transfer in a timely and appropriatemanner from the viewpoint of enabling a smooth business transfer, etc.
(4) Common Points for Valuation 1-3(i)Whether financial institutions develop an appropriate governance system to enable implementationof (1) - (3) above; and(ii) Whether financial institutions develop a reporting system of the result of valuation described in (1)- (3) above to the FSA in a timely manner.
III-11-8
III-11-8-1

Testing of System for Ensuring Smooth Implementation of Orderly Resolutions, etc.
Purpose and SignificanceTo ensure smooth implementation of Orderly Resolution, etc., it is important for financial institutions
to enhance the effectiveness of an orderly resolution by testing their resolution preparedness, etc. in normal
times. For example, financial institutions are expected to codify the procedures for implementing a recovery
plan and Orderly Resolution, etc., as playbooks, followed by testing the feasibility of their resolution
preparedness, etc. based on these documents, and thereby continuously enhancing their preparedness byaddressing the identified issues through testing, if any.
III-11-8-2

Major Viewpoints and Supervisory Method and Actions

The FSA will, taking into account the systemic importance, etc. of the financial institutions, verify thetesting activities to ensure smooth implementation of Orderly Resolution, etc., from the following
viewpoints, regarding the G-SIBs designated by the Public Notice and, where necessary, other systemicallyimportant banks, etc. To this end, the same supervisory methods and measures as specified in III-11-3-3
will apply.
(i)

Whether financial institutions codify, as playbooks, the procedures for dealing with crisis situations (forexample, decision-making processes within financial institutions and communication processes with therelevant authorities, stakeholders, etc. with regard to the implementation of a recovery plan and Orderly369

Resolution, etc.) based on the resolution preparedness, etc. stipulated by these Supervisory Guidelines;(ii) Based on the aforementioned playbooks, whether financial institutions make continuous efforts toimprove their resolution preparedness through the so-called “PDCA cycle”: (a) conducting simulation
exercises, etc., with the involvement of management and overseas offices, depending on the subject of
the testing, (b) conducting effective verification of the feasibility of their resolution preparedness, etc.
with the internal audit departments, third parties, etc., (c) identifying issues for improvements basedon the verification, and thereby (d) making efforts for sophistication;(iii) Whether financial institutions develop their medium-term plan for testing, while clarifying policies andthematic topics; and(iv) Whether financial institutions develop necessary control environments for implementing the measuresdescribed above.

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IV

Bank Holding Company

IV-1

Purpose and SignificanceA bank holding company conducts business management of bank(s) which are its subsidiaries (hereinafterreferred to as "subsidiary bank(s)") and its companies listed in Article 52-23(1) (i) through (xiii) of the Banking
Act. Its scope of business is confined to business management of the bank holding company group (“business
management” as stipulated in Article 52-21(2) of the Banking Act), the auxiliary business, and the businessactivities stipulated in Article 52-21-2(1) of the Banking Act. In business management of its subsidiaries, anybank holding company should endeavor to ensure sound and appropriate management of its subsidiary banks'business in light of the purport of the Banking Act, such as ensuring the soundness of bank management andthe protection of depositors.
IV-2

Main Points to Note

Supervisory guidelines for bank holding companies basically conform to the provisions concerning banks inthese Supervisory Guidelines. At the same time, however, the following points are also to be noted, given
business characteristics of their banking subsidiaries:(1) Whether the bank holding company plays a responsible role in constructing the entire group’s business
management (governance) structure.
(2) Whether the bank holding company accurately calculates its consolidated capital adequacy ratio,consolidated liquidity coverage ratio and consolidated net stable funding ratio (refer to III-2-1 and III-2-34-4).
(3) Whether the group as a whole has a compliance structure for third-party allotment (refer to III-3-1-5).
(4) Whether the bank holding company appropriately manages the entire group’s financial affairs, including
its financial structure on a solo basis (such as the status of interest-bearing liabilities).
(5) Whether the bank holding company understands its exposure to potential systemic risk, and puts in placea liquidity risk management structure.
(6) Regarding the appropriateness and sufficiency of disclosure (refer to III-3-2), the ultimate accountabilitylies with a bank holding company as a publicly traded company. Whether this recognition is put into
practice.

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(7) In the case where its subsidiary banks integrate their systems in the wake of the merger, whether the bankholding company puts into place a system integration risk management structure based on the content in
III-3-10.
(8) Whether the bank holding company plays a responsible role in matters to be managed/controlled in agroup-based integrated manner, such as control environments for management of information related
to customers, etc. (refer to III-3-3-3), relations between banks and their securities subsidiary companies,
etc. (refer to V-3-3-6), and constructing a system to protect benefits for the entire group’s customers (referto V-5).
IV-3

General Supervisory Methods and Measures(1) When necessary, the FSA conducts interviews with the bank holding company about the business
management over its subsidiary banks. If necessary, the regulator also interviews the relevant subsidiarybanks.
(2) When the regulator asks a subsidiary bank to make a report pursuant to Article 24 of the Banking Act, andif the matter involves the bank holding company’s business management, then the regulator also asks thebank holding company to make a report pursuant to Article 52-31 of the Banking Act.
(3) If the regulator finds a problem with business management of a bank holding company from the viewpointof ensuring sound and appropriate management of its subsidiary banks' business, the regulator asks thebank holding company to make a report pursuant to Article 52-31 of the Banking Act. If a serious problem
is identified, the FSA will issue a business improvement order pursuant to Article 52-33 of the Banking
Act.
IV-4

System Integration(1) In the case where subsidiary banks integrate their systems in the wake of a merger, the FSA regularly
asks the bank holding company, pursuant to Article 52-31 of the Banking Act, to submit a report on
their system integration risk management structure and their project management structure, grasps
their actual status, and inspect whether or not a serious problem exists.
Note:

In the case where any full-scale system integration does not follow the merger of subsidiarybanks, or in the case where the system integration has nothing to do with any merger, theregulator will, if necessary, request such reporting pursuant to Article 52-31 of the Banking Act.

(2) In the case where a notice of inspection results is issued in regard to the system integration risk
management structure and the project management structure, the FSA asks the bank holding company

372

to make further reporting pursuant to Article 52-31 of the Banking Act. Such reporting is to describe
the fact-checking, the cause-analysis, improvement measures, and other responses to the FSA’s
findings. The regulator also asks for a report on measures to appropriately control risks (such as ameasure to accurately implement the relevant plan, and internal governance structure includinginternal audit). Based on these reports, the FSA verifies whether there is a problem with the system
integration risk management structure and the project management structure.
In addition, the FSA regularly asks for follow-up reporting, and checks the progress in
improvement measures and the effectiveness of the project management structure, etc.
(3) If the transition judgment is made in regard to system integration, the FSA asks for reporting, pursuant
to Article 52-31 of the Banking Act, mainly on such judgmental grounds.
(4) If any of the above inspections from (1) through (3) finds a problem, the FSA will ask for reporting
pursuant to Article 52-31 of the Banking Act, and if a serious problem is identified, the regulator will
issue, pursuant to Article 52-33 of the Banking Act, a business improvement order concerning thesystem integration risk management structure and the project management structure.
IV-5

Certified Bank Holding Company(1) Certification criteriaWith regard to the requirement under Article 34-19-7(2)(ii) of the Banking Act Enforcement
Regulation, namely “appropriate systems should be developed in order to ensure proper business
operations at the bank holding company and the group of its subsidiary companies,” it should be
noted that the regulator should consider whether effective internal control systems for business
operations within the bank holding company’s group are put into place, after taking into accountissues, etc. that the bank holding company has identified through monitoring, etc. in a broad manner.
(2) Measures when the bank holding company does not conform to the certification criteria any longer
When the bank holding company does not conform to the certification criteria any longer, theregulator may revoke the certification based on Article 52-34-2(1) of the Banking Act. However, thesame item of the same Act also stipulates that the regulator may order the bank holding company totake necessary measures to conform to the criteria within the designated period.
In this regard, when considering whether the certification should be revoked or whether the bankholding company should be ordered to take necessary measures to conform to the criteria, the FSA
needs to consider individually and specifically the reasons why the bank holding company does notconform to the criteria any longer. For example, it should be noted that, in the case where the bankholding company does not conform to the criteria because it acquired its group’s bank to rescue thelatter, the certification does not need to be revoked immediately.

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IV-6

Administrative Processes to Note

In the case where both a bank holding company and its banking subsidiary need to file for an identicalmatter pursuant to the following, the bank holding company and the banking subsidiary may submit one
notification in their joint names.
(i)

Article 53(1)(ii) and Article 53(3)(iii) of the Banking Act(ii) Article 53(1)(iii) and Article 53(3)(iv) of the Banking Act(iii) Article 35(1)(viii) and Article 35(3)(v) of the Banking Act Enforcement Regulation(iv) Article 35(1)(xii) and Article 35(3)(ix) of the Banking Act Enforcement Regulation(v) Article 35(1)(xv) and Article 35(3)(xii) of the Banking Act Enforcement Regulation(vi) Article 35(1)(xvi) and Article 35(3)(xiii) of the Banking Act Enforcement Regulation(vii) Article 35(1)(xvii) and Article 35(3)(xiv) of the Banking Act Enforcement Regulation(viii) Article 35(1)(xviii) and Article 35(3)(xv) of the Banking Act Enforcement Regulation(ix) Article 35(1)(xix) and Article 35(3)(xvi) of the Banking Act Enforcement Regulation(x)

Article 35(1)(xx) and Article 35(3)(xvii) of the Banking Act Enforcement Regulation(xi) Article 35(1)(xxi) and Article 35(3)(xviii) of the Banking Act Enforcement Regulation

374

V

Consolidated-base Supervision over Bank Groups

V-1

Key Principles(1) Risk management of bank groups
The risk exposure of a bank group can be divided into the risk exposure of the entire bank groupand that of individual banks in the bank group. When considering the role of risk management, it
should be clarified which risk exposure should be more seriously regarded on the assumption that theultimate objective is to protect depositors and settlement systems. In this regard, there are twoconceivable approaches for risk management. One approach is to manage risks as a whole bank group,
while setting clear boundaries within the bank group. The other approach is to keep each bank awayfrom the risks of other group companies, while maintaining open boundaries within the bank group.
Individual systems to monitor and surveil risk management need to incorporate the concepts of both
approaches, depending on the feasibility of addressing regulations. However, taking into accountvarious factors, such as the actual status of risk management, stakeholders’ monitoring over a bankgroup, users’ convenience through group development, and further enhancement of international
competitiveness, it is appropriate to set up risk management with the former approach (i.e. manage
risks as a whole bank group, while setting clear boundaries within the bank group) in mind.
(2) Scope of a bank group
Regardless of whether it is a bank holding company, a sister company, a subsidiary company, or anaffiliate company, risks related to the company’s business transactions spread to any bank in the group.
With this contagion effect in mind, it is appropriate to determine the scope of a group by taking a
conservative stance on the contagion of risks in light of the inherent nature of any bank group’s risk
management as the preemptive protection, and by focusing on substantial relations. Based on theseprinciples, the scope of a bank group should be consistent with the criteria for consolidation incorporate accounting of a bank holding company or a bank (Note).
Note:

If consolidated financial statements are prepared in accordance with designatedInternational Financial Reporting Standards (referring to the corporate accounting
standards adopted by a "corporation, etc. subject to special business accounting standards,etc." stipulated in Article 14-7(3) of the Banking Act Enforcement Regulation; the same
applies hereinafter), the scope of a bank group should also be consistent with designatedInternational Financial Reporting Standards.

(3) Outline of consolidated-base supervision
Consolidated financial statements in corporate accounting and risk-monitored loans under the
Banking Act are disclosed on a consolidated basis. Furthermore, the capital adequacy ratio regulation,
the liquidity ratio regulation, the large-scale credit provision regulation, and the arm’s length375

principle are applied on a consolidated basis.
(Reference)“Council Report on Risk Management of Bank Groups, etc.” by the Financial System ResearchCommittee (January 1998)
V-2

Arm’s Length Principle

The arm’s length principle is a rule to prevent conflict-of-interest transactions between a bank and anyof its group member companies that would otherwise undermine the soundness of bank management. The
following points should be noted.
(1) When a bank outsources or conducts other transactions within its bank group, whether the bankadequately verifies that the transaction does not violate the arm’s length principle.
For example, the following transactions or conduct may constitute the transactions or conduct
stipulated in Article 14-10 or Article 14-11 of the Banking Act Enforcement Regulation. Accordingly,
when becoming engaged in such transactions or conduct, whether the bank checks the necessity of
approval from the Prime Minister based on the proviso of Article 13-2 of the Banking Act and Article
14-8 of the Banking Act Enforcement Regulation.
(i)

Reduction or waiver of rent/commission(ii) Reduction or waiver of interest, deferred interest payment(iii) Waiver of claim, DES (debt equity swap)(iv) Underwriting of capital increase in the case where a specified related person is insolvent(2) When a bank files an application for approval in accordance with the proviso of Article 13-2 of the Banking
Act, the FSA evaluates whether the bank has any of the compelling reasons listed in each item of Article
14-8 (1) of the Banking Act Enforcement Regulation or whether the bank meets requirements stipulated
in Article 14-8 (2) of the Banking Act Enforcement Regulation for the bank to become engaged in suchtransactions or conduct listed in each item of Article 13-2 of the Banking Act. For this evaluation, thepoints listed below should be noted.
(i)Case where Article 14-8 (1)(iii) of the Banking Act Enforcement Regulation is applied(A) Whether its specified related party runs into financial difficulty and needs support forreconstruction.
(B) On the assumption of receiving support for reconstruction, whether the specified related party
has been striving to make sufficient self-help efforts and clarifies management accountability.
(C) Whether the transaction or conduct has more economic rationality, compared to theconceivable liquidation of the specified related party.
(D) In the case where the bank waives its claim or offers a monetary grant, whether the bankintends to write off or set aside adequate reserves to cover the full amount of estimated loss
due to its support during the period of the relevant business improvement plan, and whether376

it declares the intention before said plan commences.
When the application is approved, the following conditions will be added, if necessary, from theviewpoint of ensuring that the specified related party implements the business improvement plan.
a.

The bank should have the specified related party implement its business improvement
plan.

b.

The bank should annually report the implementation status of the specified related
party’s business improvement plan, the bank’s recognition of the implementation status,
and the bank’s business management policy for the specified related party every fiscal
year during the period of the business improvement plan.

c.

If the specified related party’s implementation of the business improvement plan is not
sufficient, the bank should consider fundamental reviews on the business improvement
plan, including a review on the specified related party’s operations.

(ii) Case where Article 14-8 (1)(iv) of the Banking Act Enforcement Regulation is applied
Whether it is clear under normal social conventions that the bank will suffer a larger loss if thebank does not become engaged in the transaction or conduct with the specified related party.
V-3

Scope of Business of Banks and Their Group Companies

V-3-1

Key Principles(1) Purport of Prohibiting Banks from Engaging in Non-banking Business
Under the Banking Act, banks are restricted from engaging in non-banking business. The main
purport is to prevent the commingling of different kinds of risk that would otherwise arise from theengagement in non-banking business (Note).
Note:

Other purports may include the efficiency achieved through the devotion to banking
business, and the prevention of conflict-of-interest transactions.

(2) With regard to regulations on the scope of business of any bank group, the main purport of restricting
any bank from the engagement in non-banking business is also applied to the entire group whose
handling is pursuant to regulations on the bank.
Note 1:

If a bank group applies the designated International Financial Reporting Standards, theacts (such as venture capital investment related to the Small and Medium-sizedEnterprises Business Enhancement Act, etc., DES (debt equity swap), and theenforcement of security rights) permitted as exceptions to the restriction on theacquisition of voting rights (so-called the 5% Rule) in Article 16-4 of the Banking Act are
not subject to any particular limitation, even if such acts may consequently expand thescope of the group

Note 2:In the case where a company or a business entity equivalent to a company, which does not377belong to any bank group, becomes a subsidiary company of a bank solely because of thebank’s changing some of its accounting standards, it is desirable to take a certain measure
within a proper period (in principle, within a year), from the viewpoint of preventing aloophole in the purport of prohibiting banks from engaging in non-banking business.
V-3-2

Handling of Article 10(2)(xxi) of the Banking Act

V-3-2-1

Points to Note regarding Services for Regional Development, etc.

(1) Each item of Article 13-2-5 of the Banking Act Enforcement Regulation specifically lists types of theservices performed by banks under Article 10(2)(xxi) of the Banking Act (hereinafter referred to as the“services for regional development, etc.”). However, provisions in parenthesis in chapeau of the same
article of the Banking Act Enforcement Regulation add the requirement that “When the bank acquires
new management resources for the services in addition to the bank’s management resources for its banking
business, the extent of such acquisition should be confirmed to levels where the acquisition will not cause
any trouble in the bank’s sound and proper business operation even if most of its new management
resources are not used, depending on the demand.”The regulator needs to keep in mind that the said requirement should not be handled too strictly inlight of the fact that the bank has added the services for regional development, etc. to the scope of its
banking operation so as to contribute to building a sustainable society through digitalization and regional
revitalization, etc.
Accordingly, it should be noted that this requirement does not mean that the bank should limit theacquisition of its new or additional management resources to the minimum necessity, but should berecognized as meaning that as long as there is clearly no significant trouble in the performance or thesoundness of the bank’s proper operation, the bank meets the requirement even if there is no demand forits services for regional development, etc., and that the services are feasible.
(2) Among the services for regional development, etc. performed by banks, each bank should not unfairly takeadvantage of its superior bargaining position in business with regard to the services stipulated in Article
13-2-5(ii) of the Banking Act Enforcement Regulation.
V-3-2-2

Handling of “Other Auxiliary Business”

When a bank engages in operations stipulated in Article 10(2) of the Banking Act (excluding those listed
in each item of the same Article 10(2); “other auxiliary business” hereafter), whether the bank validates
the sufficiency of its measures to put in place the relevant structure from the following points of view.
(1) The following operations also fall under the category of “other auxiliary business:”378

・HR search & recruitment, business matching service for operating lease (excluding real property
lease), M&A-related service, and administrative agency business, all of which are provided to clientcompanies (including the case where these operations are provided separately from its inherent
business from the viewpoint of strengthening the functions of management consulting and support
for the client companies)(Note)It should be noted that HR search & recruitment services require a license pursuant to
the Employment Security Act. When providing these services, the bank should not
unfairly take advantage of its superior bargaining position in business.

・Service of providing individual customers (excluding those engaged in business) with consultation
for their property accumulation

・ Education and training services, management consulting service, finance-related research andstudy services, all of which are provided by the bank’s subsidiary companies or the bank holding
company’s subsidiary companies to officers and employees of other business operators, and agency
and intermediary services for the service of providing individual customers (excluding thoseengaged in business) with consultation for their property accumulation
For these business engagements, the bank needs to put into place the relevant structures from theviewpoints of customer protection and the compliance with laws and regulations as described below:(i)Whether the bank puts into place the relevant structures for strict compliance with laws andregulations, including those for preventing acts that may be problematic as the abuse of its
superior bargaining position under the Act on Prohibition of Private Monopolization and
Maintenance of Fair Trade.

Note:

For providing individual customers (excluding those engaged in business) with
consultations for their property accumulation, whether the bank puts into place therelevant structures for strict compliance. For example, whether the bank ensures that its
consultation does not fall under the investment advisory business as stipulated inprovisions of the Financial Instruments and Exchange Act.

(ii) Whether the bank clearly specifies the contents of its contract, including instruments/services
to be provided and their values, in writing or in some other appropriate form.
(iii) With regard to auxiliary business-related customer information management, whether the banksets up specific handling standards including those for unintended use. Whether the verification
system is put into place to check how thoroughly its employees are informed about suchstandards (refer to III-3-3-3-2).
(2) With regard to operations related to the issuance of e-money (including offline debit E-cards), whichbanks have already been allowed to engage in, banks should put into place the relevant structure sothat they can offer by themselves sufficient evidence to prove that they have paid full attention to user
security in various aspects, including the issuance-corresponding fund administration.

379

(3) Transactions with economic effects similar to those of lending funds(i)

In the case where a bank engages in transactions (including those where Article 10(1)(ii) or
Article 10(2)(xviii) of the Banking Act applies) with effects similar to those of lending funds
that involve the purchase and sales (including off-exchange transactions; the same applies inthis (3)) of commodities (referring to goods that can be traded on an exchange; the same applies
in this (3)), leasing of property, or the acquisition of rights related to a customer’s business,while taking account of the religion of either a customer or the relevant person, the following
points should be noted.
(A) In the case where such transactions include the purchase and sales of any commodity, thebank should not bear any risks related to the commodity (including the risk of being unable
to purchase and sell the commodity that is necessary for such transactions; the same
applies in this (3)), other than the credit risk related to the trading value of the commodity.
(B) In the case where such transactions include leasing of property (including the case where
the bank pays the acquisition value before the acquisition of the property), the bank should
not bear any risks related to the property, other than the credit risk related to the property
rent.

In addition, the requirements stipulated in Article 10(2)(xviii) of the Banking Act

must be satisfied, and the bank will not engage in any business (such as construction ofproperty) that no bank is allowed to conduct.
(C) In the case where such transactions include the acquisition of rights related to a customer’sbusiness, cash flow to be generated from the rights should be considered equivalent tolending funds, and the bank should not bear any risks that cannot be recognized as thecredit risk of the customer among the risks related to the business(ii) In the case where a bank engages in transactions (including those where Article 10(1)(i) of the
Banking Act applies) with effects similar to those of taking a deposit that includes the purchaseand sales of any commodity, while taking account of the religion of either a customer or the
relevant person, it should be noted that the bank should not bear any risks related to thecommodity.
(iii) In the case where a bank engages in transactions with effects similar to those of interest and/or
currency swap transactions that include the purchase and sales of any commodity, while taking
account of the religion of either a customer or the relevant person, it should be noted that thebank should not bear any risks related to the commodity.
(4) In determining whether operations other than those defined in the above (1) through (3) (including
operations for the purpose of effectively utilizing the excess capacity) fall under “other auxiliary
business,” the regulator will check whether the following viewpoints are comprehensively taken into
account, while also paying careful attention to the fact that non-banking business is prohibited under
Article 12 of the Banking Act.

380

(i)

Whether the operation is equivalent to any of the operations listed in each item of Article 10(1)and each item of Article 10(2) of the Banking Act.

(ii) Whether the scale of the operation is not excessive, compared to the scale of the inherent
business with which the operation is associated.
(iii) Whether the operation has functional closeness and homogeneous risks with banking operations.
(iv) Whether the operation contributes to utilizing the excess capacity that has been duly generated
while the bank has been engaging in its inherent business.
Note 1:

The case where a bank leases its commercial real property to a group company for the purposeof efficient and rational business management of the bank group (limited to the case where
the group company itself uses the property) is considered to fall under “other auxiliary
business.”
In light of the abovementioned purpose, the scope of the bank group is limited to the scope
stipulated in V-1 (2), and needs to be consistent with accounting standards for consolidation
criteria of either the bank holding company or the bank.

Note 2:

When considering the above provisions in a comprehensive manner, if, for example, a bankhas no other choice but to lease its commercial real property to a third party other than thegroup companies, the bank should put into place the relevant structure so that it can offer byitself sufficient evidence to prove that the following requirements are satisfied. In the casewhere a bank leases such property to the national or local government, or an entity that is
considered to have a public role in light of local needs and current conditions, in response to
the request from such lessee, the matter described in the following (D) may be judged in lightof the contents of such request from the viewpoints of regional revitalization and central city
invigoration.
(A) The bank does not aggressively promote the operation internally.
(B) The work is neither bank-wide nor organizational between the bank and a specified
management company.
(C) Expenditures for the property should be kept at a bare minimum level, such as minimum
amounts of conversions and repairs. In this regard, however, if reconstruction or new
construction is required from a public redevelopment project or a local government or the
like, the relevant expenditures should be kept at a bare minimum level.
(D) The scale of leasing should not be excessive compared to the scale of the inherent
business that is conducted by utilizing the real property in question.
*

The scale of leasing should be evaluated in a comprehensive manner by taking accountof several factors such as rent income, expenditures, and the lending area. (Suchevaluation does not need to be mechanical, judging from only one single item.)

Note 3:

The above (Note 2) applies mutatis mutandis to the case where a bank has no other choice
but to temporarily lease a certain property on the assumption of the sale in the future due tothe difficulty in selling it in the near term. (In this regard, however, the provisos of (C) and381

(D) are excluded.) As background information, the property used to be commercial real
property but no longer serves such function due to restructuring.
In the case where a bank leases such property to the national government or a local
government, or an entity that is considered to have a public role in light of local needs andcurrent conditions, in response to the request from such lessee, from the viewpoints ofregional revitalization and central city invigoration, the leasing period may be determined inlight of the contents of such request.
Note 4:

In determining whether operations fall under “other auxiliary business,” refer to the FSA’s replies
about the written referral procedures concerning general interpretation of laws and regulations
and the no-action letter system (the FSA’s website “Referral Procedures concerning Interpretationof Laws and Regulations (No-action Letter System, etc.)”).

V-3-3

Scope of Business of Subsidiary Companies, etc.

In light of the fact that non-banking business is prohibited under Article 12 of the Banking Act, the scope ofbusiness of a bank’s subsidiary companies (those stipulated in Article 2(8) of the Banking Act (including
companies that are recognized as subsidiary companies in accordance with the said Article 2(8); the same
applies hereinafter), subsidiary corporations, etc. (those stipulated in Article 4-2(2) of the Banking Act
Enforcement Order (excluding subsidiary companies); the same applies hereinafter), and affiliated corporations,etc. ( those stipulated in Article 4(3) of the Banking Act Enforcement Order; the same applies hereinafter)(hereinafter collectively referred to as “subsidiary companies, etc.” ) should be as follows:
In this regard, virtually the same will be applied to subsidiary companies, etc. of a bank holding company.
Note 1:In the case where a bank or any of its subsidiary companies hold shares of a domestic company(excluding any subsidiary company of the bank) with its holding shares in total exceeding the voting
right holding threshold (as stipulated in Article 16-4(1) of the Banking Act; the same applies
hereinafter), the scope of business of the domestic company (“specified investee company”
hereinafter) is the same as that of companies set forth in Article 16-2(1)(i) through (vi), (xi), (xiii),(xv) and (xvi) of the Banking Act (as for companies set forth in Article 16-2(1)(xiii), companies
under special business revitalization process are excluded), special holding companies which banks
have as their subsidiaries (meaning special holding companies stipulated in Article 16-2(6)(i) of the
Banking Act), and companies subject to special provisions (meaning companies subject to special
provisions stipulated in Article 16-4(8) of the Banking Act). It must also satisfy the criteria
concerning subsidiary companies as stipulated in the Banking Act Enforcement Regulation, theNotice and these Supervisory Guidelines.
With regard to authorization as stipulated in Article 16-2(4), the examination authority requires
the applicant bank and the company for which authorization the applicant bank is filing (hereinafterreferred to as the “company subject to the authorization” in this item) to be expected to have a goodbalance of payments and to maintain such good balance after the authorization, but the projection382

period for the balance of payments is not stipulated in the examination. In this context, the applicant
bank may set the projection period for the balance of payments as three years or longer.
In receiving a notification on the subsidiary companies, etc. (as for the subsidiary companies, anotification pursuant to Article 53(1)(ii) of the Banking Act; as for the subsidiary corporations, etc.
or the affiliated corporations, etc., a notification pursuant to Article 35(1)(xv) of the Banking Act
Enforcement Regulation; as for specified investee companies, a notification pursuant to Article
35(1)(xvii)), the FSA verifies whether the subsidiary companies, etc. comply with the scope ofbusiness, based on the Articles of Incorporation of the subsidiary companies, etc. or the businessagreement between the bank and the subsidiary companies, etc.
Note 2:

When evaluating the subsidiary corporations, etc. or the affiliated corporations, etc., the FSA also
pays careful attention to whether they comply with terms of financial statements, regulations
concerning forms and preparation methods, Implementation Guidance for Accounting Standard No.
22 “Implementation Guidance for Determining the Scope of Subsidiaries and Affiliates inConsolidated Financial Statements” (dated May 13, 2008), and other generally accepted accounting
standards, irrespective of whether or not the bank prepares annual securities reports based on the
Financial Instruments and Exchange Act.
(Reference) If the consolidated financial statements are prepared in accordance with the designatedInternational Financial Reporting Standards, such evaluation should be based on said
Standards.

Note 3:”Companies” stipulated in Article 16-2 and Article 16-4 of the Banking Act do not include special
purpose companies (conceivable purposes include asset securitization, and procurement of equity
capital), general partnerships, securities investment corporations, partnerships, and other business
entities equivalent to companies (“business entities equivalent to companies” hereinafter). In thisregard, however, the regulator pays careful attention to whether or not any business entities
equivalent to companies serve as a loophole to avoid the regulation on the scope of business of
subsidiary companies, etc. as well as the purport of prohibiting non-banking business.

Note 4:

With regard to a regional development business company (Article 16-2(1)(xiv) and Article 16-4(8)of the Banking Act), when the regulator is consulted by a bank about whether the content of businessis acceptable or not in pre-consultation, the regulator may make a judgement solely based on whether
the company subject to the authorization meets the requirement to be “a company that wasestablished for the purpose of undertaking a business activities that contribute to the revitalizationof the regional economy” stipulated in Article 17-7-3(1)(ii) of the Banking Act Enforcement
Regulation.

Note 5:In the revised Banking Act (enacted in November 2021), Article 16-2(1)(xiv) has been added, andyet it should be noted that handling of the real property business of any regional development
business company (the same (xiv), and Article 16-4(viii) of the same Act) remains the same as before
the revision.

383

V-3-3-1

Scope of Business of Subsidiary Companies, etc.

(1) With regard to any business dependently engaged in by a subsidiary company of a bank (referring to“dependent business” stipulated in Article 16-2(2)(i) of the Banking Act; the same applies hereinafter),whether a dependent business is appropriately handled in accordance with III-3-3-4 of the Supervisory
Guidelines.
(2) The scope of finance-related business engaged in by a subsidiary company of a bank (referring to “financerelated business” stipulated in Article 16-2(2)(ii) of the Banking Act; the same applies hereinafter) needs
to be within the scope as described below:(i)

Credit guarantee business
Whether a subsidiary company engaging in this business (“the guarantee company” hereinafter)
deals in credit guarantees related to commercial loans by the bank, by any subsidiary companies, etc.
of either the bank or the bank holding company, and those by any of their subsidiary corporations,etc. and affiliate corporations, etc. In addition, whether the handling takes into consideration thefollowing respects.
(A) Regarding its business management, whether the guarantee company pays full attention to theestablishment of a pure-play guarantee business system, the enhancement of internal reserves,and the ensuring of other decent payment reserves. As specific measures to these ends,
whether it has set up decent guarantee charge rates in light of guarantee characteristics, and it
has been making appropriate provision of reserves so as not to disrupt the smooth flow of
performing its guarantee obligations.
As for intragroup guarantees in particular, taking into account that any risk related to suchguarantees does not transfer outside of the group, whether the guarantee company is careful
enough not to have its business conditions affect the soundness of the bank.
(B) When offering credit guarantee services, whether the guarantee company avoids demanding
unnecessary personal collateral, other than physical collateral.
(C) Whether the bank avoids forcing a debtor who needs a credit guarantee scheme to receive aguarantee from the guarantee company established by the bank itself.
(D) Whether the bank sets up lower interest rates than usual on its loans guaranteed by theguarantee company, by reducing the portion corresponding to any of the following.
a.

Normally estimated loss from bad debtsb.

Costs required for the setting-up, management, and disposition of collateralc.

Estimated cost reduction due to the simplification of credit investigations, loan
application screening, etc.

(ii) Leasing business
When making a real property lease contract, any bank’s subsidiary company engaging in thisbusiness (“the leasing company” hereinafter) needs to confine the form of contract to the same384

lending

format(so-calledfinanceleasing),

except

for

cases

that

involvetheimprovement/management of public facilities such as educational/cultural facilities and social
welfare facilities. Accordingly, it needs to be checked whether or not the leasing company has been
engaging in operations other than those in which any bank’s general real property subsidiarycompanies are allowed to engage.
(Note)The leasing company needs to put into place the relevant management framework toprevent the abuse of its superior bargaining position and conflict-of-interest transactions.
In addition, taking into account that any bank cannot engage in real property business,and from the viewpoint of complying with laws and regulations, the FSA checks whether
full consideration and inspection are conducted in advance for the leasing company not
to substantially engage in the agency and brokerage of real property transactions and rent.

(iii) Investment advisory business
From the viewpoint of protecting investors as well as in light of the operational particularity, thehandling of investment advisory business needs to be checked in the following respects:(A) Whether the handling of safe custody is conducted by the bank itself or a relevant trust bank,instead of by the subsidiary company engaging in this business (“the investment advisory
company” hereinafter).
(B) Whether the investment advisory company excludes real property and antiques from the scopeof its advisory business and concentrates on negotiable securities and financial instruments.
(iv) Telecommunications business (so-called VAN business)
Whether most (roughly 50% or more) of the subsidiary company’s telecommunications work
consists of that related to banking business, corporate finance, and accounting (such as those related
to placing/receiving orders, accounts receivable/payable management, credit management, andother fund settlement as well as data processing related to accounting, tax affairs, and fundmanagement).
(Note)

If the subsidiary company makes an inquiry about the notification to the Ministry ofInternal Affairs and Communications under Article 16(1) of the Telecommunications
Business Act, the FSA will give a reply as follows: If the subsidiary companies, etc. engage
in communications transmission services (hereinafter “transmission services”) for noncommercial purposes, it does not need to submit such notification. (For example, in thecase where the jointly-funded subsidiary companies, etc. provide only the investing
financial institutions with the transmission services, it is obvious that the subsidiarycompanies, etc. do not aim to make profits from the transmission services through its
price-setting and the terms of offering. A wholly-owned subsidiary company falls under
this case.)(v) Business involving sales of trust beneficial interests
When any bank’s subsidiary company functions as an agency and brokerage for the purchase andsales of trust beneficial interests with real property as the trust property, the FSA checks whether

385

full consideration and inspection are conducted in advance for the subsidiary company not to
substantially engage in the agency and brokerage for real property transactions and rent, taking into
account that any bank cannot engage in real property business, and from the viewpoint of complying
with laws and regulations.
(vi) Consulting business, etc. at any bank’s subsidiary specialized in investment
When any bank’s subsidiary specialized in investment conducts the business stipulated in Article
17-2(14)(ii) of the Banking Act Enforcement Regulation, whether the subsidiary puts into place therelevant management framework to prevent the abuse of its superior bargaining position andconflict-of-interest transactions, and whether it considers and verifies the conduct sufficiently fromthe viewpoint of complying with laws and regulations, etc. in advance.
(3) Whether the scope of business of any bank’s specified subsidiary corporations, etc. (referring to subsidiarycorporations, etc. that are not specified investee companies; the same applies hereinafter) and specified
affiliated corporations, etc. (referring to affiliated corporations that are not specified investee companies;
the same applies hereinafter) is prescribed as follows. However, this does not apply to business entities
that are equivalent to companies.
(i)

The scope of business of any bank’s specified subsidiary corporations, etc. and specified affiliatedcorporations, etc. needs to be within the scope of business of companies eligible for subsidiarycompanies (referring to “companies eligible for subsidiary companies” stipulated in Article 16-2(1)of the Banking Act; the same applies hereinafter), and it also has to satisfy the criteria regarding
subsidiary companies set forth in the Enforcement Regulation, the Notices, and the Supervisory
Guidelines.
Consider, as an example, a company engaging in specialized insurance-related business (referring
to “specialized insurance-related business” stipulated in Article 16-2(2) (iv) of the Banking Act).
Only if a bank has an insurance company as its subsidiary company, the bank may hold theabovementioned company as its specified subsidiary corporations, etc. or specified affiliatedcorporations, etc.
Note that, under the enforcement of the Banking Act on Revision, etc. of Related Acts for the
Financial System Reform (hereinafter referred to as the “Act on Financial System Reform”), in thecase where the specified subsidiary corporations, etc. or the specified affiliated corporations, etc.
engaging in trust business (limited to those engaging in real property business as the main unit) ofa bank actually engage in general real property business (the subject corporation is referred to as a“specified corporation” in (ii) below), the general real property business is within the scope ofbusiness allowed to the bank’s specified subsidiary corporations, etc. and specified affiliatedcorporations, etc.

(ii) Among those that were reported as “affiliated companies” (including companies established by said
affiliated companies to have them conduct said companies’ business, and other companies engaging
in similar business; excluding companies where the above (3) applies and specified corporations),
suppose that the specified subsidiary corporations, etc. or the specified affiliated corporations, etc.

386

of a bank actually engaged in business that was not within the scope of business of companies eligible
for subsidiary companies when the Banking Act on Financial System Reform was put in force. In thecase where the subject corporation continues to engage in such business after the enforcement of
the Financial System Reform, such case is not deemed, until otherwise provided for by law, to violate
the abovementioned (i), only if the name, business, and other necessary information of the specified
subsidiary corporations, etc. or the specified affiliated corporations, etc. have been reported asordered separately.
However, this does not apply to the case where the specified subsidiary corporations, etc. or the
specified affiliated corporations, etc. are the subsidiary companies or the specified investee
companies of the bank, and the case where the specified subsidiary corporations, etc. or the specified
affiliated corporations, etc. newly engage in business other than the business engaged in by the
subject corporation before the enforcement of the Banking Act on Financial System Reform.
(Note 1) Among companies in which a bank invests, affiliated companies refer to those that havea close relationship with the bank, given the backgrounds of their establishment, andtheir financial and personal relations with the bank.
(Note 2) For example, the following cases are deemed to be the same cases as applicable to theabovementioned specified subsidiary corporations, etc. or specified affiliatedcorporations, etc., unless they violate the purport of the Banking Act.
(A) The case where an affiliated company already reported by the bank had engaged
in the abovementioned business under the enforcement of the Banking Act on
Financial System Reform and it became a specified investee company (confined toa subsidiary corporation or an affiliated corporation) of the bank for a compelling
reason as the bank acquired a certain number of the affiliated company’s sharesthat other companies held. (The case is applicable only if the notification
stipulated in Article 104 of the Supplementary Provisions of the Banking Act on
the Financial System Reform has been made.)(B) The case where the specified subsidiary corporations, etc. or the specified affiliatedcorporations, etc. had satisfied the abovementioned requirements at the time ofthe enforcement of the Banking Act on Financial System Reform and later they
became the specified investee companies (confined to a subsidiary corporation,etc. or an affiliated corporation, etc.) of the bank pursuant to the provisions ofArticle 16-4(4)(i) of the Banking Act. (The case is applicable only if it has received
permission stipulated in said Article 16-4(4)(i).)(C) The case where the respective specified subsidiary corporations, etc. or therespective specified affiliated corporations, etc. of two banks had satisfied theabovementioned requirements at the time of the enforcement of the Banking Act
on Financial System Reform and they merged and became the specified subsidiarycorporations, etc. or the specified affiliated corporations, etc. of one or the other387

bank (hereinafter referred to as “merging company”). (If the merging company
started to engage in business other than the business it had engaged in before themerger, such new business needs to have received necessary review by the end of
the fiscal year ended in March 2002 for the case to be applicable.)(iii) Whether the specified subsidiary corporations, etc. or the specified affiliated corporations, etc. avoid
engaging in any business that is not within the scope of business of companies eligible for subsidiarycompanies, such as general real property business, merchandising business, and travel agency. In
this regard, however, if the specified subsidiary corporations, etc. or the specified affiliatedcorporations, etc. had engaged in such business under the enforcement of the Banking Act on
Financial System Reform, whether the necessary review was completed by the end of the fiscal year
ended in March 2002.
Suppose two cases when the Act on Financial System Reform was put in force: one is the casewhere the specified subsidiary corporations, etc. or the specified affiliated corporations, etc. had
actually engaged in either dependent business or finance-related business (including business thatwas reported as virtually equivalent to the abovementioned business in accordance with the relevant
order separately issued); the other is the case where the specified subsidiary corporations, etc. or
the specified affiliated corporations, etc. had actually engaged in both businesses. These cases are
not deemed, until otherwise provided for by law, to violate the abovementioned (i), only if thenecessary review on business other than the dependent business or the finance-related business wascompleted by the end of the fiscal year ended in March 2002.
(Note)

If the specified subsidiary corporations, etc. or the specified affiliated corporations, etc.
have not completed the necessary review beyond the deadline of March 31, 2002, the
FSA asks for reporting on due reasons why the review has not yet been completed, in
accordance with the relevant order separately issued.

V-3-3-2

Handling of Agency/Brokerage Firms for the Purchase and Sale of Collateral Assets(excluding Real Property) Related to Other Firms’ Loans

Whether the operation of agency/brokerage firms for the purchase and sale of collateral assets (excluding real
property) related to other firms’ loans is confined to the agency/brokerage (hereinafter the “agency, etc.”) forthe purchase and sale of collateral assets (excluding real property) for the enforcement of security rights
necessary for the other firms to collect loans.
(Note 1) Agency, etc. for the purchase and sale for any purpose other than the enforcement of security rights
is not allowed in light of the purport of prohibiting non-banking business.
(Note 2) Agency, etc. for the purchase and sale of real property is not allowed in light of the fact that banks
are not allowed to engage in real property business.
(Note 3) No one other than companies stipulated in Article 17-3(1)(xxiv) of the Banking Act Enforcement
Regulation is allowed to engage in the acquisition, holding, management, and sale of collateral assets.

388

V-3-3-3

Handling of Collateral Asset Holding/Management Companies with the Collateral Related
to Financial Institutions’ Loans

The handling of companies holding and managing collateral assets related to financial institutions’ loans
needs to be checked in the following respects:(1) Whether the business of companies holding and managing collateral assets related to financial institutions’loans is limited to the following activities.
(i)

Acquisition of the relevant collateral assets (as for assets other than real property, methods for theacquisition include not only foreclosure purchase but also private enforcement) when the parent
bank and/or other financial institutions need to enforce their security rights to collect their loans(and also when a third party enforces security rights on the collateral assets related to the parent
bank and/or other financial institutions)(ii) Holding, management, and sale of the acquired assets (hereinafter referred to as “holding”)(2) Whether the company’s business performance complies with the following points.
(i)

Holding of real property(A) Whether the company strives to effectively utilize the acquired real property to enhance its
value. To this end, whether the company levels land, constructs a suitable building on the land,and purchases adjoining land, while also collaborating with Organization for Promoting Urban
Development, real property specified business partners, real estate brokers, etc. whennecessary.
(B) Whether the company strives to sell the acquired real property smoothly. To this end, whether
the company is considering securitization by utilizing a specified purpose company stipulated
in the Banking Act on Securitization of Assets.
(C) In terms of the holding of real property, whether the company avoids engaging in business thatis improper for affiliated companies to engage in, such as hotel business.

(ii) Holding of movables(A) In light of the recognition that holding of various movables inherently involves a wide range ofassumed risks, whether the company accurately grasps, analyzes, and manages risks that may
arise from holding of the movables, such as management liability risk, and seller’s liability for
non-conformity with a real property contract, by type and attribute of the movables. Then, inorder to properly deal with these risks, whether the company puts into place the relevant
framework.
(B) During the process of acquiring movables, whether the company evaluates the movables by anobjective and rational evaluation method.
(C) Whether the company properly manages the acquired movables by type and attribute of the389

movables, and strives to enhance and maintain their value(D) Whether the company considers proper sales/foreclosure sales methods by type and attributeof the acquired movables, and strives for the realization(E) In terms of the holding of movables, whether the company avoids engaging in business that is
improper for affiliated companies to engage in.
(iii) Holding of claims(A) During the process of acquiring claims, whether the company evaluates the claims by anobjective and rational evaluation method.
(B) Whether the company strives to maintain the value of the acquired claims. To this end,
whether the company acquires necessary information to evaluate the creditworthiness of thethird-party debtor (the debtor of target claims) as needed, and continuously monitors said
debtor’s financial conditions.
(C) Whether the company strives to collect the acquired claims smoothly by taking propercollection measures (including assignment to a third party) in a timely manner.
(iv) Holding of other assets
Whether the handling of other assets also conforms to the abovementioned holding of real property,
movables, and claims.
(3) Whether eligible assets are defined as collateral assets related to loans, etc. by the parent bank, etc.
Whether the purchase of these assets enables the parent bank, etc. to reasonably expect collection.
(Note)

Loans, etc. include the right to indemnification and other claims that the parent bank, etc. acquiredby making good on the relevant guarantee and accordingly have become secured claims on theassets.

(4) Others(i)Whether the company engaging in the holding of real property obtains the license pursuant to Article
3 of the Building Lots and Buildings Transaction Business Act.

(ii) Whether the company engaging in the holding of assets other than real property obtains thenecessary license, permission, registration or approval, etc. for the holding of the assets.
(iii) Whether the company separately manages revenue and expenditure/profit and loss by acquired asset.
(iv) Whether the parent bank, etc. and the company have taken necessary measures to ensure thecompany’s financial soundness.
V-3-3-4

Non-banking Advanced Banking Service Companies(1) Key principles
When a bank invests in each company set forth in Article 16-2(1)(xv) (excluding each company
stipulated in Article 17-4-3 of the Banking Act Enforcement Regulation (hereinafter referred to as a390

“certain advanced banking service company”); hereinafter referred to as a “non-banking advanced
banking service company”), it may hold such shares in excess of the voting right holding threshold.
Anticipating bank groups’ various developments in the future, this is designed to enable them to develop
their business flexibly on the condition that they obtain authorization. It also enables a bank to invest in acompany that engages in business which cannot be said to be contributing to the advancement of banking
business, the enhancement of users’ convenience, or regional development, etc. when making theinvestment, although such contribution is expected in its bank group’s strategy for the future potential.
On the other hand, when the application for authorization of a non-banking advanced banking service
company is filed, the FSA needs to examine the filing in light of the purport of prohibiting banks fromengaging in non-banking business, i.e., request for the efficiency through the avoidance of non-banking
business risks, the ban on conflict-of-interest transactions, and the prevention of abuse of their superiorbargaining position.
(Note 1) It should be noted that each advanced banking service company that was authorized before therevision of the Banking Act (enacted in November 2021) is treated as a non-banking advanced
banking service company after the revision, regardless of its operation at the time ofauthorization. In the case where such a non-banking advanced banking service company
engages in a new business, etc., following the conditions at the time of authorization, thecompany should report the fact to the FSA.
(Note 2) In the revised Banking Act (enacted in November 2021), business contributing to regional
development has been added as business that any non-banking advanced banking service
company may engage in, and yet it should be noted that handling of the real property businessof any non-banking advanced banking service company remains the same as before the revision.
(Note 3) In the case where the bank itself and other group companies conduct a demonstration test as
part of preparation for the establishment of a non-banking advance banking service company,
they should limit the content, scale, and scheduled period of the demonstration test as well as
the persons being tested to the minimum necessity, in light of the purport of prohibiting nonbanking business and the positioning of such demonstration tests in these Guidelines. The
bank and the bank group should also pay close attention so as not to affect their soundness andproper business operation by considering individual and specific risks, etc., due to thedemonstration test.
*1“Demonstration test” here means that, for the purpose of verifying the profitability andbusiness continuity of its non-banking advanced banking service company to beestablished, the bank and its group companies, on a trial basis, engage in similar businessas to be conducted by its non-banking advanced banking service company as part ofpreparation for the establishment so that the management of the bank and/or the bankgroup will make a judgement as to whether or not the establishment of the non-banking
advanced banking service company is appropriate. The bank should pay close attention
to the fact that the bank itself needs to prove the intended demonstration test will not391

affect the soundness and proper business operation of the bank and the bank group.
*2

Each “demonstration test” being conducted by a bank itself and the bank group as partof preparation for the establishment of a certain advanced banking service company willbe treated in the same manner as in the above.

(2) Points to note in examining authorization
The examination criteria for authorizing a non-banking advanced banking service company are
stipulated in Article 17-5-2 (2) of the Banking Act Enforcement Regulation. In examining each criterion,
the FSA pays close attention to the following points:(i)

Investment amountThe regulator makes a judgment on the appropriateness of the investment amount, in light of theamount of stated capital of the bank that has filed the application for authorization of a non-banking
advanced banking service company (referred to as the “applicant bank” in the (2) through (3)) as
well as its financial and profit & loss situations, etc. On the assumption that the full amount of thebank’s investment in the non-banking advanced banking service company is damaged, the impact
is examined in terms of such impact on the bank group’s capital adequacy ratio, among others.

(ii) Investment ratio, etc.
If a bank makes a non-banking advanced banking service company one of its subsidiary companies,
etc., the non-banking advanced banking service company also needs to put into place an appropriate
framework for business management, internal management, internal audit, etc. as a member of thebank group.
Assuming a case where the bank has little controlling power over the non-banking advanced
banking service company, the regulator examines whether the bank is capable of managing the nonbanking advanced banking service company’s governance and the appropriateness of its business
contents. In addition, assuming a case where the business of the non-banking advanced banking
service company no longer contributes to the advancement of its bank group, the enhancement ofusers’ convenience, or the regional development, etc., and another case where the advanced banking
service company no longer satisfies the criteria for authorization, the FSA examines whether thebank is capable of appropriately dissolving the investment in excess of the voting right holding
threshold.
(iii) Contents of business
When filing the application for authorization, the applicant bank needs to clearly explain thecontents of the business engaged in by the non-banking advanced banking service company.
With regard to contents of business engaged in by a non-banking advanced banking service
company, even if some part of the non-banking advanced banking service company additionallyengages in certain business that is neither the business contributing to the advancement of banking
business, the enhancement of users’ convenience, or the regional development, etc. (hereinafterreferred to as the “contributing business”) nor the business where such contribution is anticipated392

(hereinafter referred to as the “anticipated business”), the fact itself does not make the subject
company ineligible for the authorization. However, there are cases where the authorization will not
be given, due to their conceivable infringement of the purport of prohibiting non-banking business.
Such cases include an obvious case where contents of the additional business have adverse effects
on banking business, and less obvious cases where the additional business is much larger in scalethan the “contributing business” or the “anticipated business.”
If a non-banking advanced banking service company engage in certain business of a bank, etc.
eligible to be a subsidiary company other than its own main business, it may also engage in saidbusiness under the authorization for the non-banking advanced banking service company. On theother hand, the following two types of cases could become a loophole in the authorization system
for a bank, etc. eligible to be a subsidiary company, against the purport of regulations on the scopeof business. One type is a case where a non-banking advanced banking service company engages inbusiness of a bank, etc. eligible to be a subsidiary company without obtaining the authorization fora bank, etc. eligible to be a subsidiary company, stipulated in Article 17-5 of the Banking Act
Enforcement Regulation; and the other type is a case where a bank, etc. eligible to be a subsidiarycompany obtains the authorization for a non-banking advanced banking service company in orderto engage in non-banking business. For this reason, any such case where a non-banking advanced
banking service company engages in certain business of a bank, etc. eligible to be a subsidiarycompany other than its own main business is to be examined from the viewpoint of whether it could
become such a loophole as mentioned above.
It should be noted that even in the case where the business is not assumed to be operated at thetime of capital injection, if it is specifically assumed to be operated later, the business needs to be
examined in the same way as in the above.
On the other hand, as for the business of each non-banking advanced banking service company,
such business is, in many cases, operated by an ordinary business company that is outside of the
FSA’s jurisdiction. Besides, in examining such a company, total loss is required to be examined inaccordance with the provision (Article 17-5-2(2)(ii) of the Banking Act Enforcement Regulation).
In light of the above, it should be noted that detailed confirmation regarding the feasibility of thebusiness or risks related to the intended business, etc. is not compulsory.
(iv) Effects, etc. on the applicant bank’s business
Whether the investment amount is large or small, any case that is recognized as highly likely tohave adverse effects on the applicant bank’s business cannot obtain the authorization for the nonbanking advanced banking service company, even if contents of the non-banking advanced banking
service company can be said to be “contributing business” or “anticipated business” in terms ofcontribution to the advancement of banking business, the enhancement of users’ convenience, or
the regional development, etc. (Such cases include a case where the non-banking advanced banking
service company’s compliance risk and/or reputational risk could have a contagion effect on theapplicant bank, causing an obstacle to the bank’s inherent business operations or even on the bank393

group, causing serious damage.)(v) Applicant bank’s business management of its non-banking advanced banking service company as amember of its group
In accordance with Article 16-3 of the Banking Act, each bank is required to perform business
management of the bank group, and each applicant bank must continue to be recognized as having
no significant risk of getting in trouble of maintaining its sound and proper business operation after
acquiring or holding voting rights in its non-banking advanced banking service company in excessof the maximum threshold for voting rights pursuant to the examination criteria for theauthorization. In light of these requirements, the regulator should pay close attention to checking
whether each applicant bank needs to change its control environments after acquiring, etc. voting
rights in its non-banking advanced banking service company in excess of the maximum thresholdfor voting rights, such as intending to add a new framework to the applicant bank group’s overallmanagement frameworks or risk management frameworks as a response measure to have the nonbanking advanced banking service company in the applicant bank group.
(3) Management after the investment
In the case where a bank invests in a non-banking advanced banking service company after obtaining
the authorization for the non-banking advanced banking service company, and if the number of its holding
shares exceeds the voting right holding threshold, then the bank has to properly monitor businessconditions and other relevant situations of the non-banking advanced banking service company.
Especially, if the non-banking advanced banking service company’s business or its operations are expected
to expand, the bank also needs to properly manage the related risks and the conceivable effects on thebank group.
In some cases, for example, in a case where an advanced banking service company had engaged in“contributing business” at the time of the authorization but contents of the business substantially changed
after the investment, and in another case where certain business regarded as “anticipated business” at thetime of the authorization can no longer be deemed as “anticipated” after the investment, then the bankneeds to take proper measures, such as dissolving the investment in excess of the voting right holding
threshold.
V-3-3-5

Scope of Business of Any Japanese Bank’s Overseas Subsidiary Companies, etc.

(1) With regard to the scope of business of any bank’s overseas subsidiary companies, etc., the FSA also applies
similar key principles as those applied to the scope of business of such domestic subsidiary companies, etc.,
and pays close attention to ensure that such overseas subsidiary companies, etc. should not engage in any
business other than the business in which companies eligible for subsidiary companies may engage.
(Note)

This does not apply to the case where a bank needs to enforce its security rights to collect its
overseas credited loans but the sale of the relevant collateral assets is extremely difficult due to394the local market conditions and there is no other proper disposition method under the local
legal system. In this case, the bank may establish a management subsidiary company to have ithold and manage the unsellable collateral assets.
With regard to business engaged in by any foreign company which engages in banking
business (hereinafter referred to as a “bank incorporated abroad”), in light of the purport ofthe Basel Concordat (the formal name “Principles for the supervision of banks' foreign
establishments” (Basel Committee original publication in 1975), revised publication in 1983),
the FSA will in principle permit what the local supervisory authority permits, unless it violates
the purport of the Banking Act.
(2) When certain business engaged in by any bank’s overseas subsidiary company (except for any bankincorporated abroad) satisfies all of the following conditions, the business may, unless otherwise provided
for by law, be accepted as being within the scope of business of companies eligible for subsidiary companies,
unless it violates the purport of the Banking Act: the overseas subsidiary company had actually engaged incertain business other than the business that could be engaged in by companies eligible for subsidiarycompanies when the Banking Act on Financial System Reform was put in force; there is no problem withsuch engagement under the local legal system; and the notification stipulated in Article 104 of the
Supplementary Provisions of the Banking Act on the Financial System Reform was made about thebusiness whose abolishment within a year might cause a serious trouble. However, the FSA pays close
attention to whether necessary measures have been taken so that the review on the business can be
conducted as promptly as possible.
(3) Among subsidiary corporations and affiliated corporations that have been reported as “foreign investee
corporations” (including companies that were established by the foreign investee corporations to havethem engage in business of said corporations and other companies that engage in similar business as these,
but excluding subsidiary companies as mentioned in the above (2)), the handling of the subsidiarycorporations and affiliated corporations that had actually engaged in certain business other than thebusiness that could be engaged in by companies eligible for subsidiary companies when the Banking Act
on Financial System Reform was put in force should conform to the handling as described in the above V3-3-1.
(Note)A foreign investee corporation is defined as a foreign corporation in which a Japanese bankinvests in the accompanied form of management control or management participation.
Management control refers to the case where a bank effectively owns a majority of the voting
rights at a foreign corporation (including shares with voting rights or subscribed capital nominallyowned by officials of the financial institution but counted as the bank’s own holding by the bank).
(The case includes a case where the bank and the foreign corporation substantially own a majorityof the voting rights at another foreign corporation or another case where the foreign corporation
substantially owns a majority of the voting rights at another foreign corporation.)

395

Management participation refers to the case where a bank substantially owns up to 50% of thevoting rights at a foreign corporation and can have a substantial influence on the foreign
corporation’s financial and marketing policies through their relations in several areas, such as
personnel affairs, funding, and transactions.
For reference, a case where another investor substantially owns a majority of the voting rights at
the foreign corporation does not in principle fall under “the case where the bank can have asubstantial influence.”(4) When a bank files the application for authorization pursuant to Article 16(4) of the Banking Act(including Article 16(7) of the same Act being applied mutatis mutandis; the same applies in this (4))
in order to make a foreign company eligible to be a subsidiary company stipulated in Article 16-2(6)(i)of the Banking Act or a foreign specified finance-related services company stipulated in the same
Article 16-2(6)(i) (hereinafter referred to as the “foreign company eligible to be a subsidiary company
or the like”) one of its subsidiary companies, the bank needs to clearly describe the following mattersin application forms for the authorization including the statement of reasons.
(i)Whether or not the foreign company eligible to be a subsidiary company or the like has any
subsidiary company other than companies eligible to be subsidiary companies(ii) If any company described in (i) has been made a subsidiary company, the company’s content ofbusiness as well as its recent assets and profit-and-loss situations(iii) Details of the relevant planned measures within ten years after the date when a company
described in (i) was made the subsidiary company
Specifically, one of the plausible ways to implement the relevant measures will be to receive
the authorization, etc. necessary to make the company eligible to be a subsidiary company oneof the applicant bank’s subsidiary companies after taking measures to make the subsidiarycompany a company eligible to be a subsidiary company such as (a) receiving the approval
stipulated in Article 16-2(8) of the Banking Act; (b) making the subsidiary not eligible to be a
subsidiary company by selling the relevant voting rights or the company’s liquidation, etc.; or(c) discontinuing or transferring certain business operations, among the company’s business,that are not allowed for any company eligible to be a subsidiary company to operate.
Note that there are cases where the abovementioned authorization pursuant to Article 16-2(4) will
not be given. Such cases include a case that might negatively affect the bank’s financial soundness, acase where content of business of the company other than companies eligible to be subsidiarycompanies impairs the public order or good manners, which might ruin the social credibility of theforeign company eligible to be a subsidiary company or the like, a case where it could become aloophole in the regulation on the scope of business, such as a company other than the company
eligible to be a subsidiary company engaging in certain business that is not allowed for any company
eligible to be a subsidiary company to operate in Japan, and a case where the regulator cannot confirm

396

that the foreign company eligible to be a subsidiary company or the like is capable of accurately andfairly managing their subsidiary companies so that it can ensure the appropriateness of the businessengaged in by the company other than companies eligible for subsidiary companies.
The provision of Article 16-2(6)(i) of the Banking Act, which describes the requirement for foreign
specified finance-related services companies to meet, include the term “mainly.” In this context, theregulator will make a judgement as to whether or not the requirement is fulfilled based on whether
or not 50% or more of the company’s total income comes from the business stipulated in Article 174-4 of the Banking Act Enforcement Regulation (leasing business, lending business, etc.). Note thatin the case where necessary environments to maintain the said requirement cannot be confirmed, theauthorization pursuant to Article 16-2(4) will not be given.
* The above handling applies mutatis mutandis to the case where a bank holding company files theapplication for authorization pursuant to Article 52-23(3) of the Banking Act (including Article
52-23(6) being applied mutatis mutandis) in order to make any of foreign companies eligible to bea subsidiary company set forth in Article 52-23(5)(i) or any of foreign specified finance-related
services companies stipulated in the same Article 52-23(5)(i) one of its subsidiary companies.
(5) The purport of Article 16-2(6) of the Banking Act is to allow a bank to make a foreign company
eligible to be a subsidiary company or the like one of its subsidiary companies for ten years, regardlessof regulations on the scope of business of subsidiary companies, when the bank makes a company
other than any company eligible to be a subsidiary company one of its subsidiary companies by making
the foreign company eligible to be a subsidiary company or the like one of its subsidiary companies,
from the viewpoint of enabling a bank or a bank group that aims to enhance its international
competitiveness to make a flexible acquisition so that the bank or the bank group will not be
unreasonably forced to separate or liquidate the relevant foreign company or such foreign company
group that has locally created the added value together with the bank or the bank group.
In addition, the provision of Article 16-2(8) of the Banking Act allows a bank to have a foreigncompany other than companies eligible to be subsidiary companies as one of its subsidiary companies
permanently after obtaining approval from the Commissioner of the FSA. The purport of this issimilar to that mentioned above (the approval based on the same Article 16-2(8) is hereinafterreferred to as the “permanent approval.”)In the course of permanent approval pursuant to Article 16-2 (9) of the Banking Act, the FSA will
examine whether it is necessary for an applicant bank to continue to hold a foreign company eligible
to be a subsidiary company or the like, which is actually a subsidiary company of the bank, in light ofthe subsidiary company’s competitiveness and other circumstances. For example, conceivable points
to be examined include the following:(i)Content of business performed by any foreign company other than companies to be eligible tobe subsidiary companies and the relevant risks397

(ii) Reasons why the business mentioned in the above (i) is necessary for the local group, such as
business of any foreign company eligible to be a subsidiary company in the local group orsynergy with the finance-related services operated by any foreign specified finance-related
services company and the consistency with the local authority’s request and administrative
guidance(iii) Local practices and how local competitors handle the business mentioned in the above (i)Note that circumstances to be taken into account are not necessarily limited to the above (i)through (iii).
(6) In the case where a bank does not receive the permanent approval, the bank needs to take required
action within 10-year grace period for any foreign company other than companies to be eligible to be
subsidiary companies. Meanwhile, when there are some circumstances listed in each item of Article
16-2(10) of the Banking Act, the Commissioner of the FSA may extend the grace period by one year
or may extend the period again. In this case, conceivable examples of “a compelling reason” in each
item of Article 16-2(10) include the following reasons:(i)Related to Article 16-2(6)(i)(A) The bank started negotiations and other activities to sell its holding shares of thecompany other than companies eligible to be subsidiary companies, but the schedule has
been delayed mainly due to the local economic conditions and more time-consuming
negotiations with a potential buyer or buyers than initially expected.
(B) The liquidation procedure for the company other than companies eligible for subsidiarycompanies has made little progress for local legal reasons.

(ii) Related to Article 16-2(6)(ii)
In light of characteristics of the local financial market, it is essential to continuously own thecompany other than companies eligible to be subsidiary companies as a subsidiary company,
and any business entrustment to a third party with no capital ties will not enable the bank toachieve the target.
When filing the approval pursuant to Article 16(10), each time of such filing, an applicant bankneeds to specifically describe, in the application form, the existence of compelling reasons at the timeof filing the application, and its policies to hold the voting rights at the company other than companies
eligible to be subsidiary companies (such as measures under consideration to remove the compelling
reasons within one year).
* The above handling applies mutatis mutandis to Article 52-23(7) through (9) of the Banking Act.
(7) Notwithstanding the above V-3-3-5(1), owning a foreign company eligible to be a subsidiary company
or the like as a subsidiary company enables any bank to make a foreign company other than companies
eligible to be subsidiary companies one of its subsidiary corporations (excluding subsidiary398

companies; the same applies here in this (7)) or one of its affiliated corporations. In this case, in lightof the purport of regulations on the scope of business of subsidiary companies, the bank should takemeasures that conform to the outline mentioned in the above (4).
The same applies to the case where a bank makes a foreign company other than companies eligible
for subsidiary companies one of its subsidiary corporations or one of its affiliated corporations byowning a foreign company eligible to be a subsidiary company or the like (excluding a special holding
company) as a subsidiary corporation or an affiliate corporation.
* The handling of any bank holding company’s subsidiary companies, etc. (excluding subsidiarycompanies) conforms to the abovementioned handling.
V-3-3-6

Relations between Banks and Their Securities Subsidiary Companies, etc.

(1) With regard to banks’ conduct with financial instrument business operators having capital ties, thefollowing points should be noted, in light of the purport of the existing measures to prevent adverse effects
between banks and their securities subsidiary companies under the Financial Instruments and ExchangeAct, and also in light of the purport of “to take measures in order to secure sound and appropriate
performance of business of the bank, etc. eligible to be a subsidiary company” stated in Article 17-5(2)(v)of the Banking Act Enforcement Regulation (examination criteria for the authorization to make the bank,etc. eligible to be a subsidiary company actually one of its subsidiary companies).
・ In relations between a bank and the ﬁnancial instrument business operator mentioned above(referring to a financial instrument business operator in a case where the bank is the parent bank, etc.
(stipulated in Article 31-4(3) of the Financial Instruments and Exchange Act) of the financial
instrument business operator or another case where the bank is the subsidiary bank, etc. (stipulated in
Article 31-4(4) of the Financial Instruments and Exchange Act); hereinafter, “related financial
instrument business operator”), whether the bank has avoided getting involved in any conductprohibited by the provisions of Article 44-3 of the Financial Instruments and Exchange Act.
(2) When a bank, etc. conducts acts in relation to affiliated financial instruments business operators stipulated
under Article 153(1)(vii) of the Cabinet Office Order on Financial Instruments Business, etc. concerning
the management of legal compliance, management of risks of loss, internal audits and inspections,financial affairs, accounting affairs, tax affairs, business administration of subsidiary juridical person, etc.,
or affairs related to sales and purchase of securities, settlement of derivatives and other transactions(referred to as “internal control operations” in this section), the bank, which is a registered financial
institution, and the affiliated financial instruments business operator should specify the information
management system in the business operation manual, such as the appropriate implementation of
measures to prevent leak of non-disclosure information from divisions engaging in internal control
operations. The integration of internal control operation not only enables enhancement and efficiency

399

improvement of the execution of the operation, but may also generate risks that may impede sound andappropriate management. The risks, for example, are that the range and the location of responsibilities forthe integrated internal control operation between the bank and the affiliated financial instruments
business operator, would be unclear, and that the substantial internal control function of the bank, etc.
would not work, when the person in charge of internal control at the bank, etc. neglects the execution of
the management and supervision of internal control and does not execute them by itself. Due to thesereasons, and from the viewpoint of supervision of banks, the FSA will pay special attention to the following
points:(i)

Regarding the integrated internal control operations, whether the office regulations and organization
regulations specify the distribution of authority and responsibility between the bank, etc. and theaffiliated financial instruments business operator, and whether they specify the range of authority andresponsibility of the director, etc. in charge of the internal control operations and the range of theofficers engaged in the business operation at the bank, etc. including officers concurrently engaged in
the business operation of the affiliated financial instruments business operator, to prevent the bank,etc. from neglecting the execution of the substantial management and supervision of internal control
and does not execute them by itself. In the case of a foreign bank branch, the director in charge of theinternal control operations means the branch manager, deputy branch manager, the head of the
management division or other officers, suited to take responsibility, hereinafter referred to as “director,
etc. in charge.”(ii) Regarding the organization and personnel structure to enable a bank, etc. to fulfill the responsibility
for managing internal control operations, whether management systems as described below have beendeveloped:(A) Whether the director, etc. in charge accurately recognizes the status of business operations andhas the responsibility and authority to ensure appropriate execution of the business operations.
And whether the director, etc. in charge has the responsibility and authority to make appropriate
reports and explanations to the board of directors, etc. including a superior in the line of duty at
the head office and the officer in charge of the internal control operations in the case of a foreignbank branch; hereinafter referred to as the “board of directors, etc.” and to supervisory
authorities.
(B) When there is a possibility that the check-and-balance function by the director, etc. in charge ofthe sales division will fail to work, whether measures to ensure the effectiveness of the checkand-balance function have been taken. For example, when the manager of a foreign bank branch
is concurrently engaged in an executive post at a particular sales division or is virtually engaged
in the operations of the division, whether an officer in charge of supervising the administrative
operations other than the branch manager has been appointed independently from the sales
division, and whether there is a system for the officer to directly report to the board of directors,
etc. in addition to reporting to the branch manager.
(C) When the bank, etc., has opted to establish a consultation body between an affiliated financial

400

instruments business operator for the purpose of ensuring the effectiveness of the check-andbalance function, the FSA shall pay special attention to the following points: Whether the dutiesof the director, etc. in charge regarding the decision-making process of the consultation bodyand the involvement of the bank, etc. therein have not lost substance and whether theeffectiveness of the check-and-balance function has not been undermined, through the use of
the consultation body for the purpose of promoting sales activity. For example, to prevent this,whether the purpose of the consultation body and the procedures regarding the body, including
the method for decision-making and the compilation of minutes of meetings and the authorities
and responsibilities of each member have been clarified.
(iii) When necessary for the purpose of supervision, the FSA shall require the bank, etc. to submit reports
and materials regarding the following points under Article 24(1) or Article 52-31(1) of the Banking
Act. When necessary, the FSA shall also require the financial instruments business operator which is a
subsidiary of the bank, etc. to submit reports (excluding the affiliated financial institution related to aforeign bank branch; however, it should be noted that regarding the financial instruments business
operator that has special relationship with a foreign bank pertaining to the foreign bank branch,specified in Article 14 of the Enforcement Ordinance, the FSA can require the foreign bank branch tosubmit reports under Article 48 of the Banking Act).
(A) Policy and procedures regarding the implementation of internal control operations(B) The division of the authorities and administrative work of the officer engaged in internal
control operations, such as the director, etc. in charge(C) The status of development of various other rules(D) The state of the personnel and organizations engaged in the implementation of internal
control operations(Note)“Bank, etc.” refers to ordinary banks, foreign bank branches and bank holding companies.

(3) Prevention of the abuse of superior bargaining position related to easing of the firewall regulation between
banking and securities businesses(i)Background
The regulation of information transfer between banking and securities businesses stipulated in
Article 153(1)(vii) of the Cabinet Office Order on Financial Instruments Business, etc. (so-called
the firewall regulation between banking and securities businesses) is mainly designed to prohibit
the sharing of non-public customer information from the viewpoint of ensuring prevention of theabuse of a superior bargaining position, prevention of conflicts-of-interest transactions, and proper
protection of customer information, etc. The firewall regulation between banking and securities
businesses was introduced in 1993 when the mutual market entry by banks and securities companies
was allowed for the first time in Japan. Since then, it has been repeatedly reviewed. In 2022, fromthe viewpoints of further activating the Japanese capital market, the necessity to provide customers
with more advanced financial services, strengthening the international competitiveness, and401

enhancing the convenience for customers, etc., the regulation was eased in some ways, such that, insharing non-public information, etc. regarding certain corporations such as listed companies,
consent of these corporations has become no longer necessary. (In this regard, however, if any ofsuch corporations requests the suspension of sharing, the request needs to be responded.)On the other hand, some people point out that such easing of the regulation might increase
improper acts that could lead to the abuse of a superior bargaining position (Note). Accordingly, it
is important to ensure effective prevention frameworks suitable for the business details,characteristics, and scale, etc. of each bank and its group companies while paying close attention tosuch improper acts.
(Reference)“Second Report by the Working Group on Capital Market Regulations – To

Create an

Attractive Capital Market toward the Post-COVID Era”of the Financial

System Council (June 18, 2021)(Note)In the context of the alignment between banking and securities businesses, conceivable
examples of the abuse of a superior bargaining position or improper acts that could leadto such abuse include the following, but are not limited to them. It should be noted suchabuse or such acts may vary, depending on the actual state of each bank’s business model,
business categories of other financial institutions within a group to which the bankbelongs, and so on.

・ A case where regardless of verbally or in writing or irrespective of whether
expressed or implied, some officers or employees of the bank request customers tomake transactions with the bank group’s securities company by implicatingotherwise disadvantageous treatment, such as referring to a possible effect on theirloan transactions unless they use the group’s securities company or increase theshare of the group’s securities company in financial transactions such as
underwriting securities.
(ii) Viewpoints
As for the abuse of a superior bargaining position over customers, whether the bank and its groupcompanies have put in place effective prevention frameworks suitable for the business content,
characteristic, and scale, etc. of the bank and its group companies, for example, in terms of thefollowing, in addition to III-3-3-1-2(7):(A) Whether the management of the bank recognizes the importance of preventing the abuse of asuperior bargaining position and taking the initiative of putting it into practice in good faithby cooperating with other financial institutions within the group (including the bank holding
company), etc. Among issues where a superior bargaining position is suspected of being
improperly used, whether managerially important issues, such as cases that may have asignificant impact on customers, are systematically reported to the management of thebank timely and properly, and the management properly gets involved in creating
frameworks to prevent the abuse of the superior bargaining position.

402

(B) Whether or not the bank’s performance evaluation of officers and employees gives any
incentive that induces the abuse of a superior bargaining position. In addition, whether thebank’s earning structure tends to induce the abuse of a superior bargaining position, andwhether the profitability management of its banking business significantly lacks the rationality,
such as frequent transactions of loans by setting lending interest rates so low for somecustomers, with such rates being unfeasible without the assumption that these customers makeor will make transactions with the bank group’s securities company.
(C) Whether the bank evaluates the risk of abusing its superior bargaining position over eachtransaction counterpart and each transaction form based on the scale, credit status, and degreeof transaction reliance on the bank of each transaction counterpart, as well as in light of thebusiness content and market positioning of the bank and its group companies. Moreover, in
response to this risk, whether the bank has clarified its procedures and compliance matters toeffectively prevent the abuse of a superior bargaining position. Such procedures andcompliance matters may vary, depending on the business content and the actual transactions
with customers, but, for example, the following action can be taken:

・When the bank provides customers with information about financial products or services
to be provided by its group’s securities company, the bank clearly explains in advance that,even if customers do not make any transaction with the group’s securities company, theirtransactions with the bank will not be affected.

・The bank properly prepares and keeps records of reception and dialogue with each customer,
which will enable ex-post verification concerning the abuse of a superior bargaining
position.
(D) Whether the bank has thoroughly disseminated the matters mentioned in (C) above to all its
officers and employees by providing the relevant training and education programs.
(E) Whether the bank has established a system in which check-and-balance functions can be
fully exercised by means such as separating the relevant department that is responsible fortaking measures to prevent the abuse of a superior bargaining position from the sales
department. In terms of the verification as to whether the procedures and compliancematters mentioned in (C) above are properly complied with, whether the relevant
department properly gets involved in and manages them, depending on the degree ofimportance of these issues.
(F) As for the procedures and matters mentioned above, whether the bank’s internal audit
department is well prepared. In addition, whether the group-based integrated control,
such as cooperation among audits of the bank group’s companies, is exercised.
(iii) Supervisory Methods and Measures
The FSA will analyze not only financial services users’ voices collected through various channels,
such as information received at the information gathering contact for preventing the abuse of asuperior bargaining position, and results of hearing from borrowing companies, but also external403

information including media reporting, and inquiries from the outside, and will carry out focusedmonitoring. Based on these monitoring and examination results as well as filing of misconduct
notifications, etc., when any problem related to the abuse of a superior bargaining position isrecognized, the FSA will, as needed, ask the bank to make a report pursuant to Article 24 of the
Banking Act, and when any serious problem is recognized, the FSA will issue a business
improvement order based on Article 26 of the Banking Act. Other similar measures will also betaken, when necessary.
Meanwhile, based on Article 153(1)(x) of the Cabinet Office Order on Financial Instruments
Business, etc., each securities company is also prohibited from improperly using the superiorbargaining position of its parent bank or subsidiary bank in order to conclude or solicitate any
financial instruments transaction contract. Since this purport is the same as in Article 14-11-3(3) of
the Banking Act Enforcement Regulation, it should be noted that the regulator needs to fully
cooperate with the Securities Business Division and the Securities and Exchange SurveillanceCommission in order to conduct the examination and supervisory activities with the same focus andviewpoints . The FSA will also exchange opinions regularly with the Fair Trade Commission inlight of prohibition of the abuse of a superior bargaining position stipulated in the AntiMonopoly Law.
V-3-3-7

Relationship between Financial Institutions, etc. and Their Affiliated Insurance Companies

With regard to financial institutions’ conduct with insurance companies having capital relationships, etc., thefollowing points should be noted, in light of the purport of establishing preventive measures against adverse
effects between financial institutions, etc. and insurance companies under the Enforcement Regulation of the
Insurance Business Act, etc., in cases where financial institutions (including each financial institution set forthin the items of Article 53-4(3) of the Enforcement Regulation of the Insurance Business Act and a bank holding
company; the same applies hereinafter) are identified as “Specified Related Party” stipulated in Article 100-3 ofthe Insurance Business Act or Article 53-4(2) of the Enforcement Regulation of the same Act or “Specially
Related Party” stipulated in Article 194 of the same Act.
(1) In relationships between a financial institution and its related insurance company (referring to theinsurance company when the financial institution is identified as the Specified Related Party stipulated in
Article 53-4(2) of the Enforcement Regulation of the Insurance Business Act), whether the financial
institution has not been involved in any conduct that runs counter to any of the measures to be taken as
stipulated in Article 53-4 and Article 53-6 of the Enforcement Regulation of the Insurance Business Act
on the basis of Article 100-2 of the Insurance Business Act.
(2) In relationships between a financial institution and its related insurance company (referring to theinsurance company when the financial institution is identified as the Specified Related Party stipulated in404Article 100-3 of the Insurance Business Act and the Specially Related Party stipulated in Article 194 of thesame Act; the same applies hereinafter) as well as insurance agents, etc. belonging to the related insurancecompany, whether the financial institution has not been getting involved in any conduct prohibited by theprovisions of Article 300 of the same Act.
(Note)

Insurance agents, etc. belonging to the related insurance company refer to officers of therelated insurance company, life insurance agents belonging to the related insurance company,
non-life insurance agents belonging to the related insurance company, or insurance brokers or
their officers or employees.

V-3-3-8

Other Matters to Note Regarding Subsidiary Companies, etc.

(1) Whether the bank has a clear management strategy to produce a synergy effect as the entire group.
Also, whether the organizational structure of its subsidiary companies, etc. does not have redundantor unnecessary elements due to the backgrounds of their mergers, etc.
(2) Whether financial soundness is ensured in the financial-related subsidiary companies, such as a credit
card company and a housing loan guarantee subsidiary company.
(3) Whether subsidiary companies engaging in dependent business such as a clerical work contractor anda temporary staffing company aim to enhance the cost competitiveness of the entire group.
(4) Whether financial soundness is ensured in the bank’s affiliated or so-called “close relationship” real
property management company.
V-3-4

Restrictions on the Acquisition of Voting Rights(1) The following points should be noted in giving approval pursuant to the proviso of Article 16-4(2) or theproviso of Article 52-24(2) of the Banking Act.
For risk management concerning holding shares, refer to III-2-3-2-1-2 (7).
(i)

When a bank files the application pursuant to Article 17-7(1) or Article 34-21(1) of the Banking Act
Enforcement Regulation, the FSA will examine whether the bank has any compelling reasons for theinability to dispose its holding shares in excess of the voting right holding threshold within the period.
Conceivable “compelling reasons” are, for example, as follows:(A) In order to support the reconstruction of a certain company which is going through a business
revitalization as well as the company’s stable business operations, it is necessary to hold thevoting rights during the period of the revitalization plan.
(B) In the case where the bank acquired the voting rights in accordance with the business
revitalization plan, it is difficult to dispose by selling the shares in question partly because the405company will not pay dividends until the completion of all procedures under the plan.
(C) Since the bank found undisclosed material facts about the company, the selling of its voting
rights may infringe the provisions concerning insider trading in Article 166 of the Financial
Instruments and Exchange Act, which makes it difficult to dispose by selling the shares inquestion.
(ii) In the following cases, it should be noted that “promptly dispose” of voting rights in excess of thevoting rights holding threshold as the condition of approval stipulated in Article 16-4(3) or Article
52-24(3) of the Banking Act aims to mean “promptly dispose of voting rights at least aftertermination of the plan (*) for the company’s business improvement.”(A) DES (debt equity swap), in cases where the voting rights were acquired in accordance with
Article 17-6(1)(iii) or Article 34-20(1)(iii) of the Banking Act Enforcement Regulation.
(B) In cases where the voting rights at a company stipulated in Article 16-2(1)(xiii) or Article 5223(1)(xii) of the Banking Act (a company going through a so-called business revitalization)
will be held beyond the period stipulated in each item of Article 17-2(13) of the Banking Act
Enforcement Regulation (three years (in principle) or ten years (for small and medium-sizedenterprises)) due to a compelling reason where it is extremely difficult to transfer such voting
rights and they cannot be disposed of.
(Note)”Termination of the plan” refers to the case where the plan period expired; the case where
the plan was achieved earlier than initially planned; the case where the company wentbankrupt or de-facto bankrupt; and the case where the plan was reviewed.

(2) Other matters of attention(i)

It should be noted that the voting rights that the financial instruments business operator which is abank’s subsidiary exercises or instructs another relevant party to exercise on behalf of its customers
based on the respective discretionary investment contracts are not included in the voting rights thatany bank’s subsidiary company acquires or holds as stipulated in Article 16-4 of the Banking Act.

(ii) New business activities conducted by “companies specified by a Cabinet Office Ordinance as those
exploring new business fields” (so-called venture business companies) stipulated in Article 162(1)(xii) or Article 52-23(1)(xi) of the Banking Act refer to development or production of new goods,
development or provision of new services, introduction of a new method of producing or selling
goods, introduction of a new method of providing services, R&Ｄ on technology and the use of
relevant achievements, other new business activities, all of which enable the exploration of new
business fields. Therefore, the eligible business types are not confined to start-up businesses on thepremise of R&D but also include service and other types of business. In assessing the adequacy,
while the region-specific and business type-specific factors will be taken into account, it should be
noted that introduction of technology or methods that have already been prevailing to quite a degree
are not included.

406

(iii) It should be noted that it is permitted to hold voting rights of companies stipulated in each item of
Article 17-2(6) of the Banking Act Enforcement Regulation in excess of the voting right holding
threshold as a company exempted from the restrictions on acquisition of voting rights pursuant to
Article 16-4(7) or Article 52-24(7) of the Banking Act only if such acquisition is based on the capitalprocurement plan incorporated in the company’s business revitalization plan.
(iv) In making a judgement as to whether the company falls under the “company” in Article 17-2(6)(ix)
of the Banking Act Enforcement Regulation, it should be noted that a company that is not yet in thestage where deterioration of its financial conditions has come to the surface may be eligible.
V-4
V-4-1

Major Shareholders of Banks
Purpose, Significance, and Supervisory Viewpoints

In order to ensure sound management of the bank, notification and authorization systems, etc. for major
shareholders have been established based on the concept that it is necessary for developing an appropriate checkmechanism by the public administration for corporate and individual shareholders that intend to become
involved in bank management by acquiring a considerable portion of voting rights of a bank both at the time ofand after such acquisition.
Additionally, in order to block the risks for the bank to be affected by its major shareholder’s business conditions,while large exposure regulation and the arm’s length rule, etc. have been basically applied to the bank’s transactions
such as lending to its major shareholders, additional measures have been implemented, including theestablishment of adequate quantitative regulation on credit provision to its major shareholders, with the objectiveof preventing potential negative effects of “institutionalization of a bank” that might result from an undue influenceexerted by its major shareholder.
In the case where a major shareholder holds more than 50% of a bank’s outstanding shares, as theshareholder alone has controlling power over the bank, it is assumed that such major shareholder, broadly
similar to a bank holding company, will be expected to support the bank when the bank’s business becomesworse.
Note that these major shareholder systems have a common concept with consolidated-base supervision
for preventing contagion effects where risk within a bank group spreads to the bank, and that the systemdesign is similar to that for bank holding companies.
(Reference) ”Development of rules concerning major shareholders in banking business, etc. as well as new
business models and relaxation of regulations, etc.” (The First Subcommittee reporting, theFinancial System Council, December 21, 2000)
V-4-2

Supervisory Methods and Measures

For measures at the time of and after the acquisition of a considerable portion of voting rights at a bank,407

refer to VII.
V-5

Development of Systems to Protect Customers’ Interests

V-5-1

Purpose and SignificanceAs financial institutions are providing more diversified services and forming more internationalizedgroups across business categories, there is an increased risk that conflicts of interest may occur in a financial
institution or financial group owing to the existence of competing and opposing interests. In light of sucha situation, each bank is required to manage transactions that might cause conflicts of interest, depending
on its business content, characteristics, and size, etc. of the bank and the group companies so as not toimproperly harm customers’ interests.
In this context, based on Article 13-3-2(1) of the Banking Act, it is important for each bank to develop
appropriate frameworks to manage the conflict of interests in the bank and its subsidiary financial
institutions.
Adverse effects from conflicts of interest may occur not only between a bank and a securities company,
but also between divisions within a bank (or bank group) or among a parent company, subsidiarycompanies, sister companies, and affiliated companies within a single financial group. Therefore, it isdesirable for each bank to manage all business operations within its financial group while paying close
attention to the potential risk of conflict. In light of the fact that sharing non-public information is allowed
between a company and its parent corporation or subsidiary corporation under certain conditions such as
establishment of an information management system, the importance of managing conflicts of interest
should be recognized now more than ever, and a proper business management framework needs to beconstructed.
Accordingly, for a financial group that engages in a broader range of business operations, it is necessary
to conduct internal control with discipline based on self-responsibility in order to prevent adverse effects
from conflicts of interest not only between its bank and its securities company but also within the group. It
should be noted that rules for managing conflicts of interest will effectively work if financial institutions
construct proper business management and compliance frameworks through their voluntary efforts.
In developing a control environment for managing conflict-of-interest transactions, it is necessary not
only to take into account business contents engaged in by its group companies, and their size andcharacteristics, but also to consider the reputational risk for the bank or the identical financial group.
Meanwhile, some of any bank’s group companies may be engaged in business that is irrelevant to thebank’s customers. In light of this likelihood, the level and depth of banks’ conflict-of-interest management
does not need to be identical. In this way, when a bank creates any difference in the level and depth of theconflict-of-interest management within its group, it should be noted that the bank is required to externallyprovide sufficient explanation.

408

V-5-2Major Supervisory Viewpoints(1) Identification of potential conflict-of-interest transactions(i)

Whether the bank has identified and categorized potential conflict-of-interest transactions (seeNote below) under its department in charge of managing and controlling conflict of interests(hereinafter referred to as the “conflict-of-interest management and control division”), and also
whether the bank has established a control environment that enables continuous reviews.
(Note)

Since the firewall regulation between banking and securities businesses was eased in
2022, the conflict of interests needs to be properly and strictly managed, and it should
be noted that specific examples of “potential conflict-of-interest transactions” are to beappropriately identified, depending on the actual state of each bank’s business model aswell as the business categories, etc. of other financial institutions (including its bankholding company) in the group to which each bank belongs. In addition, with reference
to “IV-1-3 Development of Conflict-of-Interest Management Systems (2)(i)”
described in the “Comprehensive Guideline for Supervision of Financial Instruments
Business Operators,” the regulator should pay close attention to consistently
handling the relevant issues with potential conflict-of-interest transactions that are
identified and categorized in the securities company in each financial group.

(ii) Whether the process of identifying any conflicts of interest reflects the business contents, size,and characteristics of the bank and its group companies.
Additionally, whether such identified potential conflict-of-interest transactions canappropriately cope with new business activities as well as changes in laws andregulations/business practices.
(2) Methods of conflict-of-interest management(i)

As for potential conflict-of-interest transactions, whether the bank has established a frameworkso that it can appropriately identify such transactions before they are carried out. In addition,
whether the bank has established the framework so that it can select or combine the following
management methods as examples, depending on characteristics of the transactions. In
selecting these management methods, whether the bank has put into place the framework sothat it can select appropriate management methods, such as making it mandatory to receive theconfirmation of the conflict-of-interest management and control division.
(A) Separation of divisions (restrictions on internal information-sharing)
To implement the restrictions on internal information-sharing, whether the bank hastaken proper information-blocking measures based on the business content and actual
situation among divisions where conflicts of interest might occur, including the creationof the Chinese Wall (see III-3-3-3-2(3)(i)).
(B) Changes in transaction conditions or methods, or cancellation of a transaction by one409

partyIn the process of changing transaction conditions or methods, or canceling a transaction
by one party, whether the authority and responsibility to make a decision on the issue areclearly defined, including in the case where an officer or officers of the parent financial
institution or the subsidiary financial institution get(s) involved in making such a decision.
(C) Disclosing the fact of a conflict of interest to customers
When disclosing the fact of a conflict of interest to customers, whether the bank has
established a control environment to ensure fair treatment for customers, such as
disclosing details of the conflict of interest and reasons to have selected a certain
disclosure method (including reasons not to have selected other management methods),
for example, in writing and receive the consent of customers clearly and fairly before theconclusion of contracts relating to the transactions. In addition, whether the level of
disclosure content is sufficiently suitable for the customer attributes.
(D) Monitoring people who share information
When implementing the management method of monitoring people who share
information, whether an independent division or the like appropriately monitors thesepeople’s respective transactions.
(ii) When the bank or any of its subsidiary financial institutions, etc. enters into a new transaction,
whether the bank has established a framework so that it can make necessary confirmation as towhether or not there is any transaction that will cause a conflict of interest with the newtransaction, while having the conflict-of-interest management and control division get involved.
(iii) Whether the bank has established a framework to regularly examine its conflict-of-interest
management methods from the viewpoint of ensuring their effectiveness. In addition, whether
the bank properly prepares and keeps relevant records, which will enable ex post verification as
to whether potential conflict-of-interest transactions are accurately identified, and whether conflictof-interest management methods are appropriately selected and implemented.
(3) Control environment, etc. for managing conflicts of interest(i)Whether the management of the bank and that of its subsidiary financial institutions, etc. recognize
the importance of conflict-of-interest management and take the initiative of putting it into practicein good faith by cooperating with other financial institutions (including the bank holding company),
etc. within its financial group. Regarding managerially important issues, such as cases that may
have a significant impact on customers, whether the management appropriately gets involvedin making decisions about response measures, such as selecting appropriate conflict-of-interest
management methods.

(ii) Whether business management procedures based on the conflict-of-interest management policy(which refers to the policy stipulated in Article 14-11-3-3(1)(iii) of the Banking Act
Enforcement Regulation; the same applies hereinafter) have been clarified in writing, etc.

410

(including internal rules). Also, whether the bank has thoroughly familiarized officers andemployees of the bank and those of subsidiary financial institutions with conflict-of-interest
management mainly through training and education about its conflict-of-interest management
policy and the said procedures..
(iii) Whether the bank has established an appropriate environment for identifying and managing
potential conflict-of-interest transactions in an integrated manner, such as setting a conflict-ofinterest management and control division.
(iv) Whether the conflict-of-interest management and control division identifies potential conflictof-interest transactions, accurately implements the conflict-of-interest management, andproperly examines its effectiveness in accordance with the conflict-of-interest management
policy.
(v)

Whether the conflict-of-interest management and control division has ensured its
independence from the sales division, fully(vi) Whether the conflict-of-interest management and control division has established an
appropriate control environment for gathering necessary information regarding conflicts ofinterest, including information about transactions by the parent financial institution or by thesubsidiary financial institution.
(vii) Whether the bank has established the relevant framework for an independent internal audit
division to regularly examine the bank’s personnel structure and business operation system
relating to the conflict-of-interest management. In the case where a financial group has been
implementing its integrated conflict-of-interest management as a whole, whether the bank’s
internal audit division has been cooperating with the respective internal audit divisions of otherfinancial institutions (including its bank holding company) within the group.
(viii) In cases where the bank has overseas business bases or belongs to an internationally active
financial group, with regard to the conflict-of-interest management including identifying
potential conflict-of-interest transactions and proper control thereof, whether the bank has
established appropriate management environments of which levels are suitable for the content
and size, etc. of its business provided globally while also complying with the laws and regulations
in each country. For example, whether the bank manages its conflict of interests not only athome but also abroad through its global group-based organizational and integrated policy,
procedures, and systems, etc.
(4) Formulation of a conflict-of-interest management policy and publication of its outline(i)

Whether the conflict-of-interest management policy clearly states the types of potential conflictof-interest transactions, main examples of such transactions and a certain process to identify
such transactions, the conflict-of-interest management methods (including the content of andreason for the difference, if any, in the level and depth of the conflict-of-interest management),
the conflict-of-interest management systems and structures (including the responsibilities and411

roles of the conflict-of-interest management and control division and its independence as wellas the verification system concerning the identification of potential conflict-of-interest
transactions and the conflict-of-interest management methods), and the scope of companies
subject to the conflict-of-interest management. In this case, whether the types of potential
conflict-of-interest transactions, such transaction examples and the conflict-of-interest
management methods are described in such a way as to correspond to each other. In addition,
whether such management policy sufficiently reflects the business content engaged in by thefinancial group companies and their size.
(ii) When publishing the outline of the conflict-of-interest management policy, whether the outline
describes the types of conflict-of-interest transactions, the conflict-of-interest management
methods, the conflict-of-interest management systems and structures, and the scope ofcompanies subject to the conflict-of-interest management in an easy-to-understand way. And
whether the methods of publication (such as putting up a poster at the front of any bank officeor over-the-counter site, or posting on the website) is appropriate to sufficiently convey theoutline to customers and others.
V-5-3

Supervisory Methods and Measures

In the case where an inspection result or a misconduct notification, etc. reveals that there is a problem
with the bank’s framework for the protection of customers’ interest, the FSA asks for reporting from thebank, when necessary, based on Article 24 of the Banking Act. If the result provides evidence that there isa serious problem in terms of operational soundness and appropriateness, the FSA considers issuing abusiness improvement order based on Article 26 of the Banking Act.
In that case, if it is recognized that the bank’s internal control environment is extremely fragile, as shownby, for example, a failure to take specific measures to eliminate the adverse effects caused by conflicts ofinterest despite recognizing the occurrence of such conflicts, and it is deemed necessary to make the bankcommit to improving its internal control environment, the FSA considers issuing an order for partial
suspension of business (for a limited period of time needed for business improvement) based on Article 26of the Banking Act.
V-6
V-6-1

Points of attention on crypto-assets
Purpose and Significance

While the design and specifications of crypto-assets vary, some crypto-assets have a high risk of being
used for terrorist financing or money laundering, in light of the fact that there are crypto-assets whosetransfer records are not disclosed and whose transactions are difficult to trace. In addition, since cryptoassets generally have no assets to back up their value, it is difficult to conceive of their intrinsic value and412their prices fluctuate significantly. Therefore, it is necessary for banking groups to consider the risk ofprice fluctuations when holding crypto-assets. Furthermore, the management of crypto-assets is subject
to system risks such as system malfunction and cyber attacks.
In addition to the above, taking into account the reputational risk in the event that these risksmaterialize, the acquisition of crypto-assets by the banking group should be limited to the minimum
necessary extent, and when the acquisition, holding, or disposal of crypto-assets (including indirect
methods such as investment in funds that substantially invest in crypto-assets; hereinafter referred to as“acquisition, etc. of crypto-assets”) in the course of the business of the banking group, a sufficient
framework should be in place to ensure that there is no risk of interference with the operation of thebanking entity's own business or serious damage to the banking group.
V-6-2

Major Supervisory Viewpoints

As mentioned above, the banking group needs to have a framework in place for the acquisition, etc. of
crypto-assets in accordance with Article 13-6-9 and Article 13-6-10 of the Banking Act Enforcement
Regulation. Specifically, the following points need to be taken into consideration.
(i)

Identification, evaluation, and reduction of risks based on the characteristics of the crypto-asset
Based on the structure (including the issuer, administrator, and other related parties, as well as
the details of projects closely related to the crypto-asset), expected use, distribution status,
technology used for the crypto-asset, and other characteristics of the crypto-asset (hereinafterreferred to as the "characteristics of the crypto-asset"), whether sufficient consideration has been
given to the identification and evaluation of the risks of the crypto-assets, and whether an internal
control environment has been established to appropriately reduce such risks, including themeasures described in (ii) through (iv) below. In addition, whether these measures are periodicallyverified and reviewed.

(ii) Measures against money laundering and financing of terrorism
In cases where there is a high risk of being used for money laundering or financing of terrorism,
whether the appropriateness of the acquisition, etc. of crypto-assets is carefully determined. For
example, crypto-assets whose transfer records are extremely difficult to trace have a particularlyhigh risk of being used for money laundering and financing of terrorism, and therefore, care should
be taken not to conduct acquisition, etc. of such crypto-assets.
In addition, whether measures have been appropriately taken in line with the measures describedin the Guidelines for Anti-Money Laundering and Combating the Financing of Terrorism, such as
paying attention to the status of the countermeasures against money laundering and financing ofterrorism of the counterparty to the acquisition, etc. of crypto-assets. In particular, in cases where
the acquisition, etc. of crypto-assets may involve the transfer of crypto-assets from or to a person413

residing or located overseas, whether the measures described in Ⅲ-3-1-3-1-2(4) have be taken.
(iii) Measures to ensure financial soundness
Even if the business of the banking group requires the acquisition of crypto-assets, whether
appropriate policies have been established from the perspective of ensuring soundness, such as
limiting the amount of crypto-assets to be acquired to the minimum extent necessary for the
relevant business. In addition, with respect to the holding of crypto-assets, whether a framework isin place that enables the appropriate disposal of such assets by promptly selling them, etc., in
consideration of the market risk, liquidity risk, etc. of such crypto-assets.
Whether the banking group has a policy which does not allow the group to conduct acquisition,etc. of crypto-assets for the purpose of investment.
(iv) Security management measures for acquisition, etc. of crypto-assets
・Whether the department in charge of the management of crypto-assets and the responsible
person are clarified. (When multiple departments are in charge of managing crypto-assets,
whether responsibilities and assignments between departments are clearly defined.) Whether aperson with sufficient knowledge and experience of the characteristics of the crypto-assets to behandled is assigned.
・Whether the internal rules about management, response to outﬂows and other rules related to
crypto-assets have been properly established, and are being thoroughly communicated to officers
and employees. Whether the internal rules are periodically verified and reviewed.
・Whether the system management framework for the management of crypto-assets to be handled,including measures to prevent the outflow of crypto-assets due to unauthorized access, etc. has
been sufficiently established. Whether the system risk management framework is periodicallyverified and reviewed by experts.

414

VI

Supervision of Foreign Bank Branches

VI-1

Purpose and SignificanceA foreign bank that has a branch office, a sub-branch or other business office (hereinafter collectively
referred to as the “branch office”) in Japan is directly subordinate to the head office located in a foreigncountry where the Banking Act and other relevant Japanese laws and regulations are not applicable.
Depending on the business management methods of the head office, and on the types or contents ofoperation, as well as on the business division to which the branch office belongs, the management andcontrol relationships might not sufficiently work among business divisions within a branch office or among
branch offices if there are more than one.
Therefore, when supervising the soundness and appropriateness of the operations of a branch office ofa foreign bank, it is important to make efforts to identify the actual state of the management of business
operations at the branch office and the risks involved therein, in light of the management characteristics ofthe foreign bank as well as the individuality and diversity of the branch office’s business operations, andwhen necessary, to engage in communication and consultation with the foreign bank’s head office or thesupervisory authority of the bank’s home country, or to take supervisory measures, such as requiring thesubmission of reports based on the Banking Act or other relevant laws and regulations.
(Note)

The following Major Supervisory Viewpoints describe key points to be especially noted in lightof the characteristics of foreign bank branch offices. During the supervisory process, not only
the supervisory viewpoints described below but also other parts of this guideline should beproperly referred to, depending on the branch office’s business and other factors, whennecessary.

VI-2

Major Supervisory Viewpoints(1) Appropriate control over business management and operations of the branch office by the head officeand the management team of the branch office(i)When the head office or the regional head office (hereinafter collectively referred to as the “headoffice”) formulates the entire group’s management policies or plans, whether the purpose andsignificance of having a branch office in Japan and its position within the group are clarified.
Whether the business strategies or plans of the branch office are consistent with the group’s
policies or plans, and are also sustainable.

(ii) Whether the management team of the branch office and employees dispatched from the head
office, who are adept in the management and business operations of the branch office, areappointed and appropriately allocated. (Whether a management team and person in charge ofbusiness operation and management with sufficient qualifications and experience in managing
the business operations of the branch office in Japan are appointed.)415

(iii) In order to ensure the appropriate operation of the branch offices, whether the head office hasdelegated adequate and appropriate authorities to the management team of the branch officeand the person in charge of business operation and management, and clarified division of the
responsibilities between the branch office and the head office. In addition, whether the authority
and the responsibility is adequately and appropriately distributed within the branch office sothat the management team can appropriately manage the business. (Whether legitimate andeffective rules concerning the organizations and administrative authorities have beenformulated, and whether the rules are ensured to be well known.)(iv) Whether the head office has developed and maintained systems or structures to supervise,manage and monitor the branch office in a manner suited to the actual state of the branch
office’s business operations and risks. (Whether it is ensured that the head office’s business
management division, international business control division, and any other relevant division
has an appropriate and adequate system or structure to supervise, manage and monitor theforeign branch office.) In the case where a foreign bank has more than one branch office inJapan, whether the representative recognizes the strategic policies and plans such as profit
target of all branches in Japan, and comprehensively manages the branch offices by, for example,
requiring necessary reports from each branch office, in order to establish an internal control
environment which is consistent with such policies and plans.
(v)

Whether a system or structure has been put in place that will enable the branch office topromptly and appropriately contact with and report to the head office and the relevantsupervisory authorities in case of any operational or managerial problems or any cases of
misconduct.

(vi) Whether the internal control environment of the branch office is sufficient, based on thepositioning of the branch office within the entire bank, its business strategies and plans, and its
actual business operations and risk characteristics.
(vii) Whether the head office properly recognizes the status of risks of the branch office, and takes
necessary measures, having identified not only the business operation and financial condition,
but also the risk characteristics of the branch office.
(viii) Whether the management team of the branch office checks for any inadequacies in light of (i)through (vii) above, and, when necessary, takes appropriate measures after consulting with thehead office.
(2) Development of legal compliance framework(i)

Whether a legal compliance framework (including the development of effective rules aboutorganization and management, personnel structure and operational structures) has been
established and maintained so as to thoroughly comply with the Banking Act of Japan as well asother domestic and foreign laws and regulations related to its operations.

(ii) Whether a framework is in place so as to continuously check the understanding of its officers

416and employees in the branch office about the Banking Act and other related laws and regulations,and when necessary to provide training and education.
(iii) Whether a framework has been established and maintained to enable the branch office topromptly and appropriately report and respond in case of the occurrence of any legal violationor the revelation of any improper business operation in practice. (Whether independent internalfunctions are in place to check and monitor the activities of the branch office’s manager incharge of business operations, as well as the activities of the sales division.)(iv) In the case where some officials and employees at a branch office do not understand Japaneselaws and regulations well for any reason, whether the head office and the branch office strive toestablish the relevant systems and make continuous efforts to deal with the situation
appropriately and to thoroughly ensure necessary guidance and monitoring.
(3) Development of risk management framework(i)

Whether a framework to manage various risks such as credit risk, market risk, liquidity risk, andoperational risk (including administrative risk and IT system risk) are developed, which aresuited to the actual status of the business operations of the branch office. Whether the head
office appropriately and sufficiently supervises and monitors the risk management.

(ii) Whether an in-branch control framework (including the development of effective rules aboutorganization and management, personnel and operational structures) has been appropriately
and sufficiently developed, to detect operational risk at an early stage and to appropriately deal
with and rectify them.
(iii) Whether a framework has been established and maintained to enable the branch office topromptly and appropriately report and respond in the case where any problem with its risk
management comes to light. (Whether independent internal functions are in place to check andmonitor the activities of the branch office’s manager in charge of business operations, as well as
the activities of the sales division.)(iv) When a foreign bank group has transactions that involves two or more operational bases (forexample in the case of credit transactions or market transactions, the location where credit
examination or making contracts is conducted is different from the location where it is managed
as an account branch), whether the respective functions and roles of the head office and thebranch offices are clarified in the context of the entire bank. Whether these functions and roles
are reasonable and appropriate in the entire group’s risk management framework.
(4) Implementation of inspections and audits of business operations of branch offices and follow-up(i)Whether the effectiveness of inspections (including self-inspections) and internal audits of thebusiness operations of the branch office is ensured. Especially, whether the internal audit
division at the head office or the branch office is able to conduct internal audits, taking into
account the business contents and risk profile of the branch office. Whether the management417

of the head office and the branch office take appropriate measures based on the outcome of theinternal audit.
(ii) Whether employees and managers well versed in the Banking Act and other laws and regulations
related to the bank’s business operations are allocated to the divisions in charge of inspections(including self-inspections) and the internal audit.
(iii) Whether audits of business operations are implemented in a suitable manner that matches theactual state and risks of the branch office’s business operations. Whether external experts are
utilized according to the risk level when necessary.
(iv) Whether the implementation of improvement measures and follow-up actions in response to
the matters pointed out in the inspections and audits of the branch office is ensured. (Whether
the internal responsibility-sharing has been clarified to ensure the implementation andcompletion of the improvement measures and follow-up actions.)(5) Establishment of appropriate information management framework(i)

Whether the branch office and the head office appropriately and sufficiently developed thebranch office’s information management framework (including the development of effective
rules of information management, the full awareness of the rules by executives and employees,
and the development of personnel and operational structures).

(ii) Whether a framework has been put in place to ensure that the branch office and the head officepromptly and appropriately take measures and provide explanations to their customers, relevant
parties, and relevant supervisory authorities in the case of a problem related to information
management concerning the business operations of the branch office or any customer
information leakage.
(iii) Whether the branch office and the head office investigate and analyze the causes of suchinformation management problem or customer information leakage accident, formulate aproper and appropriate improvement plan, and steadily implement them.
(iv) Especially, with regard to customer information management, whether a management
framework has been put in place suited to the business operations of the branch office, inreference to III-3-3-3 “Management of customer Information.”(6) Enhancement and reinforcement of complaint handling function(i)Whether the branch office accumulates and analyzes complaints arising from its business
operations, and makes effort to improve the control environment for customer explanations at
the time of contract signing or on other occasions.

(ii) Whether the branch office has any proper framework to deal with violence intervening in civil
affairs, such as refusal of any connection with anti-social forces. Especially, whether an
integrated management framework for legal affairs has been developed and is functioning, inorder to properly report suspicious transactions including remittance, fund settlements and418

credit-related transactions under the Banking Act on Prevention of Transfer of Criminal
Proceeds.
(7) Entrustment of business operation of branch office(i)

In the case where a branch office entrusts part or all of its operations necessary to engage in its
business, whether a management framework has been appropriately established, in accordancewith the actual state of its entrustment and risks, with reference to III-3-3-4 “Entrustment.”(ii) It should be noted that entrustment refers to the entrustment of part or all of administrative
operations in order for the branch office to engage in its business, and does not mean to havethe branch office’s business management or such management functions (including animportant personnel management policy) handled by an external entity.
(8) Entrustment of operation to business operation service provider
In the case where a branch office of a foreign bank entrusts its operations to an entity stipulated in
Article 32(ii) of the Cabinet Office Ordinance on Financial Instruments Business, etc. (hereinafterreferred to as a “business operation service provider” in this section), the following points shall be notedfrom the perspective of ensuring the sound and appropriate management of the banking business.
(i)

Whether the scope and content of the entrusted operation are limited to administrative operationthat does not involve the fundamentals of the banking business. And even in the case where theentrusted business operation does not involve the fundamentals of the banking business, in light of
the fact that the entrusted operation is closely related to the execution of the banking business,whether the appropriateness of the entrusted operation and the appropriateness of the entrustee,including information management risks and operating risks associated with the entrusted operation,
as well as the business execution capabilities and management systems of the business operation
service provider, are adequately reviewed and verified.

(ii) It should be noted that the ultimate operational and regulatory responsibility for the entrusted
operation lies with the branch office of the foreign bank as the entrustor, even if the responsibility
stems from the business execution by business operation service provider. Therefore, in order toaccurately respond to the supervisory authority by the branch office related to the entrusted
operation, whether a responsible person for the entrusted operation has been appointed, andwhether a system to manage the business operation service provider has been developed and thedivision of responsibilities has been clarified.
(9) Development of internal control environment in cases where the concurrent position system has been
introduced
Among foreign financial institutions groups in which respective foreign banks have their securities
subsidiary companies or branch offices engaging in securities-related business in Japan, when suchforeign bank branch office has introduced the concurrent position system, the appropriateness and419

sufficiency of its internal control environment need to be examined, improved, or enhances. For
details, refer to the above V-3-3-6 “Relations between Banks and Their Securities Subsidiary
Companies.”(10) Remuneration system
The planning and application of the branch office’s remuneration system is, in principal, to beappropriately supervised by the authority in its home country on a group basis, so as to ensure thatthe incentive of the executives and employees to take risks is not excessive.
On the other hand, the FSA also monitors each such branch office’s planning and application of
the remuneration system with an objective of appropriately cooperating with the authority in its homecountry. Especially, in the case where excessive risk-taking is likely to be induced, the FSA will
examine such risk management issues to a deeper degree, and will take necessary measures, such asproactively raising an issue with the authority in the home country.
(11) Protection of depositors and maintenance of other orderly financial systems (examination criteria at
the time of licensing and supervisory viewpoints when foreign bank branch office engages in deposittaking operations)(i)Regarding asset management at a foreign bank branch office, if the asset management
excessively relies on overseas operation bases, there are several problems, such as the difficulty
for the bank branch office to grasp its own asset management portfolio, and the difficulty for
the Japanese supervisory authority to verify the appropriateness of asset management by theforeign bank branch office.

(ii) Therefore, foreign bank branch offices should develop a control system that enables them toconduct their banking business properly and fairly, taking into account the need for securetransactions for depositors, such as ensuring that the branch office fully understand how thefunds, especially funds raised through collecting deposits, are invested, and does not excessively
rely on transferring the funds to any other operation base of the group.
(iii) Based on the foregoing, when examining a license for a foreign bank branch office, it is necessary
to determine whether or not such branch office’s fund management excessively relies ontransferring its funds to any other operation base of the group. For example, the business plan
after the establishment of the branch office would be assessed based of the viewpoint of whether
or not most of the deposits collected domestically will be managed in overseas operation bases.
(Note)

When a foreign bank branch office takes retail deposits, it should be noted that, under thecurrent circumstance where the deposit insurance system is not applicable to foreign bankbranch offices, a safer fund management framework is generally required for such funds,
taking into account the characteristics of retail deposits, such as the fact that these funds
are directly linked to the lives of individuals.

(iv) Even after the establishment of a branch office, the status of intra-group fund transfers,

420including those between the head office and branch accounts, the status of assets held in Japan,
as well as the content and method of its deposit-taking operations, etc. should be verified todetermine, for example, whether or not most of the deposits collected domestically are
constantly transferred abroad through the head office and branch accounts, and whether or not
the branch office’s fund management excessively relies on transferring its funds to any otheroverseas operation base of the group.
(v)

Furthermore, when a foreign bank branch office engages in deposit-taking operations, inaddition to the matters stipulated in Article 30-2(i) and (ii) of the Banking Act Enforcement
Regulation, the internal control system to provide its customers with appropriate explanations
on the following matters that will serve as useful references for depositors, in accordance withthe customers’ level of knowledge and experience, is examined.
(A) Whether or not the deposit product is covered by the deposit insurance system in theforeign bank’s home country, and if so, the details of the system.
(B) The facts that the solvency of a foreign bank branch office is ultimately sourced from theforeign bank as a whole, and that the financial stability of the foreign bank as a whole isunder supervision of its foreign authority.

VI-3

Supervisory Methods and Measures(1) With regard to each item described in the above VI-2, while taking account of characteristics of the
branch office’s operations, when necessary, interviews shall be conducted periodically andcontinuously. The FSA will also take the opportunity to have a direct dialogue with the foreign bank’shead office to share the recognition of the issues for the entire group and those for the branch office.
In addition, if necessary, interviews shall be conducted on the results of the internal audit on the
branch office conducted by the internal audit division of the head office or the branch office.
In light of a circumstance where the necessity of strengthening cooperation with overseas
supervisory authorities is increasing in the wake of progress in both the internationalization ofbusiness operation and the diversification of business contents across the group, and taking accountof another circumstance where regulations and standards are converging at an accelerated pace, the
FSA shall cooperate and exchange information with the supervisory authorities of the foreign bank’shome country and other relevant foreign supervisory authorities, while proactively utilizing theframeworks to cooperate with supervisory authorities of the foreign bank’s home country.
Based on the issues for the group as a whole identified through these actions, the FSA will conduct
in-depth interviews on the effect of these issues on the branch office’s business management and on
the measures that have been taken to cope with the effect.
(2) If, based on the off-site monitoring as mentioned in the above (1), inspection results, or reports on a
misconduct notification, etc. it is found that there is a problem in the business operations or internal421

control system of a branch office of a foreign bank, the FSA shall, when necessary, require the foreignbank branch office to submit a report based on Article 24(1) of the Banking Act, and will also ask theforeign bank’s head office to submit a report based on Article 48 of the Banking Act. If a serious
problem is found, the FSA will issue a business improvement order or take any other measures basedon the Article 26 of the Banking Act.
(3) In addition, the FSA shall seek to engage in direct communication and share the recognition of theissues with the foreign bank’s head office in the home country through the “System for Exchange ofOpinions” described in II-5-3, and as necessary, consult with the supervisory authority in the branch
office’s home country.

422

VII

Handling of New Entry into Banking Business

VII-1

License Examination for New Entry into Banking Business and Supervisory Actions after
Granting the License

VII-1-1

Purpose and SignificanceNew forms of banks or those with distinctive features have been established, including settlement
services-focused banks with their ATMs installed at convenience and other chain stores, online banks, andmiddle-risk and middle-return loan providing banks mainly targeting small and medium-sized enterprises.
In terms of the shareholding structure, some outsiders such as non-financial companies are entering into
the banking business.
When a would-be bank applies for a banking license or when a would-be major shareholder of a bankapplies for the approval, the FSA needs to strictly examine whether or not the applicant’s financial basis,
personnel structure, and other attributes meet the examination criteria stipulated in the Banking Act.
In general, when a would-be bank applies for a banking license, the supervisory viewpoints stipulated in
the Supervisory Guidelines should also serve as a reference to determine whether or not the applicant iscapable of accurately, fairly, and efficiently carrying out the banking business in accordance with thebusiness model that the applicant intends to implement. The following subsections especially illustrate the
FSA’s supervisory viewpoints during the process of the license examination and in the course of subsequent
supervisory actions, with regard to new entry into the banking business.
As for the specific examination approach, the FSA conducts thorough interviews with the applicant about
the application content, and when inspecting the management executive’s qualification, as well as
inspecting whether the application content is consistent with the actual status of the relevant framework inplace to carry out the banking business accurately, fairly, and efficiently, the FSA will ask, if necessary, theapplicant to submit additional data and materials that should serve as evidence to support the applicant’s
explanation.
The FSA also examines whether measures stipulated in Article 55-2(5) and Article 58-3(1) of the
Deposit Insurance Act will be specifically taken.
(Reference) ”Check Items related to Article 55-2(5) and Article 58-3(1) of the Deposit Insurance Act”
(Material 1 described in the Forms and Reference Information)
VII-1-2

License Application Filed by a Bank whose Finance and Management Are Influenced by a
Shareholder

When inspecting the prospective income and expenditures and adequacy of capital base after thecommencement of business (Article 1-8(3)(ii) and (iii) of the ), the FSA also pays close attention to thepremises on which these prospects are based. At the same time, the prospects for how the bank’s major

423

shareholders, and persons who are as influential on the bank’s finance and management as the former(hereinafter representatively referred to as the “bank’s major shareholders” in this VII-1-2 below) will takeactions when the bank’s business conditions get worse also provides an important indication for the FSA
to determine the bank’s financial soundness.
Specifically, the FSA will also grasp whether and how the bank’s major shareholders have discussed theiraction plan in case of the bank’s business deterioration, and whether the bank and the major shareholders
have shared and confirmed the contents of the major shareholders’ action plan to maintain the bank’s
financial soundness in case of the bank’s worsening financial standings.
VII-1-3

Handling of License Application for Limited Banking Operations(1) Supervisory approaches for license examination
In the case where a banking license application is filed by a would-be-bank whose business model
does not necessarily envisage all banking operations, for example, with no intention of engaging inloan business or funds transfer transactions, the FSA examines, based on the criteria stipulated bylaws and regulations, whether or not the applicant has systems in place to appropriately carry out
such limited banking operations.
In this regard, however, after obtaining the license, the new bank might aim to develop its businessin a direction that was not assumed at the time of license application. In such a case, the FSA needs
to re-examine whether the bank has systems in place to appropriately carry out such business.
Therefore, when granting a banking license to any applicant whose business model does notenvisage all banking operations, the FSA attaches a condition to the effect that, if the new bankintends to engage in any new banking operation that was not assumed at the time of license
application, the FSA’s approval is required in advance.
(2) Points of attention in the post-license supervision
After obtaining the license, if the new bank develops its business in a direction that was notassumed at the time of license application, based on the licensing condition, the FSA re-examines
whether the bank has systems in place to appropriately carry out such business, and determines
whether or not to approve it.
In case the bank violates the licensing condition, the FSA considers invoking an administrative
disposition based on Article 27 of the Banking Act.
VII-1-4

Risk Management and Profitability in Cases Where the Asset Structure is Biased towards
Securities including Government Bonds(1) Key principles
When the asset structure of any bank is biased toward government bonds and other securities,424

instead of loans, the required amount of capital base is quite small, since there is little credit risk
under the current capital adequacy ratio regulation that focuses on credit risk. However, taking into
account a business form different from the traditional banking business, a capital base is required to
be set up which is commensurate with risk characteristics such as interest rate risk and operationalrisk. In addition, if any bank does not take the credit risk that is assumed in the traditional banking
business, the bank cannot expect such return (profitability) that corresponds to the credit risk. This
point also needs to be taken into account when the authority examines the prospective income andexpenditures.
(2) Major supervisory viewpoints during the license examination process and after granting the license(i)

Matters to be checked in the license examination(A) In the case where the bank’s asset structure is biased toward government bonds and othersecurities, instead of loans, whether the bank’s level of capital base is commensurate withrisk characteristics such as interest rate risk and operational risk, in light of a business form
different from the traditional banking business; whether the bank has systems in place forproper risk management, such as ALM (Asset Liability Management).
(B) When examining the prospective income and expenditures, the FSA needs to check thefollowing: What the would-be-bank expects to be the source of earnings. Whether thesource of earnings is expected to be steady and stable in the future. Whether the applicant
has contingency plans in case the prerequisites for earnings fall behind the estimates.
Whether the level of earnings is expected to be enough to cover ordinary expenses, evenunder such a scenario.
(C) In the case where the would-be-bank plans to engage in the settlement business across thecountry, whether steady settlement will be ensured.

(ii) Points of attention in the post-license supervision
Mainly through inspection or collection of reports, the FSA checks whether the capital baseat the time of license examination has been maintained, and whether the bank’s risk
management such as ALM has been properly conducted. With regard to the source of earnings
checked at the time of license examination, the FSA checks whether the actual earnings are inline with the plan and whether there are any changes in the prerequisites for earnings. In cases
where the actual earnings fall behind the respective plans, the FSA checks the corresponding
measures mainly through the collection of reports.
VII-1-5

Customer Protection and Other Viewpoints in Cases Where New Types of Banks are
Exclusively Focused on Non-face-to-face Transactions Using Online Banking or ATMs
without any Manned Offices(1) Key principles

425

As existing banks have already started to handle online financial transactions, there is a need toeffectively protect customers by revising the roles of regulations and supervisory approaches in sucha way as to match the characteristics of electronic transactions. New types of banks that are exclusively
focused on non-face-to-face transactions using online banking or ATMs without any manned offices,in particular, need to have alternative tools to take over the functions of conventional manned offices,
specifically by formulating fair internal rules and having appropriate internal frameworks in place. If
any bank intends to provide IT (information and communications technology)-based new services,
the bank needs to have a certain mechanism in place for ordinary users to safely and conveniently use
without any special training. Based on the above viewpoints, in granting the license to and supervisingover banks that are exclusively focused on non-face-to-face transactions using online banking orATMs, the FSA pays close attention to the following points. As for the general regulations andsupervision pertaining to online financial transactions, the FSA will revise the existing ones in lightof findings and suggestions from various reports by experts in related fields.
(2) Major supervisory viewpoints during the license examination process and after granting the license(i)

Matters to be checked in the license examination(A) Whether the bank has systems in place to appropriately handle each of the matters listed
below even without manned offices.
a.

Handling of complaints and consultations from customersb.

Response to customers in the wake of a system shutdownc.

Fulfillment of accountability to customers based on laws and regulationsd.

Making disclosuree.

Fulfillment of the duty of checking at the time of transaction and reporting
suspicious transactions in order to counter organized crimes including money
laundering(B) Regarding the prospective income and expenditures, whether the bank has clear
contingency plans in case of a worsening business environment, such as the new entry ofcompetitors or system obsolescence, and whether the plan anticipates a certain level of
earnings, even under such a scenario.
(C) Whether the bank has a solid measure to ensure liquidity in the case of a temporary andmassive customer churn, taking into account the characteristics of an interest rate- or any
other condition-sensitive customer segment, as well as the characteristics of transactions
for which cancellations and changes are easily made.
(D) Whether the security level of the bank’s system is satisfactory. Whether the bank has
appropriately set up any security management system for system operations (including
the management of any outsourced contractor) and crisis management systems in case of
the occurrence of failure. (Submission of evaluation documents from an external
institution is required.)426

(ii) Points of attention in the post-license supervision
The FSA checks the implementation status of each measure checked at the time of license
examination mainly through inspection or collection of reports.
VII-1-6

License Application Filed by a Bank of Which Parent Company is a Non-Financial Company

VII-1-6-1

Perspective of Ensuring the Independence of Any Subsidiary Bank from Its Parent NonFinancial Company(1) Key principles
A prerequisite for ensuring any bank’s sound management is to ensure the independence ofmanagement. In cases where a non-financial company is one of the major shareholders who areassumed to have influence on management polices of a bank, the FSA pays especially close attention
to whether the independence of bank management is ensured so that the soundness of the subsidiarybank is not impaired by the requests from the non-financial company (referred to as the “parent nonfinancial company” in this VII-1-6 below ) from the viewpoint of its business strategy.
(2) Major supervisory viewpoints during the license examination process and after granting the license(i)

Matters to be checked in the license examination(A) Whether the subsidiary bank has a solid management system in place for the management
team to always place top priority on the soundness of bank management and makemanagerial decisions independently. Whether the bank avoids undermining theindependence of the subsidiary bank’s management, for example, by having an officer ofthe subsidiary bank concurrently serve as an officer or an employee of the parent nonfinancial company.
(B) In the case where the subsidiary bank shares its office with the parent non-financial
company, whether the bank avoids undermining of the sound and appropriate
management of the banking business in terms of security or risk management byentrusting part of the banking business to the parent non-financial company, or by havingsome employees of the parent non-financial company concurrently serve as those of thebank. (This matter should apply to a general form of “in-store branches” such as installing
ATMs at convenience stores.)(ii) Points of attention in the post-license supervision
Based on the Banking Act, mainly through the inspection on the subsidiary bank or thecollection of reports, the FSA checks the independence of the subsidiary bank’s management
after granting a license, and how the soundness and appropriate management of banking
business has been ensured.

427

VII-1-6-2

Perspective of Blocking the Parent Non-Financial Company’s Business Risk

(1) Key principles
Even if the independence of bank management is ensured, unexpected risks of the parent nonfinancial company, such as its business deterioration, may affect the subsidiary bank. Especially if thesubsidiary bank and the parent non-financial company share their operating base, the subsidiary bankis likely to lose the operating base at once in the wake of bankruptcy of the parent non-financial
company (risk of going to bankrupt together). In order to deal with these risks, the current largescale credit provision regulation, and the arm’s length principle should be rigorously complied with.
In addition, the following points should be noted.
(2) Major supervisory viewpoints during the license examination process and after granting the license(i)

Matters to be checked in the license examination
Whether the subsidiary bank sufficiently takes measures to block the parent non-financial
company’s risks (*). These measures need to include the following items at minimum:(A) If the parent non-financial company’s business conditions get worse, the subsidiary bankshould not provide the parent with support and loans.
(B) The subsidiary bank should assume in advance the parent non-financial company’sbusiness deterioration, sales of some or all shares in the subsidiary bank held by the parent
non-financial company, withdrawal of deposit, and various risks arising from the parent
non-financial company (such as the loss of synergy effects, falling share prices or a run on
deposit due to the reputational risk, and the defection of business partners). Based onthese assumptions, measures (such as the ensuring of both sources of earnings and sourcesof fund procurement, and the enhancement of equity capital) should be taken to prevent
undermining of the sound management of the subsidiary bank.
(C) Especially if the subsidiary bank and the parent non-financial company share theiroperating base, the subsidiary bank must take measures so as not to allow the parent nonfinancial company’s failure to cause difficulty for the subsidiary bank to continue its
business.
(Note)In addition, if another subsidiary company of the parent non-financial company
shares the operating base with the subsidiary bank, the subsidiary company’s risks
may be highly likely to affect the subsidiary bank. Therefore, the FSA requires thesubsidiary bank to take necessary measures to block the subsidiary company’s risks
as well.

(D) Even after taking the above risk-blocking measures, in some cases, it might be difficult tocompletely block the parent non-financial company’s risks. With the objective of grasping
the subsidiary bank’s business deterioration due to the parent non-financial company’s
management risks at an early stage, during the examination process related to the approval428

for the bank’s major shareholders, the FSA checks the business conditions of the parent
company, which may have influence on the subsidiary bank’s management. Specifically,in examining the prospective income and expenditures as well as the social credibility of
the license applicant, the FSA also takes into full account the parent non-financial
company’s financial conditions and its social credibility.
(ii) Points of attention in the post-license supervision
After granting a license, the FSA checks the implementation status of the risk-blocking
measures (whose steady implementation is a prerequisite for the license) mainly throughinspection of the subsidiary bank or collection of reports. If the implementation status of therisk-blocking measures is found to be problematic or if the initially planned risk-blocking
measures are found to be insufficient, the FSA may issue a business improvement order to thesubsidiary bank, based on Article 26 of the Banking Act.
VII-2

Approval Examination for Major Shareholders of Banks and Supervisory Actions after the
ApprovalVII-2-1

Purpose and Significance(1) Some non-financial companies have been entering into banking business, with the aim of obtaining
synergy effects by sharing their customer base and store network. Others hold shares of banks for the
purpose of investment. Among them, excluding the national and local governments, etc., those who
may have influence on bank management need to be approved as major shareholders of banks, basedon the Banking Act.
(2) Therefore, when a banking license application is filed by a would-be-bank, and if a non-financial
company or an investment fund intends to become a major shareholder of the applicant, it is necessary
to simultaneously file the approval application for the major shareholder of the bank. Accordingly, the
FSA needs to conduct examination related to approval for the bank’s major shareholder in parallelwith the license examination.
VII-2-2
VII-2-2-1

Matters to be Checked in the Bank’s Major Shareholder Approval Examination
Bank’s Major Shareholder Approval Application Filed by a Non-Financial Company(1) When the FSA examines whether or not the sound and appropriate management of the bank’s
operations is likely to be undermined, in light of matters concerning funds for the non-financial
company to acquire voting rights at the bank, the purpose of its holding, and other matters related tothe holding of the voting rights, the following points, for example, are fully inspected.

429

(i)

Whether the non-financial company’s policies and purposes to hold shares of the bank are likely
to undermine the soundness and appropriateness of the bank’s operations. For example,
whether the purpose of holding the voting rights is other than short-term purchase and sales.

(ii) In light of the source of funds for the non-financial company to acquire the voting rights,
whether there is any possibility that the soundness and appropriateness of the bank’s operations
will be damaged. For example, whether the funds to acquire the voting rights are supposed tocome from excessive borrowings.
(iii) Whether fair transactions are ensured among group members including the non-financial
company.
(2) When the FSA examines whether or not the sound and appropriate management of the bank’s
operations is likely to be undermined, in light of the non-financial company’s assets as well as income
and expenditures, the following points, for example, are fully inspected.
(i)

In light of the non-financial company’s financial conditions and fund procurement, whether
there is any possibility that the soundness and appropriateness of the bank’s operations will bedamaged.

(ii) In particular, suppose that a non-financial company has more than 50% of the voting rights at
its subsidiary bank. In this case, whether the relevant contingent plan earmarks a sufficient cash
flow to ensure the sound management, even if the subsidiary bank’s earnings fall below the plan.
(iii) For the process of approval examination, the FSA requests the submission of materials such as
the latest annual financial statements and the audit report (or similar materials that show the
non-financial company’s financial conditions, if said company is a foreign corporation), andchecks whether or not the audit report has additionally pointed out a material uncertainty
regarding the going concern assumption.
(3) When the FSA examines whether or not the non-financial company fully understands the public
nature of banking operations and also has social credibility in full measure, in light of its personnel
structure and other factors, the following points, for example, are fully inspected.
(i)Whether the non-financial company fully understands the public nature of banking operations
and also has social credibility in full measure, in light of the non-financial company’s
management system, and its management control system relevant to the bank where the nonfinancial company holds the voting rights of more than the Major Shareholder Threshold(referred to as the “subsidiary bank” in the following VII-2-2 and VII-2-3).

(ii) A prerequisite for ensuring any subsidiary bank’s sound management is to ensure theindependence of the subsidiary bank’s management. In cases where a non-financial company isa major shareholder of a bank, the FSA fully examines, for example, the following points, inorder to prevent any request by the non-financial company from the viewpoint of its businessstrategy from undermining the independence of the subsidiary bank’s management.

430

(A) Whether the independence of the subsidiary bank’s management is not undermined byhaving an officer or an employee of the non-financial company concurrently serve as an
officer or an employee of the subsidiary bank.
(B) In the case where the subsidiary bank shares its office with the non-financial company,
whether the sound and appropriate management of banking business is not underminedin terms of security or risk management by part of the banking business being entrusted
to the non-financial company, or by having some employees of the non-financial company
concurrently serve as those of the bank. (This matter should apply to a general form of“in-store branches” such as installing ATMs at convenience stores.)(4) Even if the independence of the subsidiary bank’s management is ensured, unexpected risks of thebusiness company, such as its business deterioration, may affect the subsidiary bank. Especially if thesubsidiary bank and the business company share their operating base, the subsidiary bank is likely tolose the operating base at once in the wake of bankruptcy of the business company (risk of going tobankrupt together). In order to deal with these risks, the FSA fully examines, for example, thefollowing points:(i)

Whether the relevant measures are sufficiently taken in order to prevent the business company’s
risks from spreading to the subsidiary bank. These measures need to include the following items
at minimum:(A) If the business company’s business conditions get worse, it should not receive any support
and loans from the subsidiary bank.
(B) The business company should assume in advance its business deterioration, sales of someor all of its holding shares in the subsidiary bank, withdrawal of deposit, and various risk
arising from the subsidiary bank due to the business company (such as loss of synergy
effects, falling share prices of and withdrawal of deposits from the subsidiary bank due tothe reputational risk, and the defection of business partners). Based on these assumptions,
measures (such as the ensuring of both sources of earnings and sources of fundprocurement, and the enhancement of equity capital) should be taken to prevent
undermining of the sound management of the subsidiary bank.
(C) Especially if the subsidiary bank and the business company share their operating base, thesubsidiary bank must take measures not to let the business company’s failure cause
difficulty for the subsidiary bank to continue its business.

(ii) Even after taking the above risk-blocking measures, in some cases, it might be difficult tocompletely block the business company’s risks affecting the subsidiary bank. With the objectiveof grasping the subsidiary bank’s business deterioration due to the business company’s
management risks at an early stage, during the examination process related to the approval forthe bank’s major shareholders, the FSA fully examines financial conditions and social credibilityof the business company, which may have influence on the subsidiary bank’s management.

431

VII-2-2-2

Bank’s Major Shareholder Approval Application Filed by an Investment Fund

(1) When the FSA examines whether or not the sound and appropriate management of the bank’s
operations is likely to be undermined, in light of matters concerning funds for the investment fund toacquire voting rights at the bank, the purpose of its holding, and other matters related to the holdingof the voting rights, the following points, for example, are fully examined.
(i)

Whether the investment fund’s policies and purposes to hold shares of the bank aren’t likely toundermine the soundness and appropriateness of the bank’s operations. For example, whether
the purpose of holding the voting rights is not short-term purchase and sales.

(ii) In light of the source of funds for the business company to acquire the voting rights, whether
there is any possibility that the soundness and appropriateness of the bank’s operations will bedamaged. For example, whether the funds to acquire the voting rights are not supposed to comefrom excessive borrowings.
(iii) Whether a fund manager or a major stakeholder concurrently serves as an officer or an employeeof the subsidiary bank.
(iv) Whether it is stipulated that the investment fund should not receive any support and loans fromthe subsidiary bank if its performance becomes worse.
(v)

Whether fair transactions are ensured among group members including the investment fundand its stakeholders.

(2) When the FSA examines whether or not the sound and appropriate management of the bank’s
operations is likely to be undermined, in light of the investment fund’s assets as well as income andexpenditures, the following points, for example, are fully examined.
(i)

In light of the investment fund’s performance and fund procurement, whether there isn’t any
possibility that the soundness and appropriateness of the bank’s operations will be damaged.

(ii) In particular, suppose that an investment fund has more than 50% of the voting rights at its
subsidiary bank. In this case, even if the subsidiary bank’s earnings fall below the plan, whether
the relevant contingent plan earmarks a sufficient cash flow to ensure sound management.
(iii) For the process of approval examination, the FSA requests the submission of materials such as
the latest annual financial statements and the audit report (or similar materials that show theinvestment fund’s performance, if it is a foreign investment fund).
(3) When the FSA examines whether or not the investment fund fully understands the public nature ofbanking operations and also has social credibility in full measure, in light of its fund management
system and other factors, the following points, for example, are fully examined.
(i)

Whether the investment fund fully understands the public nature of banking operations andalso has social credibility in full measure, in light of its fund management system.

432

(ii) Whether the investment fund’s major stakeholders fully understand the public nature of banking
operations and also have social credibility in full measure.
(4) Especially taking into account common cases where it takes a certain period for a new bank to put thebusiness on track after obtaining a new license, the FSA checks whether the investment fund intends
to hold its bank shares for a certain long-term period; whether it has a policy to stabilize and nurture
the management of the new bank with its governance as a shareholder; and if so, in what way that canbe guaranteed.
At the same time, the FSA also checks the investment fund’s view on the stock offering.
VII-2-3

Points of attention in the Post-Approval Supervision(1) Based on Article 52-11 of the Banking Act, the FSA requests major shareholders of banks to annuallysubmit their annual securities reports and other disclosure materials (including those showing the statusof fund procurement; or materials showing business and financial conditions if there are no disclosurematerials), and documents describing the business relations (such as deposits, and borrowings) between
the respective major shareholders of banks and the respective subsidiary banks.
(2) If off-site monitoring and/or inspection results raise a question about the effectiveness of measuresfor ensuring the independence of the subsidiary bank and blocking business risks affecting thesubsidiary bank, the FSA will, when necessary, require the major shareholder of the bank to submit areport based on Article 52-11 of the Banking Act. If a serious problem is found, the FSA will issue anorder for action or take any other measures based on Article 52-13 of the Banking Act.
VII-3
VII-3-1

Application to Capital Participation in Existing Banks
Matters to be Noted in Capital Participation in Existing Banks(1) The points of view described in the above VII-1 basically also apply to supervisory viewpoints toward
any bank that has changed the conventional business model in the wake of capital participation in thebank by a business company and/or an investment fund. The conceivable new business models
include one that envisages the full-scale development of online banking business. When necessary,
the FSA asks for reporting pursuant to Article 24 of the Banking Act; grasps the status of preparation
for the change of business model as well as the status of protection of existing customers; andexamines the appropriateness of such business.
(2) When the examination results indicate the necessity of ensuring the smooth and appropriate
preparation of systems for both the protection of depositors and the change of business model, the433FSA orders a partial suspension of business, based on Article 26 of the Banking Act, for a limited
period of time needed for the preparation, or takes other actions.
VII-3-2

Approval for Major Shareholders of Banks(1) The points of view described in the above VII-2 basically also apply to the examination related to theapproval for major shareholders of existing banks in which business companies and investment funds
take their respective stakes. During the approval process for such major shareholders of banks, the
FSA conduct in-depth interviews and full examinations.
(2) The supervisory viewpoints mentioned in the above VII-2 basically also apply to cases where abusiness company intends to hold shares of a bank holding company.
VII-4

Application Mutatis Mutandis of the Supervisory Guidelines to New Forms of Banks

Domestic banks comprise not only major banks, to which the Supervisory Guidelines apply, and regionalbanks, to which the Comprehensive Guidelines for Supervision of Regional Financial Institutions apply,
but also new forms of banks and so-called subsidiary trust banks. For supervision over the latter banks, theSupervisory Guidelines apply mutatis mutandis when necessary, while the respective banks’ forms and theactual state of their business are also taken into account.
(Note)

Regarding operations using trust accounts conducted by trust banks, see the Comprehensive
Guidelines for Supervision of Trust Companies separately established.

434

VIII

Bank Agency Service

VIII-1

Purpose and Significance(1) “Bank agency service” refers to a type of business performing any of the following acts on behalf of abank: (i) acting as an agent or intermediary for conclusion of a contract on acceptance of deposits or
installation savings, etc.; (ii) acting as an agent or intermediary for conclusion of a contract on loansof funds or discounting of bills; or (iii) acting as an agent or intermediary for conclusion of a contract
on exchange transactions. ”Bank agent” (including ”secondary bank agent” (meaning a bank agent
that carries out bank agency services on re-entrustment from a principal bank agent); the same applies
hereinafter) refers to a person who provides the bank agency service under the license of the Prime
Minister prescribed in Article 52-36(1) of the Banking Act.
“Principal bank” refers to a bank which, through agency or brokerage services provided by the bankagent, concludes (i) a contract on acceptance of deposits or installation savings, etc.; (ii) a contract
on loans of funds or discounting of bills; or (iii) a contract on exchange transactions.
(2) Bank agents, as those who themselves engage in the bank agency service, must take necessary
measures to ensure sound and appropriate management for their bank agency service. Principal banks
and principal bank agents (meaning a bank agent that further entrusts another bank agent with bankagency services; the same applies hereinafter) are also held responsible for taking measures to ensure
sound and appropriate management for the bank agency service engaged in by their respective bankagents.
The purport of the Banking Act, which makes not only bank agents but also principal banks andprincipal bank agents take such responsibility, is to declare that principal banks (in cooperation withthe respective principal bank agents if the bank agency service is sub-entrusted) must primarily fulfill
their responsibility of ensuring the sound and appropriate conduct of business operations related tothe bank agency service engaged in by the respective bank agents. Even when supervising a bankagent, full attention should be paid to the primary responsibility of its principal bank.
VIII-2
VIII-2-1

Key principles
History and Purport of Introduction of the Bank Agency Service System

In the past, under the restrictions on capital contribution and the regulations of concurrent business, abank agency had been authorized, in principle, only when a bank’s subsidiary company had committed to
exclusively engaging in the agency. Then, in accordance with the law to partially revise the Banking Act,etc., which was enforced on April 1, 2006, the bank agency service system was created.
The new system has enabled general enterprises to enter into the bank agency service. Partly because of435this, users’ access to financial services is expected to be ensured and enhanced, and various distribution
channels of financial institutions are also expected to be effectively utilized. On the other hand, in order toprevent any general enterprise from taking advantage of its business relations to conduct unfair
transactions, the sound and appropriate management of the bank agency service must be ensured.
Accordingly, when supervising bank agents, it is necessary to supervise bank agents and principal banks
in a timely and appropriate manner in order to ensure the adequate and steady conduct of the bank agency
service, in light of the purport of making the entrance into the bank agency service subject to the license
system and the purport of making concurrent business subject to the case-by-case approval system.
Especially in cases where bank agents concurrently engage in other business, including the case where an
existing general enterprise has entered into the bank agency service, it should be noted that such bankagents are urged to put into place the relevant business operation framework to prevent inappropriate
handling, such as cross-selling (lending), preferential lending, and diversion of customer information.
VIII-2-2

Supervision through Principal BanksWith regard to the bank agency service engaged in by bank agents, principal banks are held responsible
for taking measures to ensure the sound and appropriate management as mentioned in the above VII-1 (2).
Therefore, when supervising a bank agent, it is of course important to supervise the bank agent itself, but
it is more necessary to place emphasis on supervision of its principal bank, and the relevant supervisory
method should be to ensure the sound and appropriate conduct of business operations related to the bankagency service engaged in by the bank agent principally through supervision over its principal bank.
In this regard, however, in cases where the FSA needs to directly guide and supervise a bank agent orbank agents, including the case where a bank agent has its particular problem and another case where there
is a common problem among certain bank agents, close attention should be paid to reduce theadministrative workload, based on the full consideration of the size and characteristics of the bank agent(s).
(Note)

When the FSA asks a principal bank or a bank agent to submit a report or other documents about
the bank agent’s small-scale office (e.g., a small-scale post office), the sales office’s
characteristics related to the services and products available there must be taken into fullconsideration and due regard must be given so as not to disturb its smooth operation.

VIII-3Administrative Processes Related to Supervision over Bank Agents

VIII-3-1
VIII-3-1-1

General Administrative Processes
Flow of General Administrative Processes Related to Supervision over Bank Agents

In terms of supervision, the flow of administrative processes is shown in Exhibit 4.

436

VIII-3-1-2

Supervisory Actions through Principal Banks(1) Supervisory approaches
When supervising a bank agent, the FSA checks whether the sound and appropriate business
operations of the bank agent is ensured, and also checks its principal bank’s business management
framework. Specifically, during the offsite monitoring of the principal bank, the FSA, when necessary,
includes matters related to the bank agent to which the principal bank entrusts the bank agency
service. In addition, when conducting interviews with the bank agent, the FSA also conducts
interviews with the principal bank.
On such an occasion, based on the above VIII-1 and VIII-2, the monitoring will focus on whether
the bank agent and the principal bank have appropriately taken the following measures: those toprevent inappropriate handling approaches, such as cross-selling (lending) and preferential lending;those to appropriately manage customer information; and those to sever relations with antisocial
forces.
In addition, by referring to the entries in notifications submitted by the principal bank, the FSA
checks whether the principal bank effectively guides and supervises the bank agent.
(2) Supervisory actions(i)When the off-site monitoring as mentioned in the above (1) and examination results throughusual supervisory administrative processes raise a question about the sound and appropriate
business operations of the bank agent or the principal bank’s guidance to the bank agent, the
FSA asks for reporting based on Article 52-53 of the Banking Act. In addition, when necessary,
the FSA conducts an improvisational interview with the principal bank, or asks for reporting
based on Article 24 of the Banking Act, or takes any other actions to set the record straight,
striving to grasp points at issue. If any problem is identified, the FSA urges efforts for the
improvement.

(ii) When interviews with the principal bank indicate that there is a problem with the bank agent, if
necessary, the FSA also conducts interviews with the bank agent, or asks for reporting based on
Article 52-53 of the Banking Act, or takes any other actions to set the record straight, striving
to grasp points at issue. If any problem is identified, the FSA urges efforts for improvement.
(iii) If examination results of the reporting reveal a serious problem with the bank agent’s businessexecution framework, the FSA will issue a business improvement order based on Article 52-55
or a business suspension order based on Article 52-56 of the Banking Act.
(iv) If such results provide evidence that there is such a serious problem as the principal bank’s
lacking relevant frameworks to guide and supervise the bank agent, the FSA will consider issuinga business improvement order to the principal bank, based on Article 26 of the Banking Act.
VIII-3-1-3

Cooperation between Supervisory Departments437

(1) When a license application for the bank agency service is filed (or the intention to file such application
is identified), or when a problem is found in the internal control environment of any of the applicants,
principal banks, bank agents or principal bank agents, or when any problem is found in relevant
frameworks to guide and supervise a bank agent or an applicant, the principal bank’s supervisorydepartment or the bank agent’s supervisory department promptly provides the relevant supervisorydepartment with information about details of the application and the problematic situation. If
necessary, the receiving supervisory department will check the internal control environment of theapplicant or principal bank or bank agent or principal bank agent, or the frameworks to guide andsupervise the bank agent or the applicant. In addition, when invoking an administrative disposition
or giving approval or license, the principal bank’s supervisory department or the bank agent’s
supervisory department provides the relevant supervisory department with information or asks for its
opinion, striving for close cooperation.
(Note 1) Principal banks refers to any principal bank stipulated in Article 34-43(2) of the Banking Act
Enforcement Regulation. The same applies hereinafter.
(Note 2) Principal banks and principal bank agents include would-be principal banks and would-be
principal bank agents applying for the bank agency service license for the first time. Before
receiving a license, these persons do not have obligations such as an obligation to guide theirrespective bank agents, but such obligations will be imposed when a license is granted; andbanks have obligations to supervise their overall outsourced operations including the bankagency service (Article 12-2(2) of the Banking Act). Thus, if necessary, the supervisorydepartments in charge of these persons will examine whether the relevant measures are taken
to ensure the appropriate business operation of the bank agent in question even before thelicense, in accordance with VIII-4-2-6 and VIII-5 of the Supervisory Guidelines.
(2) When the bank agency service is sub-entrusted, especially when the sub-entrusted service is rolled
out as numerous or extensive operations under the so-called franchise system or in any other form,
closer cooperation between supervisory departments is required, with the objective of giving more
appropriate guidance and supervisory attention to the principal bank and the principal bank agent.
If any party concerned grasps the intention to roll out the sub-entrusted bank agency service as
numerous or extensive operations, the party must promptly contact the FSA.
(3) Regardless of the method used, information should be promptly provided.
VIII-3-1-4

Internal Delegation of Part of the Authority of the Director-General of Local Finance
Bureau to the Director, etc. of the Competent Finance Office

When the principal office or other office of the bank agent is located within the jurisdictional district of438

the local finance office, Otaru sub-office, or Kitami sub-office, the authority delegated to the DirectorGeneral of Local Finance Bureau can be delegated internally to the director of the localfinance office or
sub-office, according to the judgment of the director-general.
Written applications and notifications regarding these matters should be submitted to the DirectorGeneral of Local Finance Bureau.
VIII-3-1-5

Administrative Report(1) The Director-General of Local Finance Bureau should report to the Director-General of the FSA’s
Supervision Bureau the situation of the bank agent as of the end of each quarter by the 20th day of
the following month.
(Reference) Form VIII-3-1-5 described in the Forms and Reference Information(2) With regard to supervision over bank agents, the Director-General of Local Finance Bureau shouldreport the details of cases (i) through (vii) listed below to the Director-General of the FSA’s
Supervision Bureau without delay, and should also provide the supervisory departments in charge ofprincipal banks, principal bank agents, and secondary bank agents, respectively, with the relevant
information.
Cases (i) and (iii) should be reported in Form VIII-3-1-5.
(i)Case where the Director-General of Local Finance Bureau has given license under Article 5236(1) of the Banking Act(ii) Case where the Director-General of Local Finance Bureau has given approval for concurrent
business under Article 52-42(1) of the Banking Act(iii) Case where the Director-General of Local Finance Bureau has received a notification of
discontinuance of business, etc. pursuant to Article 52-52 of the Banking Act(iv) Case where the Director-General of Local Finance Bureau has asked for submission of reports
and materials under Article 52-53 of the Banking Act(v)

Case where the Director-General of Local Finance Bureau has received the result of an on-site
inspection pursuant to Article 52-54 of the Banking Act(vi) Case where the Director-General of Local Finance Bureau has issued a business improvement
order under Article 52-55 of the Banking Act(vii) Case where the Director-General of Local Finance Bureau has rendered a supervisorydisposition under Article 52-56 of the Banking Act
VIII-3-1-6

Application Mutatis Mutandis of the Supervisory Guidelines439

For supervision over bank agents, in addition to the matters set forth below, the above sections II and III
as well as the Forms and Reference Information are timely applied mutatis mutandis, if necessary.
(1) The above II-2 applies mutatis mutandis to providing information as well as handling complaints
about bank agents, while the above II-3 applies mutatis mutandis to responses to cases where inquiries
concerning the interpretation of laws and regulations, etc. are received, and the above II-4 to points
of attention in giving administrative guidance.
(2) When invoking an administrative disposition to a bank agent, II-5 applies mutatis mutandis. In
addition, in light of its principal bank’s responsibilities of giving guidance on business operations
related to the bank agent engaged in by the bank agent as well as taking other measures to ensure thesound and appropriate conduct of the business operations, the matters described in VIII-3-1-2 andVIII-3-1-3 should be noted.
VIII-3-2

Administrative Processes Related to License Application

VIII-3-2-1

Points to Note in Applying for License

VIII-3-2-1-1

Necessary or Unnecessary of License(1) Criteria to determine whether license is necessary or unnecessary
Whether a license is necessary or unnecessary needs to be determined in a comprehensive manner,
after taking into consideration the positioning of such conduct in a series of conduct toward
concluding a contract either on the acceptance of deposits or installation savings, etc., or on the loansof funds or discounting of bills, or on the exchange transactions (hereinafter representatively referred
to as a “contract on acceptance of deposits”). Note that it is not appropriate to focus on only part ofthe series of conducts and immediately determine that a license is unnecessary.
(2) Cases where license is necessary
For example, a person who engages in any of the following conduct (i) through (v) as its business
operation, in principle, needs to receive the license for a bank agent stipulated in Article 52-36(1) of
the Banking Act.
(i)

Solicitation for conclusion of a contract on acceptance of deposits(ii) Financial instrument explanation for the purpose of solicitation for conclusion of a contract on
acceptance of deposits(iii) Negotiation on terms and conditions with the aim of concluding a contract on acceptance of
deposits(iv) Receipt of application for a contract on acceptance of deposits (excluding a case where a440written application for the contract is simply received or collected, and another case where any
wrong description or omission in a written application for the contract or failure to attach atleast one of the necessary documents is pointed out)(v)

Acceptance of a contract on acceptance of deposits(3) Cases where license is unnecessary(i)A license for the bank agent is unnecessary for a person who acts as an agent or intermediary
for a contract on acceptance of deposits on behalf of a customer.
In this context, however, full attention should be paid to some cases where such license may
be required. For example, even when a contract or a scheme agreed on between a bank and theperson in questions stipulates that the conduct should be engaged in on behalf of a customer, if
the person practically engages in agency or intermediation services substantially on behalf ofthe bank beyond or against the scope of business stipulated in the contract or the scheme, alicense may be necessary.

(Note)”On behalf of a customer” means receiving a request from a customer, taking thecustomer’s side, and aiding for the benefit of the customer.

(ii) When a person receives entrustment from a bank and engages in the entrusted conduct that
falls short of intermediation, the person does not need to obtain a license for a bank agent.
For example, a license for a bank agent may be unnecessary for a person who receives
entrustment from a bank and engages in entrusted conduct that is only part of businessprocessing of the conduct (A) though (d) cited below:(A) Simple distribution and delivery of advertising leaflets, brochures, contract application
forms(Note)In this case, although the name of the handling financial institution and its contact
information are allowed to be conveyed, explaining how to fill in the distributedor delivered documents may be deemed as intermediation.

(B) Receipt and collection of contract application forms and attached documents(Note)In this case, checking the content of a filled-in contract application form, beyond
the simple receipt and collection of the contract application form or beyond
pointing out any wrong description or omission in the contract application formor failure to attach at least one of the necessary documents, may be deemed asintermediation.

(C) In an explanatory meeting about financial instruments, explanation about the structuresand how to utilize general financial instruments handled by banks(D) Business of simply introducing customers to financial institutions without conducting
solicitation activities(Note)a.

The above "introduction" includes the following acts.
Leaving or posting advertising media in which the financial institution introduces441

itself in the store of the operator.
b.

Providing an explanation of the relationship between the business operator andthe financial institution or the business contents of the financial institution.

c.

Only a link to the financial institution's site shall be established, and negotiations
and procedures leading to the conclusion of the contract shall be conducted
between the financial institution and the customer, and the business operator shallnot be involved in the conclusion of the contract.

(iii) As for the conduct of installing an ATM in a sales office or other office in response to theentrustment from a bank, if the ATM falls under the “unmanned equipment” in Article
35(1)(iv) of the Banking Act Enforcement Regulation, a license for a bank agent is unnecessary.
VIII-3-2-1-2

Points of Attention in Acceptance of License Application Forms

VIII-3-2-1-2-1

Acceptance Procedures for License Applications Forms(1) Submission destination of the license application forms
When a license application form for a bank agent is submitted by a license applicant, check whether
the submission destination is the Director-General of Local Finance Bureau administering theapplicant’s principal office or other office.
(2) Proxy application related to license application(i)

When a proxy application related to a license application is made, check whether or not a powerof attorney exists, and if it exists, the scope of the power of attorney, based on the letter ofattorney or any other document with similar effect.

(ii) Even when a proxy application is made, whether the principal applicant has business execution
capability as a bank agent needs to be fully inspected in some way, such as conducting interviews
with the applicant if necessary.
VIII-3-2-1-2-2

Entries in the License Application Form

When checking the entries in the license application form, the following points should be noted.
(Reference) Forms 7-1 and 7-2 described in the Forms and Reference Information(1) Trade name or name of the applicant (Article 52-37 (i) of the Banking Act)In the case where an applicant is an individual, check whether the applicant enters, in the “tradename or name” column, either his/her trade name when the trade name has been registered or his/her
fictitious business (dba, doing business as) name when a fictitious business name has been used.

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(2) Name and location of the applicant's business office(s) or other office(s) at which the bank agent
would perform (Article 52-37(iii) of the Banking Act)
“Business office(s) or other office(s)” in the license application form refers to certain facilities tobe established for the operation of all or part of the bank agent, and exclude facilities that serve forpurposes other than bank agent-related operations.
(3) If that individual is involved in the ordinary business of another corporation, the other corporation's
trade name or name (Article 34-32 (i) and (ii) of the Banking Act Enforcement Regulation)
As for the other corporation's trade name or name, check whether the official name (such as “XX
Incorporated”), instead of the informal name (such as “XX Inc.”), has been entered.
(4) In the case where the person also engages in businesses other than bank agent, the type of each ofthese businesses (Article 52-37(v) of the Banking Act)As for the types of these other businesses, check whether the entry is in accordance with the Middle
Classification as set forth in the Japan Standard Industrial Classification stipulated in the Ministry ofInternal Affairs and Communications Public Notice No. 139 titled “Establishment of thenomenclature and classification table concerning industries pursuant to the provision of the Cabinet
Order Providing for Industrial Classification and Classification of Diseases, Injuries and Death to be
used for Statistical Surveys” (hereinafter referred to as “the Japan Standard Industrial Classification”)(in cases where these other businesses fall under the Large Classification J- FINANCE AND
INSURANCE, the entry should be in accordance with the Fine Classification).
VIII-3-2-1-2-3

Attached Documents

When checking the attached documents, the following points should be noted.
(1) Articles of incorporation (Article 52-37(2)(i) and (ii) of the Banking Act)
Whether business operations are related to the bank agent stipulated in the purposes of the articles
of incorporation.
(2) Documents that contain statements on matters specified by a Cabinet Office Order as those relating
to details and methods of the bank agent (Article 52-37(2)(ii) of the Banking Act)(i)

Among the entries in the “documents that contain statements on matters specified by a Cabinet
Office Order as those relating to details and methods of the bank agent,” check whether “thetype of contract as prescribed in each item of Article 2(14) of the Banking Act that a bank agent
handles” (Article 34-33(1)(i) of the Banking Act Enforcement Regulation) has been entered inaccordance with the following formulae:

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(A) In the “type of deposits” column, whether deposits are classified. For example, whether
yen deposits and foreign currency deposits respectively are classified into current deposits,
ordinary deposits, saving deposits, notice deposits, fixed-term deposits, fixed term savings,
and negotiable certificate of deposits.
(B) In the “type of borrowers” column, whether borrowers are classified, for example, in
consumers and enterprises.
(C) In the “use of funds borrowed” column, whether the uses (such as living expenses, funds
to purchase a house, funds to purchase an automobile, and education expenses) have beenentered in cases where borrowers have specific uses. As for cases where the use is not
specified, whether said effect has been entered.
(ii) Among the entries in the “documents that contain statements on matters specified by a Cabinet
Office Order as those relating to details and methods of the bank agent,” “the system of carryingout the bank agent” (Article 34-33(1)(iii) of the Banking Act Enforcement Regulation) is toinclude systems set forth in each item of Article 34-33(2) of the Enforcement Regulation. In
order to grasp those systems, a pictorial drawing of the surrounding area and the layoutprescribed in Article 34-34(xiii) of the Enforcement Regulation should be used as a reference
when necessary, and the supervisory department in charge should also timely ask for thesubmission of the structure chart and the organizational chart relevant to said system.
(3) Resume (Article 34-34(i) of the Banking Act Enforcement Regulation), or Resume of every officer(Article 34-34(ii) of the same Regulation)(i)

In cases where the present address in the “resume” (when the applicant is an individual) or in
the “resume of every officer” (when the applicant is a corporation) is not identical to the addressin the corresponding extract of the resident record, check the reason. Also check whether thetwo addresses have been entered in the “resume” or the “resume of every officer.”(ii) Check whether the Chinese characters used in the name in the “resume” or the “resume of every
officer” are identical to those used in the name in the corresponding extract of the resident
record. (For example, when an old-style Chinese character has been used in the name in theextract of the resident record, the same old-style Chinese character should be used in the namein the “resume” or the “resume of every officer.”)(4) Extract of a resident record (Article 34-34 (i) and (ii) of the Banking Act Enforcement Regulation)
The “extract of a resident record” to be submitted should contain the following items:(i)Address(ii) Name(iii) Date of birth(iv) Registered domicile

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(5) Any document alternative thereto (Article 34-34 (i) and (ii) of the Banking Act Enforcement
Regulation)
When a foreigner who does not have residence in Japan submits a copy of a document issued in
his/her home country, which is equivalent to a residence record in Japan, or any other similar
document, the submitted document falls under the “any document alternative thereto” stipulated in
Article 34-34 (i) and (ii) of the Banking Act Enforcement Regulation.
(6) Document in which the person pledges not to fall under the provisions of the Article 34-37(iv)(Article 34-34(i) of the Banking Act Enforcement Regulation)
The “document in which the person pledges not to fall under the provisions of Article 34-37(iv)”
to be submitted should contain not only the pledge that the person shall not fall under any of subitems (a) to (h) of item (iv), but also declare to the effect that “the person recognizes that, if thepledge turns out to be false, it would fall under the cause set forth in Article 52-56(1)(ii) of the
Banking Act.”(7) Document in which the person pledges not to fall under the provisions of the Article 34-37(v) (Article
34-34(ii) of the Banking Act Enforcement Regulation)
The “document in which the person pledges not to fall under the provisions of the Article 34-37(v)”to be submitted should contain not only the pledge that the person shall not fall under any of sub-items(a) to (c) of the item (v), but also declare to the effect that “the person recognizes that, if the pledge
turns out to be false, it would fall under the cause set forth in Article 52-56(1)(ii) of the Banking Act.”(8) Document in which an officer pledges not to fall under any of the provisions of sub-items (a) to (h)of Article 34-37 (iv) (Article 34-34(ii) of the Banking Act Enforcement Regulation)
The “document in which an officer pledges not to fall under any of the provisions of sub-items (a)to (h) of Article 34-37 (iv)” to be submitted should contain not only the pledge that the officer shallnot fall under any of sub-items (a) to (h) of item (iv), but also declare to the effect that “the officer
recognizes that, if the pledge turns out to be false, it would fall under the cause set forth in Article
52-56(1)(ii) of the Banking Act.”(9) Draft of the entrustment contract (Article 34-34 (iii) and (iv) of the Banking Act Enforcement
Regulation)(i)

Whether the matters prescribed in each item of Article 34-35(1) of the Banking Act
Enforcement Regulation have been stipulated in the “draft of the entrustment contract.”(ii) Provisions regarding the measures prescribed in each item of Article 34-63(1) of the Banking
Act Enforcement Regulation fall under the “other particulars found to be necessary” (Article
34-35(1)(x) of the Enforcement Regulation) for the entries of the “draft of the entrustment
contract.”445

(10) Documents stating the condition of securing persons with abilities concerning the bank agent and thecondition of placement of those persons (Article 34-34(v) of the Banking Act Enforcement
Regulation)(i)

Check whether the “documents stating the condition of securing persons with abilities
concerning the bank agent and the condition of placement of those persons” contain thefollowing matters:(A) Person(s) with sufficient knowledge about the bank agent’s operations that the applicant
carries out (Article 34-37 (iii) (a) and (b) of the Banking Act Enforcement Regulation) as
well as the method for the person(s) to have acquired the knowledge (including a
document that proves the acquisition of the knowledge, if any), and the planned placementof the person(s)(Note 1) The “sufficient knowledge about the bank agent’s operations that the applicant
carries out” means necessary knowledge to carry out the operations in a sound andappropriate manner. Conceivable examples include the knowledge about the bankagent’s practical operations that the applicant carries out, and the knowledge about
laws and regulations such as the Banking Act, the Banking Act on the Protection of
Personal Information, the Banking Act on Prevention of Transfer of Criminal
Proceeds, and the Foreign Exchange and Foreign Trade Act.
(Note 2) Persons with sufficient knowledge about the bank agent’s operations that theapplicant carries out are to be assigned as a “responsible person for operations inorder to secure compliance with laws and regulations, etc. pertaining to the bankagent’s operations that the applicant carries out” (Article 34-37(iii)b of the Banking
Act Enforcement Regulation) and as a “supervising manager for supervising of
securing compliance with laws and regulations” (ditto). Accordingly, in addition toprofessional knowledge about the abovementioned laws and regulations, theknowledge described below is also required.
a.

In the case of a “responsible person for operations in order to secure compliancewith laws and regulations, etc. pertaining to the bank agent’s operations that theemployer engages in”
In terms of basic laws such as the Civil Code, the Commercial Code, theCompanies Act, and the Penal Code, professional knowledge about certain partsof such basic laws that are relevant to the bank agent’s operationsb.

In the case of a “supervising manager for supervising of securing compliance withlaws and regulations”
In terms of basic laws such as the Civil Code, the Commercial Code, theCompanies Act, and the Penal Code, professional knowledge not only aboutcertain parts of such basic laws that are relevant to the bank agent’s operations

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but also about a wide range of matters related to compliance(B) Background of each person with experience involved in the bank agent’s operations thatthe employer engages in (including a document that proves the experience, if any) andthe planned placement of the person(s)(ii) With regard to the background of each person with experience involved in the bank agent’s
operations that the employer engages in, check whether the background contains necessary
information (such as the name of each company where the person has previously worked, theassigned departments, the assigned roles, the date of each assignment, each tenure, and each
operation in his//her charge) to accurately grasp the person’s experience.
(11) “Record concerning assets” (Article 34-34(vi) of the Banking Act Enforcement Regulation)
With regard to the “record concerning assets,” the FSA will check accordingly whether a certificate
of deposit balance, a certificate of property tax assessment, and/or any other document that proves
the amount of assets is attached, where necessary.
(12) “Documents certifying the guarantee” (Article 34-34(x) of the Banking Act Enforcement Regulation)
Conceivable examples of the “documents certifying the guarantee” include a guarantee contract
and a letter of awareness.
(13) “Documents stating the content and means of concurrent business” (Article 34-34(xi) of the Banking
Act Enforcement Regulation)
With regard to the “documents stating the content and means of concurrent business,” the FSA
will check whether they contain the classification information in accordance with the Middle
Classification as set forth in the Japan Standard Industrial Classification (in cases where theconcurrent business falls under the Large Classification J- FINANCE AND INSURANCE, theinformation should be in accordance with the Fine Classification).
(14) “Documents stating matters which to be referenced for an examination as prescribed in Article 52-38(1) of the Banking Act, beyond the provisions set forth in each of the preceding items” (Article 3434(xiv) of the Banking Act Enforcement Regulation)
The documents stating matters which are to be referenced for a permission examination of thebank agency service (Article 52-38 (1) of the Banking Act), for example, include a certificate ofdeposit balance and a certificate of property tax assessment (as in the above (12)). If there is anyother reference document necessary for the examination, the FSA will ask the applicant for thesubmission accordingly so as to conduct the examination in an accurate and prompt manner.
VIII-3-2-2

Points to Note in Examining Permission447

(1) When examining permission for bank agency services, a careful examination will be made of whether
a person who intends to obtain the permission is able to execute the business as a bank agent as
described in the Banking Act, the Enforcement Order, the Enforcement Regulation, and thisSupervisory Guideline as well as the points to note to be listed below.
(2) If problems are recognized during the examination, it should be noted that it is necessary to cooperatewith relevant supervisory departments in accordance with VIII-3-1-3(1), as there might be problems
in the instructions by a principal bank or a principal bank agent.
Moreover, if a person who conducts numerous or extensive operations by giving sub-entrustmentof bank agency services to another party, for example, in the form of a franchise system, applies forthe permission, it should be noted that it is more important to cooperate with relevant supervisorydepartments, as similar problems might happen to other applicants. In a case like this, the FSA must
be contacted promptly.
VIII-3-2-2-1

Examination Related to Financial Basis

It is necessary to make an examination of a financial basis provided in Article 52-38(1)(i) of the Banking
Act, in consideration of matters listed in Article 34-37(ii) of the Banking Act Enforcement Regulation. The
main points to note are described, for example, in the following (1) and (2).
The examination will be made based on the written application for permission, Article 52-37(2) of the
Banking Act, Article 34-34(vi) to (x) and (xiv) of the Banking Act Enforcement Regulation, and otherdocuments or materials on a case-by-case basis, together with the cooperation from the applicant throughinterviews and submission of additional documents when necessary.
(1) Whether the amount of net assets is calculated accurately, as found by scrutinizing the balance sheet
and other documents or materials.
(2) In examining the amount of net assets during the applicable period for the estimation of income andexpenditures and property status, the conditions on which to estimate the income and expendituresand property status will be closely scrutinized. Moreover, when the conditions, which are prerequisite
for the estimation of income and expenditures and property status, are found to be below theestimation, whether to expect enough profit to cover the ordinary expenses, etc. will be examined.
VIII-3-2-2-2

Examination Related to Business Execution Ability

It is necessary to make an examination of “the ability necessary to perform bank agency services
appropriately, fairly, and efficiently” in Article 52-38(1)(ii) of the Banking Act, in consideration of matterslisted in Article 34-37(iii) of the Banking Act Enforcement Regulation.

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The examination will be made based on the written application for permission, Article 52-37(2) of the
Banking Act, Article 34-34(i) to (v), (ix), and (xii) to (xiv) of the Banking Act Enforcement Regulation,and other documents or materials on a case-by-case basis, together with the cooperation from the applicant
through interviews and submission of additional documents when necessary.
(1) When the applicant is an individual (excluding a person who engages in bank agency services in two
or more offices; the same applies hereinafter), assign the personnel necessary for conducting thebusiness (Article 34-37(iii)(a) of the Banking Act Enforcement Regulation)
When the applicant is an individual, it should be noted that the applicant needs to have theknowledge described in (*1) and (*2) of VIII-3-2-1-2-3(11)(i)(A) as “sufficient knowledge aboutbank agency service’s operations that the applicant carries out.”(2) “Regular loan agreement” (Article 34-37(iii)(a) of the Banking Act Enforcement Regulation)“Regular loan agreement” refers to a loan agreement in which there is little room for the discretionof a loan officer because procedures such as judging whether or not to conclude the agreement andsetting the conditions of the agreement are stylized.
(Note)

This “regular loan agreement” includes a loan agreement pertaining to “standardized loan
products” provided in (3).

(3) “Standardized loan products” (Article 34-37(vi)(c) and 34-37(vii)(b) of the Banking Act
Enforcement Regulation)“Standardized loan products” mean loan products for which the loan possibility and conditions
have been determined only by mechanical processing of financial data concerning the fundconsumers; “financial data” described here are data related to finance of the fund consumers,
including each account item listed in financial statements, and against which there is little or no room
for the discretion of a loan officer.
(4) A person who has engaged in the services of loaning of funds, or is found to possess abilities equal or
better thereto (Article 34-37(iii)(a) and (b) of the Banking Act Enforcement Regulation)(i)

A person who has engaged in the services of loaning of funds refers, for example, to a person
who has engaged in loan business in a financial institution or a money lender. It should be notedthat “the services of loaning of funds” do not refer to mere services for transmitting documents,
but need to satisfy the requirements of the services of loaning of funds that the applicant
engages in as a bank agent.

(ii) It should be noted that a person who has engaged in analyzing corporate finance, for example,
as a certified public accountant, a certified public tax accountant, a financial consultant, aninvestment banking business manager, a management consultant at a chamber of commerce
and industry can be defined, in some cases, as a person who is found to possess abilities equal449

to or better than a person who has engaged in the services of loaning of funds, and that theknowledge and experience required for the services of loaning of funds that the applicant
engages in as a bank agent need to be judged in light of his or her qualifications and job history.
(iii) It should be noted that even a person who has engaged in the services of loaning funds, or isfound to possess abilities equal or better thereto, needs to have sufficient knowledge about bankagency services.
(5) When the applicant is a corporation (including an individual who engages in bank agency services at
two or more offices; the same applies hereinafter), assignment of the personnel necessary for
conducting the business (Article 34-37(iii)(b) of the Banking Act Enforcement Regulation)
As for “a responsible person for operations in order to secure compliance with laws and regulations,etc. pertaining to bank agency services that the corporation engages in” and “a supervising manager
for supervising of securing compliance with laws and regulations, etc.” who need to be assigned when
the applicant is a corporation, it should be noted that the former and the latter need to have theknowledge described in (*1) and (*2)a of VIII-3-2-1-2-3(11)(i)(A) and (*1) and (*2) of VIII-3-2-12-3(11)(i)(A), respectively.
(6) Main points to note pertaining to internal rules (Article 34-37(iii)(d) of the Banking Act Enforcement
Regulation)
While a bank agent must establish internal rules concerning bank agency services, the following (i)to (viii), for example, should be noted when confirming the internal rules for examination of
permission:(i) Method of segregated management of property
Whether the internal rules specifically define the methods of segregated management ofproperty delivered by customers with regard to the operations pertaining to bank agency
services and stipulate that the delivered property be able to be managed in a condition that is
immediately distinguishable as to whether said property is its own asset or belongs to any
principal bank. Also, whether they prescribe specific procedures for properly examining thestatus of compliance.
(Note)

It is preferable to manage money in a physically segregated manner. At least, it isnecessary to manage it in a segregated account.

(ii) Methods of solicitation for the conclusion of contracts and clarification of the contents of thecontract
Whether the internal rules specifically define the methods of customer solicitation,clarification of the contents of contracts, and provision of documents at the signing of contracts,
and stipulate that the bank agent conducts appropriate business operations in compliance withlaws and regulations. Also whether they prescribe specific procedures for properly examining
the status of compliance with laws and regulations.

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(iii) Methods for preparation and storage of books and documents
Whether the internal rules specifically define the methods for preparation and storage of thebooks and documents listed in Article 34-58 of the Banking Act Enforcement Regulation.
(iv) Method of implementing training
Whether the internal rules stipulate specific provisions concerning the development of acontrol environment for properly implementing training for sales representatives in order toensure compliance with laws and regulations, and provision of appropriate solicitation andexplanation of financial instruments, as well as provision of documents, to customers.
(v)

Method for verification at the time of transaction
Whether the internal rules specifically stipulate the development of a system for appropriate
identification confirmation based on the Foreign Exchange Act and appropriate verification at
the time of transaction based on the Anti-Criminal Proceeds Act, and appropriate submissionof doubtful transactions.

(vi) Development of internal control environment
Whether the internal rules specifically stipulate the methods of managing operations
pertaining to internal controls and the internal system of responsibility.
(vii) Management of customer information(A) Whether the internal rules specifically specify the methods and systems for properly
managing customer information (including separation of organizations and persons incharge, installation of information barriers in terms of equipment and systems, blockadeof information) and other handling pursuant to III-3-3-3.
(B) Whether the internal rules specifically specify the measures in order to obtain thecustomer’s prior consent concerning treatment of non-public financial information andother non-public information (information as prescribed in Article 34-48 of the Banking
Act Enforcement Regulation; the same applies hereinafter).
(viii) Method for dissemination of internal rules
Whether the contents of the internal rules will be well disseminated to all officers andemployees engaging in bank agency services.
(7) “It is not found that the personnel structure, capital structure, or organization, etc. of the applicant islikely to hinder carrying out of bank agency services precisely, fairly, and efficiently.” (Article 3437(iii)(e) of the Banking Act Enforcement Regulation)
When examining the applicant’s business execution ability, decisions should be made on whether
or not to give the applicant the permission to operate as a bank agent by considering whether there
is a corporation or an individual that has great influence on the applicant, and the degree of its
influence, etc. based on the personnel structure, capital structure, or organization, etc. of theapplicant.
(Note)For example, cases where the applicant has a parent company, or the applicant has a company

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to which it sends a majority of its directors are typical ones where it is found that there is a
corporation that has a great influence on the applicant, but are not limited to these cases.
VIII-3-2-2-3

Examination on Social Credibility

It is necessary to make an examination of “a person who has sufficient social credibility” provided in
Article 52-38(1)(ii) of the Banking Act, in consideration of matters listed in Article 34-37(iv) and (v) of
the Banking Act Enforcement Regulation.
The examination will be made based on the written application for permission, Article 34-34(i), (ii) and(xiv) of the Banking Act Enforcement Regulation and other documents or materials on a case-by-case basis,
together with cooperation from the applicant through interviews and submission of additional documents
where necessary.
VIII-3-2-2-4

Examination on Concurrent Engagement in Other Businesses

It is necessary to make an examination of concurrent engagement in other businesses provided in Article
52-38(1)(iii) of the Banking Act, in consideration of matters listed in Article 34-37(vi) of the Banking Act
Enforcement Regulation. The main points to note are described, for example, in the following (1) to (6).
The examination will be made based on the written application for permission, Article 52-37(2) of the
Banking Act, Article 34-34(iii), (iv) and (xi) to (xiv) of the Banking Act Enforcement Regulation, and otherdocuments or materials on a case-by-case basis, together with cooperation from the applicant throughinterviews and submission of additional documents where necessary.
It should be noted that the relationships between the contents of the main concurrent business and thebusiness related to bank agency services are prescribed in Article 34-37(vi)(c) and (vii), etc.; Exhibit 5
shows classified information on the relationships. (However, when examining concurrent engagement inother businesses, Exhibit 5 should not always be applied mechanically; individual cases should be fully
examined in order to ensure that the applicant is not be likely to inhibit the proper and reliable managementof the bank agency services by concurrently engaging in other businesses.)(1) It should be noted that the businesses (for example, acting as an agent or intermediary for repayment
of deposits, and receiving payment of loans) usually carried out incidentally to the operations in whichto engage by performing the activities listed in each item of Article 2(14) of the Banking Act do notcorrespond, in principle, to other businesses provided in Article 52-38(1)(iii) of the Banking Act,
excluding those cases where they correspond to businesses required to be licensed, permitted, andregistered in other laws and regulations, including claim management and collection businesses as set
forth in the Banking Act on Special Measures Concerning Claim Management and Collection
Business.
(Note)

Accordingly, these cases do not correspond to concurrent businesses subject to examination452

for permission, and approval does not need to be obtained for concurrent business(2) “Standardized loan products” (Article 34-37(vi)(c) and (vii)(b) of the Banking Act Enforcement
Regulation)“Standardized loan products” mean loan products for which the loan possibility and conditions
have been determined only by mechanical processing of financial data concerning the fundconsumers; “financial data” described here are data related to finance of the fund consumers,
including each account item listed in financial statements, and against which there is little or no room
for the discretion of a loan officer.
(3) “The act is pertaining to a loan agreement that is concluded with security of goods or articles
purchased with the loan funds” (Article 34-37(vii)(a) of the Banking Act Enforcement Regulation)“A loan agreement that is concluded with security of goods or articles purchased with the loan
funds” includes a housing loan (that places mortgage on a house to be purchased with the loan funds)
or an auto loan (that places mortgage on an automobile to be purchased with the loan funds, or sets
ownership retention, etc.).
(4) “The content of its concurrent business is likely to damage the social credibility as a bank agent”(Article 34-37(vi)(b) of the Banking Act Enforcement Regulation)
While the cases where the content of its concurrent business is likely to damage the social credibility
as a bank agent are, for example, thought to be those where the bank agent concurrently engages ina business that is likely to damage good morals and customs or peace in public life, or that is contrary
to public order and decency, and in an antisocial business, the judgment should be made by taking
into comprehensive consideration the characteristics and mode of the concurrent business, and theimpact on the transaction counterparty and society.
(5) “The content of main concurrent business” (Article 34-37(vi) and (vii) of the Banking Act
Enforcement Regulation)
Whether or not the concurrent business that the bank agent engages in corresponds to the main
concurrent business should be judged by taking into comprehensive consideration the scale of the
concurrent business including the expenses, sales, and earnings pertaining to the business, and thejob titles and number of those engaged in the business, and the time required for the business.
(6) The act of “making use of its advantageous position in a transaction for concurrent business” (Article
34-37(vi)(d) of the Banking Act Enforcement Regulation)
With regard to the act of “making use of its advantageous position in a transaction for concurrent
business,” while a document, “Regarding Unfair Trading Practices Following Loosening of Financial
Institutions’ Business Categories and Expansion of Business Scope,” issued on December 1, 2004, by453

the Fair Trade Commission, will be referenced, the following practices, for example, may constitutethe act of making use of its advantageous position in a transaction for concurrent business.
(i)

The bank agent actually forces customers to sign contracts which stipulate that it accepts
deposits for which it acts as an agent or intermediary (the same applies to other acts listed ineach item of Article 2(14) of the Banking Act; the same will apply in the following (ii) to (iv)),
by implying that it will suspend transactions related to concurrent businesses, or give
unfavorable treatment to such businesses unless they sign the contracts.

(ii) The bank agent actually forces customers to sign contracts on acceptance of deposits for which
it acts as an agent or intermediary, by requesting them to do so when it conducts transactions
with them regarding concurrent businesses.
(iii) In cases where customers intend to sign contracts with a competitor who conducts business
related to bank agency services, the bank agent prevents customers from signing the contracts
on acceptance of deposits with its competitor (including a bank or a bank agent; the same will
apply in (iv)) by implying it will suspend transactions with them regarding concurrent
businesses or give unfavorable treatment to such businesses.
(iv) The bank agent actually forces customers not to sign contracts on acceptance of deposits with
its competitor, by requesting them to do so when it makes transactions with them regarding
concurrent businesses.
VIII-3-2-3

Others

VIII-3-2-3-1

Handling of Approval of Permission Application

VIII-3-2-3-1-1

Permission Number(1) The permission number of a bank agent will be as follows (Serial numbers will be given also tosecondary bank agents.):〇〇財務（⽀）局⻑（銀代）第〇〇号
Director-General of the XX Local Finance (Branch) Bureau (Bank Agent) No. XX(2) Handling of permission numbers(i)Each permission number will be identified by a serial number, which is assigned by the local
finance bureau.

(ii) When a permission is no longer valid, the applicable permission number will be a missing
number and will not be replaced.
(iii) Permission numbers will be managed using Form VIII-3-1-5 described in the Forms andReference Information.

454

VIII-3-2-3-1-2

Notification to Permission Applicants

When the FSA gives permission to an applicant to engage in bank agency services, the FSA will issue awritten permission to the permission applicant.
VIII-3-2-3-2

Handling of Denial of Permission Application(1) In case the FSA denies the application for the permission, the FSA will issue a written notice which
describes the reason for the denial and the right of the applicant to request the Commissioner of the
FSA to examine the permission applicant (See II-5-2).
VIII-3-3

Points to Note Regarding Receipt of Notification(1) In general, when receiving a notification based on Article 52-39, 52-52, or Article 53 of the Banking
Act, or Article 34-56, Article 34-61, or Article 35 of the Banking Act Enforcement Regulation or otherlaws and regulations, it is necessary to closely examine the content of the notification to find out
whether the notification violates any laws and regulations, and whether there are problems with theappropriateness and soundness of the applicant’s business operations. As a result of confirmation,
when some problem is found, measures for a report request under Article 52-53 of the Banking Act
and for a business improvement order under Article 52-55 of the Banking Act will be properly taken(See II-5-2).
(References)
VIII-3-4

Form 7-4 described in the Forms and Reference Information

Administrative Processes Related to Application for Approval of Concurrent Business

VIII-3-4-1
VIII-3-4-1-1

Points to Note in Approval of Concurrent Business
Necessity of Approval of Concurrent Business

When a bank agent who has already received an approval of concurrent business begins an operation
classified separately from that before the change made in the middle classification (small classification
when the bank agent belongs to the large classification [J] for finance and insurance) set forth in theJapanese Standard Industrial Classification, it is necessary, with regard to the new operation, to newly
obtain an approval of concurrent business described in Article 52-42(1) of the Banking Act.
VIII-3-4-1-2

Points to Note in Acceptance of Written Application for Approval of Concurrent
Business

455

Form 7-3 described in the Forms and Reference Information as well as VIII-3-2-1-2 should be applied
to matters to be stated in a written application for approval of concurrent business.
VIII-3-4-2

Points of Attention in Examination of Approval of Concurrent Business

VIII-3-2-2 should be applied.
VIII-3-4-3

Others

VIII-3-4-3-1

Handling of Approval

When the FSA approves a concurrent business, a written approval of concurrent business should be
issued to the applicant.
VIII-3-4-3-2

Handling of Disapproval

When the FSA refuses to approve a concurrent business based on Article 52-42(2), a written disapproval
notice which describes the reason for the disapproval and the right of the applicant to request theCommissioner of the FSA for examination will be issued to the applicant.
VIII-4
VIII-4-1

Bank Agent
Purpose and SignificanceBank agency services means a business performing any of the following acts on behalf of a bank: (i)acting as an agent or intermediary for conclusion of a contract on acceptance of deposits or installation
savings, etc.; (ii) acting as an agent or intermediary for conclusion of a contract on loans of funds or
discounting of bills; or (iii) acting as an agent or intermediary for conclusion of a contract on exchangetransactions. The bank agent means a person who provides bank agency services under the license of thePrime Minister prescribed in Article 52-36(1) of the Banking Act. The bank agent, as a person who
provides bank agency services themselves, should take measures to ensure sound and appropriate
management in relation to the bank agency services it provides.
VIII-4-2

Major Supervisory Viewpoints(1) In view of the nature and business content of a bank agent, appropriateness of business operations,etc. of the bank agent should be supervised based on III-3 when necessary, as well as on the matters456

set forth in the following VIII-4-2-1 to VIII-4-2-7.
(2) If problems are recognized with regard to a bank agent, it should be noted that it is necessary tocooperate with relevant supervisory departments of a principal bank or a principal bank agent inaccordance with VIII-3-1-3(1), because there might be some problems with instructions by theprincipal bank or the principal bank agent.
Moreover, if problems are recognized with regard to a person who conducts numerous orextensive operations by giving sub-entrustment of bank agency services to another party, forexample, in the form of a franchise system, it should be noted that it is more important to cooperatewith relevant supervisory departments, because similar problems might happen to other agents. In acase like this, the FSA must be contacted promptly.
VIII-4-2-1

Prohibited Acts, and Inappropriate Transactions Pertaining to a Bank Agent(1) Wrongful use of an advantageous position in a transaction as a bank agent (Article 34-53(iii) of the
Banking Act Enforcement Regulation)
Supervision of wrongful use of an advantageous position in a transaction as a bank agent must be
conducted with due consideration of “Regarding Unfair Trading Practices Following Loosening of
Financial Institutions’ Business Categories and Expansion of Business Scope,” a document issued
on December 1, 2004, by the Fair Trade Commission. For example, the following practices may
constitute a wrongful use of an advantageous position in a transaction as a bank agent ((i) and (ii)of the following practices may also constitute “wrongfully acting as an agent or intermediary in the
conclusion of a contract as prescribed in one of the items of Article 2(14) of the Banking Act on thecondition that the customer effect a transaction with the bank agent or a business operator it
designates” provided in Article 34-53(ii) of the Banking Act Enforcement Regulation).
(i)

The bank agent effectively forces customers to purchase products in which it deals in its
concurrent business by implying that it will stop acting as an agent or intermediary in thecontract on the lending of funds (including other acts set forth in each item of Article 2(14) of
the Banking Act; the same will apply in the following (ii) to (iv)) or give unfavorable
treatment to agent or intermediary services it provides in the contract on the lending of funds
unless they make transactions with the bank agent regarding the bank agent’s concurrent
business.

(ii) The bank agent requests, and effectively forces, customers to purchase products in which it
deals in its concurrent business when it acts as an agent or intermediary in the contract on thelending of funds to customers.
(iii) In cases where customers intend to sign contracts with a competitor who conducts the samebusiness in which the bank agent engages as its concurrent business, the bank agent prevents
customers from purchasing the products by the competitors in its concurrent business by
implying that it will stop acting as an agent or intermediary in the contract on the lending of457

funds or give unfavorable treatment to agent or intermediary services it provides in thecontract on the lending of funds.
(iv) The bank agent requests, and effectively forces, customers not to purchase products by thecompetitors in its concurrent business when it acts as an agent or intermediary in the contract
on the lending of funds to customers.
(2) Wrongful use of an advantageous position in a transaction based on concurrent business (Article 3453(v) of the Banking Act Enforcement Regulation)
Supervision of wrongful use of an advantageous position in a transaction in concurrent businessmust be conducted with due consideration of “Regarding Unfair Trading Practices Following
Loosening of Financial Institutions’ Business Categories and Expansion of Business Scope,” adocument issued on December 1, 2004, by the Fair Trade Commission. For example, the practices
set forth in VIII-3-2-2-4(6) may constitute a wrongful use of an advantageous position in atransaction in concurrent business ((i) and (ii) of these practices may also constitute “wrongfully
having the customer effect a transaction with itself or a person doing business it designates on thecondition that it act as an agent or intermediary in the conclusion of a contract as prescribed in each
item of Article 2(xiv) of the Banking Act” provided in Article 34-53(iv) of the Banking Act
Enforcement Regulation).
(3) With regard to a control environment that prevents prohibited acts as prescribed in Article 52-45 of
the Banking Act and Article 34-53 of the Banking Act Enforcement Regulation, attention should be
paid to the points listed below.
(i)Whether the bank agent establishes a division or appoints a person responsible for
implementing measures for preventing prohibited acts. Also, whether the bank agent develops
a control environment for examining whether such division or person has properly
implemented measures for preventing prohibited acts.

(ii) Whether the bank agent establishes internal rules on a system for implementing training
required to prevent prohibited acts and a system for dealing with complaints from customers
and disseminates these rules within the organization.
(iii) In order to prevent prohibited acts, whether the bank agent conducts training, on a regularand as-needed basis, by a person who has knowledge and practical experience of laws andregulations pertaining to bank agency services.
(iv) Whether the bank agent establishes a control environment for responding to complaints, suchas specifying the contact point for customer complaints regarding prohibited acts, establishinga division in charge of processing complaints and prescribing procedures for processing
complaints.
(4) In addition to the above (1) to (3), prevention of inappropriate transactions, etc. should be based on458

III-3-1-6.
VIII-4-2-2

Legal Compliance (for Especially Important Matters)

Supervisory methods and measures related to verification at the time of transaction, obligation forreporting of suspicious transactions and elimination of relations with antisocial forces should be based on
III-3-1 as well as on the following (1) and (2).
(1) If inspection result notices, misconduct notifications, or the like reveal a problem relating to a bankagent’s internal control environment for ensuring the fulfillment of obligation of verification at thetime of transaction and obligation for reporting of suspicious transactions, or to its structure to ban
any relations with antisocial forces, the FSA requires the bank agent to submit reports based on Article
52-53 of the Banking Act when necessary. If a serious problem is found, the FSA issues a business
improvement order based on Article 52-55 of the Banking Act.
(2) Moreover, if a bank agent violates laws and regulations, including the obligation of verification at thetime of transaction and obligation for reporting of suspicious transactions, or a bank agent is deemed
to have significantly harmed public interest, the FSA issues a business suspension under Article 5256 of the Banking Act. The same will apply to cases where a bank agent, who recognizes therelationship with antisocial forces, hasn’t taken proper actions, and is found to have violated laws andregulations or to have significantly harmed public interest.
VIII-4-2-3

Provision of Information and Consultation Function for Protection of Users

Based on Article 52-44(2) and (3) of the Banking Act and Article 34-43 to 34-53 of the Banking Act
Enforcement Regulation, supervisory measures regarding the bank agent’s provision of information andconsultation function, etc. for protection of users should be taken in accordance with III-3-3 and thefollowing (1) to (3).
(1) Control environment for preventing explanation that might be falsely recognized as abuse of superior
position
If a bank agent concurrently engages in other businesses, confirmation should be made as towhether the bank agent has developed a control environment that prevents the provision of
explanations that could be mistaken as an abuse of a superior bargaining position banned under the
Antimonopoly Act; it is necessary to note that, for example, activities listed in VIII-3-2-2-4(6) and
VIII-4-2-1(1) can be those which correspond to an abuse of a superior bargaining position.
(2) System for prevention of misrecognition of financial products as deposits (Article 34-45 of the459

Banking Act Enforcement Regulation)
If a bank agent sells financial instruments or acts as an agent or intermediary, it should be notedthat the bank agent needs to develop a control environment for preventing misrecognition of financial
products as deposits.
(3) Management of customer information(i)

Customer information should be basically managed in accordance with III-3-3-3. If a bankagent concurrently engages in other businesses, the bank agent should pay attention towhether it has developed methods and systems for properly managing customer information(including establishing internal rules regarding separation of organizations and persons incharge, installation of information barriers in terms of equipment and systems, blockade of
information, conducting employee education and training, etc.) in order to prevent thecustomer information obtained through its bank agency services from being used for its
concurrent business without the customer’s prior consent.

(ii) As for the customer’s prior consent, particularly, with regard to treatment of non-publicfinancial information and non-public information (note that information on customer
attributes (name, residential address, telephone number, sex, birthdate and occupation) is
personal information, but is not included in non-public financial information and non-public
information), it is necessary to confirm whether the bank agent has taken measures in order toobtain the customer’s prior consent (described in Article 34-48 of the Banking Act
Enforcement Regulation), for example, in the following appropriate methods.
(A) Face-to-face contact
Method of giving a prior explanation in writing to and obtaining prior consent in writingfrom the customer before the customer makes an application for a contract(B) Mail
Method of sending a prior written explanation and obtaining a written reply showing
the customer’s consent before informing the principal bank of the conclusion of thecontract(C) Telephone
Method of giving a prior oral explanation, then promptly sending the written document
describing the given explanation (the document can be delivered directly to the customer
in the case of having face-to-face contact with the customer after obtaining the customer’s
consent by telephone) and obtaining the customer’s consent in writing before thecustomer makes an application for a contract(D) The internet, etc.
Method of giving a prior explanation by electronic or magnetic means, and obtaining
the customer’s consent by electronic or magnetic means

460

VIII-4-2-4

Rules, etc. for User Protection

Rules are based on III-3-4 and are as follows.
As for posting by a bank agent of signs prescribed in Article 52-40 of the Banking Act, and Article 34-40
and 34-45(3) of the Banking Act Enforcement Regulation, attention should be paid to whether the shapes
and sizes of the signs and the intelligibility of letters written, and the conditions under which the signs areposted might cause customers’ misidentification and confusion.
Posting of holidays and business hours of a specified bank agent prescribed in Article 52-46 of the
Banking Act, Article 16-7 of the Banking Act Enforcement Order, and Article 34-55 of the Banking Act
Enforcement Regulation, and posting by a bank agent of discontinuance of a principal bank prescribed in
Article 52-48 of the Banking Act and Article 34-57 of the Banking Act Enforcement Regulation will besimilarly carried out.
VIII-4-2-5

Measures to be Taken by a Bank Agent When Undertaking Bank Agency Services for Twoor More Principal Banks

VIII-4-2-5-1

Explanation to Customers (Articles 34-43 and 34-46 of the Banking Act Enforcement
Regulation)

If a bank agent undertakes services on behalf of two or more principal banks, it must explain the following
items from (i) to (iv) to customers in advance. It should pay attention to whether it has developed a control
environment for doing its utmost to enable customers to understand the items, by using written
explanations, for example.
(i)

If the amount of fees to be paid by the customer is different from the amount of fees to be paid
under a similar contract with another principal bank, the fact that there is a difference must be
explained to the customer.

(ii) If the bank agent acts as an agent or intermediary for another principal bank regarding thesigning of a contract similar to the one which the customer intends to sign, this fact must be
explained to the customer.
(iii) The contents of the similar contract described in the above (ii) and other information that
could be useful for the customer must be provided upon his/her request.
(iv) The trade name of the principal bank which is the ultimate counterparty to the customer’stransaction must be made clear to the customer.
VIII-4-2-5-2Management of Customer Information

If a bank agent undertakes bank agency services on behalf of two or more principal banks, the bank agent461

should fully examine whether it has developed methods and systems for properly managing customer
information (including establishing internal rules regarding separation of organizations and persons incharge, installation of information barriers in terms of equipment and systems, blockade of information,and conducting employee education and training, etc.) in order to prevent the customer information
obtained through the bank agency services for one principal bank from being used for the bank agency
services for another principal bank without the customer’s prior consent.
VIII-4-2-6

Measures Taken by a Principal Bank Agent to Ensure the Sound and Appropriate Conduct
of Business Operations of a Secondary Bank Agent(1) A principal bank agent is responsible for taking measures to provide guidance regarding business
operations related to bank agency services that a secondary bank agent engages in, and to ensure thesound and appropriate conduct of other business operations of the secondary bank agent. In order tosupervise the secondary bank agent, full attention should be paid to the responsibility of the principalbank agent as well as of its principal bank.
Therefore, in order to ensure the sound and appropriate conduct of business operations related tobank agency services that the secondary bank agent engages in, it is necessary to supervise theprincipal bank agent properly.
(2) If problems are recognized with a secondary bank agent (or a person who would be a secondary bankagent), or if off-site monitoring is given to a principal bank agent, information will be collected froma principal bank agent. This information collection should be based on VIII-5-2 when necessary, andattention should be paid to whether an internal environment has been developed in order to preventa secondary bank agent from entrusting to the third party the bank agency services that the secondarybank agent conducts by receiving sub-entrustment from the principal bank agent.
(3) If problems are recognized with regard to a principal bank agent’s control environment for instructing
and supervising a secondary bank agent, it should be noted that it is necessary to cooperate with
relevant supervisory departments of the secondary bank agent in accordance with VIII-3-1-3(1),because there might be some problems with the internal control environment of the secondary bankagent.
Moreover, if problems are recognized with regard to a person who conducts numerous orextensive operations by giving sub-entrustment of bank agency services to another party, forexample, in the form of a franchise system, the FSA must be contacted promptly.
VIII-4-2-7
VIII-4-2-7-1

OthersProhibition of Name-Lending462

When judging whether a use of a name corresponds to “the name of that bank agent” prescribed in Article
52-41 of the Banking Act, it should be noted the use of a name corresponds to “the name of that bank agent”
even if, for example, the bank agent permits to use the abbreviated name of the bank agent.
VIII-4-2-7-2

Points to Note Regarding Public Inspection of Written Reports of Bank Agency
Services

Public inspection of written reports of bank agency services prescribed in Article 52-50(2) of the Banking
Act and Article 34-59(5) of the Banking Act Enforcement Regulation should be treated as follows:(1) The date of public inspection of written reports should be a day other than a holiday as specified in
Article 1 of the Banking Act on Holidays of Administrative Organs, and the public inspection period
should be within the duration designated by the director-general of the local finance bureau. However,when it is necessary to organize written reports for any other reason, the public inspection date ortime may be changed.
(2) Written reports must not be taken out of the place of the public inspection designated by the directorgeneral of the local finance bureau.
(3) When any inspector falls under the following category, the public inspection may be suspended or
refused:(i)

Any person who does not follow the above (1) and (2) or the instructions of the bureau.

(ii) Any person who has defaced or damaged written reports, or who may do so.
(iii) Those who have caused trouble to other inspectors, or who may do so.
(4) Of the written reports, “particulars which are likely to cause unfair disadvantages to the carrying outof the business of the bank agent”, which are excluded from public inspection, are thought to include
records on property and balance sheets to be submitted as documents attached to the written reports.
(5) When a request is made for the inspection of written reports related to a bank agent to which thelicense has been granted by another director-general of the local finance bureau, the applicant for
inspection will be informed that such inspection can be supplied by the finance bureau that granted
the license.
VIII-4-2-7-3

Public Inspection of Written Explanation of Principal Bank“Compelling reasons why the bank agent that filed the application has to postpone the commencement463

of the public inspection as under the provisions of paragraph (1)” prescribed in Article 34-60(4) of the
Banking Act Enforcement Regulation, include cases where the legitimate interests of third parties are likely
to be adversely affected by natural disasters or public inspection. It should be noted that the bank agent’s
own reasons are not included.
VIII-5

Principal Bank

VIII-5-1

Background(1) The term “principal bank” means a bank which, through agency or brokerage services provided by
the bank agent, concludes (i) a contract on acceptance of deposits or installation savings, etc.; (ii) a
contract on loans of funds or discounting of bills; or (iii) a contract on exchange transactions.
A principal bank is responsible for taking measures to provide guidance regarding business
operations related to bank agency services a bank agent engages in, and to ensure the sound andappropriate conduct of business operations of the bank agent.
(2) The purpose for which the Banking Act makes a principal bank as well as a bank agent take such
responsibility is to declare that primarily a principal bank must fulfill its responsibility of ensuring thesound and appropriate conduct of business operations related to bank agency services that a bankagent engages in. Even when supervising a bank agent, full attention should be paid to the primary
responsibility of a principal bank.
Thus, when supervising a bank agent, it is of course important to supervise the bank agent itself,
as specified in Exhibit 4. However, it is more necessary to place emphasis on supervision of a principalbank, and mainly supervision of a principal bank should be carried out to ensure the sound andappropriate conduct of business operations related to bank agency services that a bank agent engagesin.
VIII-5-2

Major Supervisory Viewpoints(1) When collecting information from a principal bank, for example, in cases where a principal banksubmits a notiﬁcation prescribed in Article 35(1)(vi)-２ of the Banking Act Enforcement Regulation,
off-site monitoring is given to a principal bank, and a problem is found in an internal control
environment of a bank agent (or a person who intends to be a bank agent), attention should be paid
to whether examine is carried out in a principal bank, based on the following perspectives:(2) If problems are recognized with regard to a principal bank’s control environment for guidance andsupervising a bank agent, it should be noted that it is necessary to cooperate with relevant supervisorydepartments of the bank agent in accordance with VIII-3-1-3(1), because there might be some464

problems with internal control environment of the bank agent.
Moreover, if problems are recognized with regard to a person who conducts numerous orextensive operations by giving sub-entrustment of bank agency service to another party, forexample, in the form of a franchise system, the FSA must be contacted promptly.
VIII-5-2-1

Points of Attention Regarding Selection of Bank Agent(1) When signing contracts for entrusting bank agency services (including if further entrustment of
entrusted bank agency services is authorized), whether the principal bank specifies the significanceof the entrustment in relation to governance, identifies the various risks involved therein and conducts
full deliberations on the method of risk management.
(2) Whether full deliberations are conducted on whether a person with whom the principal bank intends
to entrust bank agency services meets the criteria for legal approval.
In particular, when a person with whom the principal bank intends to entrust bank agency services
engages in concurrent business, whether the contents of his or her concurrent business are not only
examined based on the provisions (on whether the contents of concurrent business are not likely todamage social credibility as a bank agent) under Article 34-37(vi)(B) of the Banking Act Enforcement
Regulation, but also fully examined from the viewpoint of reputational risk for the bank.
(3) With regard to whether a person with whom the principal bank intends to entrust bank agency
services is an antisocial force, or takes measures to ban any relations with antisocial forces, whether
full deliberations are conducted in light of the purpose of the “Guideline for How Companies Prevent
Damage from Antisocial Forces” (agreed upon at a meeting on June 19, 2007, of cabinet ministers
responsible for anti-crime measures).
VIII-5-2-2

Measures to Ensure Appropriateness of the Business of a Bank Agent by a Principal Bank
(Article 52-58 of the Banking Act, Article 34-63 of the Banking Act Enforcement
Regulation)(1) Development of internal control environment for supervision of a bank agent(i)Whether a system for supervising a bank agent (including a business audit management system
for a bank agent) is properly developed, for example, by establishing a division responsible forthe implementation of measures to ensure the sound and appropriate conduct of business
operations related to bank agency services or by appointing a person responsible thereof.

(ii) Whether an internal control environment is developed to examine whether measures areproperly taken by those divisions and persons to ensure the appropriateness of business
operations related to bank agency services that each bank agent provides.

465

(iii) When giving sub-entrustment of bank agency service to another party, particularly by having
the party conduct numerous or extensive operations, for example, in the form of a franchisesystem, more attention should be paid to whether a principal bank conducts the instruction andsupervision properly due to an increasing number of those concerned. Moreover, it should be
noted that it is necessary to examine whether a principal bank develops an appropriate control
environment in which a principal bank agent properly instructs and supervises a secondary bankagent.
(2) Contents of entrustment contracts(i)

Whether the matters listed in each item of Article 34-35(1) and Article 34-63(1) of the
Banking Act Enforcement Regulation, and the provisions on monitoring of compliance withthese matters constitutes the content of an entrustment contract.
Moreover, in terms of guidance and supervising bank agents, whether a control environment isdeveloped in order to examine whether the contract has similar contents, even when theprincipal bank is not a contracting party.

(ii) Whether there is a control environment that enables full examination on internal regulations,etc. of a bank agent. Moreover, when revising the internal regulations, etc., whether there is acontrol environment that enables full scrutiny of the contents of the revision with the relevantbank agent.
(3) Implementation of training for compliance with laws and regulations, etc. (Article 34-63(1)(i) of the
Banking Act Enforcement Regulation)(i)

In order to secure compliance with provisions of laws and regulations, etc. pertaining to bankagency services, whether comprehensive training programs are conducted not only on the
Banking Act, but also on the Anti-Criminal Proceeds Act, the Personal Information Protection
Act and other relevant laws and regulations, and the internal regulations of the bank agent,etc.

(ii) Whether a person who has knowledge and practical experience of laws and regulations
pertaining to bank agency services gives instruction as a lecturer in the training programs.
(Note)

It does not matter whether the lecturer in the training program is an officer or employeeof the principal bank or the bank agent, as long as he or she has knowledge and practicalexperience.

(iii) Whether there is a control environment that enables the bank agent or the person who
engages in the bank agency services to maintain and improve his or her business execution
ability through implementation of regular training programs.
(iv) As for the contents of the implemented training programs, whether examination is conducted
to determine whether the bank agent and the person who engages in the bank agency services
understand the contents within a range necessary to conduct the services properly.

466

(4) Measures for necessary and appropriate supervision, etc. of the bank agent (Article 34-63(1)(ii) of
the Banking Act Enforcement Regulation)(i)

Whether the supervision based on Article 34-63(1)(ii) of the Banking Act Enforcement
Regulation is implemented properly, and whether monitoring of the implementation status isconducted.

(ii) Whether there is a control environment developed in which the results of the above
monitoring, etc. are examined in the responsible division of the bank, are reported to the
management when necessary, and are reflected in appropriate business instruction by thebank and appropriate business operations by the bank agent.
(Note)In the case where the principal bank and the bank agent (only when the agent is a bank)belong to the same bank holding company group, it should be noted that the proper
business management of such bank agent needs to be ensured as such group’s business
management conducted by such bank holding company based on Article 52-21(1) of the
Banking Act.

(5) Measures to terminate the entrustment contract with the bank agent when necessary (Article 3463(1)(iii) of the Banking Act Enforcement Regulation)
When a problem is found as a result of the monitoring conducted against the bank agent, whether
there is a control environment developed for implementing appropriate measures such as providing
guidance to the bank agent, and terminating the entrustment contract. In addition, whether there isa control environment established for properly protecting customers when terminating theentrustment contracts.
(6) Measures the principal bank itself needs to take to conduct an examination (Article 34-63(1)(iv) of
the Banking Act Enforcement Regulation)
With regard to examining the loan of funds or the discounting of bills conducted by the bank agent,whether there is a standard or a control environment developed for dealing with cases where
preliminary reports or approvals made to the principal bank are needed so that the principal bank canconduct an examination when necessary.
(7) Measures to ensure appropriate management of customer information and to prevent crime (Article
34-63(1)(v) and (vii) of the Banking Act Enforcement Regulation)(i)With regard to development of a control environment to secure appropriate management ofcustomer information in the bank agent, and measures to prevent crime concerning businesspertaining to bank agency services at the business office or other office of the bank agent,whether appropriate guidance and know-how are provided so that the bank agent can develop
a control environment to the same extent as the principal bank takes measures to manage its

467

own customer information and prevent crime at the business office or another office, forexample, through physical facilities, assignment of personnel, and security countermeasures of
the IT system.
(ii) Whether there is a control environment developed for encouraging the bank agent tounderstand the provisions of the Anti-Criminal Proceeds Act and the Foreign Exchange Act aswell as preventing the deposit account, etc. from being used for organized crime or otherillegal activities.
(8) Measures for the closure of business offices of the bank agent (Article 34-63(1)(viii) of the Banking
Act Enforcement Regulation)
When the bank agent closes its business office or office where it engages in bank agency services,
whether the bank agent has developed a control environment for smoothly implementing measuresfor preventing significant effects on the customers, by establishing the schedule and business transfer
method for succession of transactions pertaining to the customers to a business office of the principalbank or another financial institution or another bank agent, etc., without any problems, and thecustomer notification method.
(9) Measures to process complaints (Article 34-63(1)(ix) of the Banking Act Enforcement Regulation)
Whether the bank agent has developed a control environment for responding to complaints, suchas specifying the contact point for customer complaints pertaining to bank agency services that thebank agent engages in, establishing a division in charge of processing complaints and prescribing
procedures for processing complaints.
VIII-5-2-3

Points of Attention Regarding Inspection of the Registry of Bank Agent

When a depositor or another interested person requests inspection of the registry regarding a bank agent
based on Article 52-60 of the Banking Act, it should be noted that a principal bank needs to comply withthe request for inspection in principle. For such occasions, the regulator shall encourage the principal bankto show the registry online using the Internet where possible.
VIII-5-2-4

Points of Attention Considered Regarding a Case Where the Bank Agent is the Parent
Company or a Major Shareholder of the Principal Bank

VII-1-6 and VII-2-3 apply mutatis mutandis to cases where the bank agent is the parent company or amajor shareholder of the principal bank, when necessary, and in particular, whether the principal banksecures the appropriateness of the business operations of the bank agent should be fully examined.

468

IX

Electronic Payment Handling Services

IX-1

Background

Electronic payment handling services refer to the business that (1) based on an entrustment from a bank,
to come to an agreement with a depositor that has opened an account for deposits with the bank to carryout any of the following actions by a means that uses an electronic data processing system: (i) to transfer
funds in that account, and decrease the amount of deposit claims by an amount equivalent to the amountof the transferred funds, or (ii) to increase the amount of deposit claims by an amount equivalent to theamount of funds received through a fund transfer transaction,: and to increase or decrease the amount ofclaims under a deposit contract based on the agreement, on behalf of the bank, and as (2) to provide
intermediary services for concluding contracts for the acceptance of deposits on behalf of the bank referred
to in the preceding item (hereinafter referred to as the "entrusting bank") in relation to the action listed in(1). Electronic payment handling service provider is those engaged in electronic payment handling services
upon registration by the Prime Minister based on Article 52-60-4 of the Banking Act.
Amid the advancement of the fintech field, and along with the trend of separating the issuance function
and the transferring function of digital money, required roles of regulation are to assure intermediaries ofa certain degree of their independent activities and to enable them to cooperate and collaborate smoothlywith multiple financial institutions. In light of the facts that electronic payment handling service providers,
as intermediaries, increase or decrease the amount of each relevant deposit claim on behalf of relevantbanks and that services relating to electronic payment handling services are important ones involving therights and obligations of their customers, the regulator needs to request electronic payment handlingservice providers to develop systems for delivering their services properly, as well as to provide customers
with information, etc. from the perspective of customer protection.
IX-2
IX-2-1

Key Principles
Key Principles concerning Supervision of Electronic Payment Handling Service Providers

The registration system for electronic payment handling services is to impose necessary regulations toassure intermediaries of a certain degree of their independent activities and to enable them to cooperateand collaborate smoothly with multiple financial institutions along with the trend of separating the issuancefunction and the transferring function of digital money. Accordingly, the framework of supervising
electronic payment handling services should not adopt the principal system under the license system, butshould adopt a system to ensure the appropriateness and legality of the services by requiring theses service
providers to have a certain financial basis and comply with restriction on acts under the registration system.
In electronic payment handling services, prompt alignment of books between a bank and an electronic
payment handling service provider is necessary so that the bank can identify relevant depositors and the469

respective amounts of their deposits. In this way, electronic payment handling service providers are
positioned between users and banks, and increase or decrease the respective amounts of deposit claims onbehalf of relevant banks. Accordingly, they are required to secure the stability of their systems in order toprotect users.
For this reason, in supervising electronic payment handling service providers, the FSA focuses on themain risks and conducts monitoring from the perspective of customer protection. In particular, suchmonitoring will focus on their IT system risk management frameworks and their efforts to protect users,
and thereby the regulator will encourage electronic payment handling service providers to provide services
that contribute to improving the convenience of payment services while also ensuring the stability of theirsystems and the protection of customers.
IX-2-2

Key Principles concerning Administrative Processes related to Supervision(1) Supervisory approaches
The supervisory authority’s continuous monitoring starts with accurate profiling of electronic
payment handling service providers and identification of their issues to be addressed. Then,
depending on the nature and priority of those issues, the authority chooses among and flexibly uses
various monitoring methods (including on-site inspection) and follows up on the progress of the
improvement.
Which monitoring method is effective will depend on the target electronic payment handlingservice provider’s actual circumstances. In addition, which to use should be determined after fully
considering the effectiveness of each monitoring method in the given situation, workload burdens ofboth the supervisory authority and the electronic payment handling service provider, and the urgencyof the issues. In general, what comes first is to conduct monitoring through analyses of the electronic
payment handling service provider’s business performance, financial performance, annual factfinding surveys concerning money laundering risk and measures for terrorism financing, etc. or
through interviews with the electronic payment handling service provider’s personnel and its
stakeholders within and outside the electronic payment handling service provider. On this occasion,
whether or not the electronic payment handling service provider’s business is sound and appropriate
for the time being is judged based on the analysis findings. After this step, whether or not to conduct
on-site inspection under Article 52-60-21 of the Banking Act will be determined.
For specific implementation, the monitoring will be based on the description in IX-2-1 above while
also taking into account supervisory viewpoints in these Supervisory Guidelines as supplements oramplification. The supervisory authority will also take account of the discussion content in theindustry so as to have dialogues smoothly with these providers.
(2) Cooperation between supervisory departments(i)

Cooperation between the FSA and respective Local Finance Bureaus

470

The FSA and respective Local Finance Bureaus need to properly share information that isrecognized as necessary to supervise electronic payment handling service providers so as toshare what they see as problems. Therefore, these supervisory authorities should endeavor tostrengthen their cooperation, such as by mutually providing information timely andappropriately and exchanging opinions actively about information, etc. except for coordination,etc. related to internal delegation as listed in (3) below. In addition, among respective Local
Finance Bureaus, when a Local Finance Bureau identifies a non-public problem or the like about
an electronic payment handling service provider who is under the administration of another
Local Finance Bureau, it should timely provide the administering Local Finance Bureau and the
FSA with relevant information and endeavor to strengthen their cooperation.
(ii) Contact and coordination with the Director-General of Local Finance Bureau
When a Local Finance Bureau invokes an administrative disposition to an electronic payment
handling service provider who is under its administration, it should promptly contact and report
the details of such disposition to the Director-General of another relevant Local Finance Bureau,
who administers the area where the business office of the electronic payment handling service
provider is located.
(3) Internal delegation of part of the authority of the Director-General of Local Finance Bureau to thedirector, etc. of the competent finance office
When the main business office (referring to the “main business office” stipulated in Article 34-635 of the Banking Act Enforcement Regulation; the same applies hereinafter) of the registration
applicant or the electronic payment handling service provider is located within the jurisdictional
district of either the local finance office or Otaru sub-office, or Kitami sub-office, among theauthorities delegated to the Director-General of Local Finance Bureau, the authority to receive thewritten notifications, applications and reports submitted by the registration applicant or theelectronic payment handling service provider can be delegated internally to the director of the local
finance office or sub-office, according to the judgment of the Director-General. Written notifications,etc. regarding these matters should be submitted to the Director-General of Local Finance Bureau
administering the area where the main business office of the registration applicant or the electronic
payment handling service provider is located.
(4) Coordination with the FSA
The Director-General of Local Finance Bureau should coordinate in advance with the FSA withregard to the following matters (which does not preclude the coordination with the FSA with othermatters on an as-needed basis), regarding the authority over which is delegated to them as a matterof supervisory process concerning electronic payment handling service providers. It should be notedthat the Director-General should report the results of the deliberations made by their bureau andexpress opinions thereof in the coordination.

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(i)

Business improvement orders under Article 52-60-22 of the Banking Act(ii) Revocation of registration or business suspension orders based on Article 52-60-23(1) of the
Banking Act(5) Administrative report(i)

The Director-General of Local Finance Bureau should report to the FSA, without delay, thecontent of supervision of electronic payment handling service providers if the content falls
under any of the following cases (A) to (E). In addition, if the content falls under the followingcase (F), the Director-General of Local Finance Bureau should report the content to the FSA
without delay and send the relevant materials to other finance bureaus. In doing so, theDirector-General should also report and send the materials related to the names of persons
working as officers within 30 days before the revocation.
(A) Case where the Director-General of Local Finance Bureau has registered under Article
52-60-5(1) of the Banking Act(B) Case where the Director-General of Local Finance Bureau has received a notification of
discontinuance of business, etc. pursuant to Article 52-60-36(1) of the Banking Act(C) Case where the Director-General of Local Finance Bureau has asked for submission ofreports or materials under Article 52-60-20(2) of the Banking Act(D) Case where the Director-General of Local Finance Bureau has issued a business
improvement order under Article 52-60-22 of the Banking Act(E) Case where the Director-General of Local Finance Bureau has ordered the suspension of
the services under the provisions of Article 52-60-23(1) of the Banking Act(F) Case where the Director-General of Local Finance Bureau has revoked the registration
under the provisions of Article 52-60-23(1) of the Banking Act(ii) Written business reports based on Article 52-60-19(1) of the Banking Act
In preparing written business reports, the following points should be noted:(A) After examining the reported content with reference to matters confirmed at the time ofregistration filing, such as the management plan and the finance plan, in a case where theregulator finds any substantial discrepancy between them, he/she should check the actual
management conditions through the hearing from the electronic payment handling service
provider.
(B) As a result of the checking, in the case where there is any possibility that the target
provider “does not have a financial basis that satisfies the criteria specified by Cabinet
Office Order as those found to be necessary for performing electronic payment handlingservices in a proper and reliable manner,” the regulator should consider necessary
measures such as collecting relevant written reports based on Article 52-60-33 of the
Banking Act.
(iii) Sending to the FSA

472

(A) Reports concerning electronic payment handling service providers to be sent as needed
The following should be sent to the FSA’s relevant division within one month after thesubmission deadline: a duplicate copy of the written report concerning management ofusers’ property and a copy of each reference document, and if there is any electronic
payment handling and other similar service provider who attaches its opinion, the relevant
document that describes the electronic payment handling service provider’s opinion
regarding (ii) above.
(B) Regular reporting concerning electronic payment handling service providers
a. The Director-General of Local Finance Bureau should collect the annual business
report as of the end of March from each electronic payment handling service provider
by the end of May every year pursuant to Article 62-20(1) of the Banking Act.
b. A copy of such business report from each electronic payment handling service provider
should be sent to the FSA’s relevant division by the end of June every year.
(C) Submission of the registration status list concerning electronic payment handling service
providersa. The registration status list of all registered electronic payment handling service
providers should be updated whenever new registration is made, and the updated list
should be sent to the Director-General of the FSA’s Supervision Bureau within 20 days
after the 6th month.
b. The list must include the following entries:
・Name of each registered electronic payment handling service provider
・Registration number
・Date of registration
・Date of discontinuation
・Telephone number and email address of each registered electronic payment

handling service provider
・Type of concurrent business(6) Points to note in preparation of written applications and written notifications submitted by electronic
payment handling service providers
It should be noted that, when entering the names of directors or officers in written applications or
written notifications submitted by an electronic payment handling service provider, the current nameof a person who has changed his/her surname may be accompanied by his/her old name inparentheses.
IX-3

Information Technology (IT) System Risk

In supervising electronic payment handling service providers, III-3-7-1 is applied mutatis mutandis. Also,473

depending on attributes of services and systems, the following supervisory viewpoints should be especiallynoted.
In this regard, however, even in a case where an electronic payment handling service provider has nottaken measures literally as described in III-3-7-1 and the following supervisory viewpoints, if the electronic
payment handling service provider is recognized as having no particular problem in light of its size andattributes, the provider does not need to be judged as being unsuitable from the perspective of customer
protection.
IX-3-1Main Supervisory Viewpoints(1) Response measures to attributes of services and systems(i)

In the case where an electronic payment handling service provider has advanced and complex
IT systems linked to various services and systems, in addition to what is described in III-3-7-12 (3)(i), whether the electronic payment handling service provider includes the following risk
in its IT system risk:
・Risk incurred by using external services;
・Risk incurred by connecting with API, etc.;
・Risk incurred by linking with various services and systems, such as a response measure tocope with its rapidly increased transactions, and so on(Note)

It is desirable to use objective benchmarks as a basis for identifying IT system risk in
a comprehensive manner. For example, in terms of the connection with banking
systems, the standards shown by The Center for Financial Industry Information
Systems (API Connection Checklist Manual) may be used as reference.

(ii) Whether the IT system risk management division identifies and manages the upper limit of thetransactions through the computer system, such as the number of feasible transactions per day,and whether it reviews the countermeasures from the IT system aspect and the administrative
work aspect in cases where the transactions exceed the upper limit.
It should be noted that the said division also needs to identify the upper limit with the relevant
contacts such as banks, and to review the countermeasures collaborating with those contacts incases where the transactions exceed the upper limit.
(iii) Whether the user division cooperates with the IT system risk management division at the timeof introduction of a new service or alternation of the content of an existing service, and whether
the IT system risk management division evaluates the relevant IT system regardless of whether
the system is newly developed or not.
(iv) In addition to the matters described in III-3-7-1-2(6), in a case where an electronic payment
handling service provider links its system with a system of a bank or any other company, or in acase where many users are expected to use the electronic payment handling service system,
whether the electronic payment handling service provider has formulated and properly474

implemented rules and policies, etc. including the following points in order to ensure the qualityof the entire systems.
・Establish a policy to conduct tests in order to ensure quality.
・In managing its system performance capacity, formulate a plan that assumes a rapid increase

in its transactions based on relevant cases of other companies and set up the threshold(including cases where the number of transactions is anticipated to temporarily increase, suchas launching a large-scale sales promotion campaign).
・Establish monitoring points, monitor and, as needed, control the loading condition by taking

into account the limit of performances and capacities of various resources.
・Identify the respective upper limits of relevant systems, including linked systems with banks,etc., at the time of development of such systems, and so on.
In addition, whether the electronic payment handling service provider sets and verifies thetest scenarios based on the operation environment of the user side with regard to new services
provided, changes in the relevant bank’s API specification, and changes in the authentication
system.
(v)

In addition to the matters described in III-3-7-1-2(9)(i) and (v), for emergency situations,
whether the electronic payment handling service provider has developed an appropriate
communication system with the relevant bank and important outsourcing contractors, etc.
(including any external service provider and any linked system counterparty), and whether it
considers holding any joint training session with the relevant bank or any other linked systemcounterparty based on its contingency plan, taking the importance and relevant risks into
consideration.
Moreover, based on such training results, whether it reviews its contingency plan as needed.

(vi) Whether the electronic payment handling service provider performs a risk evaluation in termsof influence spread, for example, by understanding how effects of partial system failures spreadand identifying a single point of failure that cannot be circumvented, in order to mitigate theeffects of system failures, in addition to coping with the matters described in III-3-7-12(10)(vii). And whether the electronic payment handling service provider considers
establishing a service system mechanism for minimizing the damage to users by using a cloudservice mechanism properly to mitigate risks.
(2) Response measures to external services such as a cloud service(i)

In addition to the matters described in III-3-7-1-2(4)(iv), in identifying important user
information, whether the electronic payment handling service provider includes datatransferred or forwarded to subcontractors and linked system counterparties in its target
coverage.

(ii) In addition to the matters described in III-3-7-1-2(8)(ii), when selecting and using external
services such as a cloud service, whether the electronic payment handling service provider

475

properly assesses the safety of information security on the basis of its attributes. Also, whether
it considers risk suitable for the service(s) to be used and takes the relevant measure(s).
For example, whether the electronic payment handling service provider implements thefollowing:・Identify the base that processes and stores important information.
・Include the audit and monitoring authorities, etc. in the relevant contract.
・Check and evaluate guarantee reports and third-party certificates.
・Identify cloud service-specific risk.
・Assess security risk (including the risk inherent in the authentication function), and so on.

(iii) Whether the electronic payment handling service provider makes efforts to establish its
communication system between the electronic payment handling service provider and its cloudservice provider so as to prepare for potential failure in the cloud service, in addition to copingwith the matters described in III-3-7-1-2(10)(ii). The electronic payment handling service
provider is required to recognize the importance of considering the measures to be taken andtimely and appropriate calling of attention to users in such cases.
(3) Response measures for transactions via communication methods such as the internet without any
face-to-face contact(i)

Whether the electronic payment handling service provider has introduced an appropriate
authentication system that matches risk of the following transactions as examples, in addition
to the cases in III-3-7-1-2(5)(vii).
(A) Authentication methods that do not rely on fixed IDs/passwords alone, such as variable
passwords, biometric authentication, digital certificates and other multi-factor
authentication that combines effective factors(B) Adoption of passwords for transactions, which are different from log-in passwords (It is
important not to allow users to set the same passwords.)
In addition, whether the electronic payment handling service provider recognizes andassesses risks regularly and timely in light of changes in internal and external environments aswell as the state of accident/incident occurrence and reviews its authentication method asneeded.

(ii) Whether the electronic payment handling service provider has taken anti-fraud measures
suitable for its services, such as the following as examples, in addition to the matters describedin III-3-7-1-2(5)(viii):
・Blocking-off of communication from any unauthorized IP address;
・Measures to encourage users to introduce or update security software that allows them todetect and remove viruses, etc.;
・Development of systems/structures to detect unauthorized log-ins/irregular transactions, etc.

and promptly inform the relevant users;

476

・Suspension of use of IDs that are confirmed as being unauthorized;
・Display of the previous log-in (log-off) time and date on the screen;
・Notification to each user at the time of transaction, and so on.

(iii) Whether the electronic payment handling service provider has taken measures related tosecurity at the system design/development stages, including the following, in addition to thematters described in III-3-7-1-2(6):・Clarification of specific security requirements;
・Measures to prevent the occurrence of vulnerable points, such as implementing secure coding,security design based on the entire services including linked parts in the case where theelectronic payment handling service provider links its system with any other company’ssystem, and so on.
IX-4

Legal Compliance (for Especially Important Matters)

Supervisory methods and measures related to verification at the time of transaction, obligation forreporting of suspicious transactions and elimination of relations with antisocial forces should be based on
III-3-1 as well as on the following (1) and (2). In addition, related to prohibited acts, the following (3) and(4) should be noted.
(1) If the inspection result finds that a misconduct notification or the like has revealed a problem relating
to an electronic payment handling service provider’s internal control environment for ensuring thefulfillment of obligation of verification at the time of transaction and obligation for reporting of
suspicious transactions, or to its structure to ban any relations with antisocial forces, the FSA requires
the electronic payment handling service provider to submit reports based on Article 52-60-20 of the
Banking Act when necessary. If a serious problem is found, the FSA issues a business improvement
order based on Article 52-60-22 of the Banking Act.
(2) Moreover, if an electronic payment handling service provider violates laws and regulations, including
the obligation of verification at the time of transaction and obligation for reporting of suspicioustransactions, or an electronic payment handling service provider is deemed to have significantly
harmed public interest, the FSA issues a business suspension under Article 52-60-23 of the Banking
Act. The same will apply to cases where an electronic payment handling service provider, whorecognizes the relationship with antisocial forces, has not taken proper actions and is found to haveviolated laws and regulations or to have significantly harmed public interest.
(3) Prohibition of deposit of money, etc. / Segregation management of property (Article 52-60-13 of the
Banking Act / Article 34-63-26 of the Banking Act Enforcement Regulation)
Whatever the pretext is, each electronic payment handling service provider must not receive a477

deposit of money or any other property from any customer, or must not have the person closely
related to the electronic payment handling service provider (Article 16-8-2 of the Banking Act
Enforcement Regulation) deposit any customer’s money or any other property related to theelectronic payment handling services that the electronic payment handling service provider engages
in, except for cases prescribed in Article 34-63-26 of the Banking Act Enforcement Regulation.
In a case where an electronic payment handling service provider receives a deposit of money related
to its electronic payment handling services, the electronic payment handling service provider mustsegregate the money from its own property to execute segregation management immediately after thereceipt of the deposit. It also must deliver the money to its entrusting bank (Article 34-63-26(4) of
the Banking Act Enforcement Regulation).
(4) With regard to a control environment that prevents prohibited acts as prescribed in Article 52-60-16of the Banking Act, attention should be paid to the points listed below.
(i)Whether the electronic payment handling service provider establishes a division or appoints a
person responsible for implementing measures for preventing prohibited acts. Also, whether
the electronic payment handling service provider develops a control environment for examining
whether such division or person has properly implemented measures for preventing prohibited
acts.

(ii) Whether the electronic payment handling service provider establishes internal rules on a system
for implementing training required to prevent prohibited acts and a system for dealing withcomplaints from customers and disseminates these rules within the organization.
(iii) In order to prevent prohibited acts, whether the electronic payment handling service provider
conducts training, on a regular and as-needed basis, by a person who has knowledge andpractical experience of laws and regulations pertaining to electronic payment handling services.
(iv) Whether the electronic payment handling service provider has established a control
environment for responding to complaints, such as specifying the contact point for customer
complaints regarding prohibited acts, establishing a division in charge of processing complaints
and prescribing procedures for processing complaints.
IX-5

Provision of Information and Consultation Function for Protection of Users

Based on Article 52-60-11(2) of the Banking Act as well as Article 34-63-13 to 34-63-22, and Article 3463-28 of the Banking Act Enforcement Regulation, supervisory measures regarding the electronic payment
handling service provider’s provision of information and consultation function, etc. for protection of users
should be taken in accordance with III-3-3 and the following:(1) Customer information should be basically managed in accordance with III-3-3-3. If an electronic
payment handling service provider concurrently engages in other businesses, the electronic payment478

handling service provider should pay attention to whether it has developed methods and systems forproperly managing customer information (including establishing internal rules regarding separationof organizations and persons in charge, installation of information barriers in terms of equipment andsystems, blockade of information, conducting employee education and training, etc.) in order toprevent the customer information obtained through its electronic payment handling services frombeing used for its concurrent business without the customer’s prior consent.
(2) As for the customer’s prior consent (described in Article 34-63-19 of the Banking Act Enforcement
Regulation), particularly, with regard to treatment of non-public financial information and nonpublic information (note that information on customer attributes (name, residential address,
telephone number, sex, birthdate and occupation) is personal information, but is not included in nonpublic financial information and non-public information), it is necessary to confirm whether theelectronic payment handling service provider has taken measures in order to obtain the customer’s
prior consent by appropriate methods, such as a method of displaying the relevant information on thescreen of the customer’s electronic device using the Internet.
IX-6

Rules, etc. for User Protection(1) Coordination with an entrusting bank
One of the services that an electronic payment handling service provider offers may be a service
that is coordinated with account transfer service by a bank (hereinafter referred to the “electronic
payment handling coordinated service”). While this electronic payment handling coordinated service
has the potential to become a highly convenient service for users of electronic payment handlingservices, it may have inherent risks, differing from services that are completed by an electronic
payment handling service provider alone. For example, a malicious third-party may pretend to be adepositor of such a coordinated deposit account and execute a fraud transaction through theelectronic payment handling coordinated service. Moreover, along with the progress in technologicalinnovation, such coordination among service providers is likely to increase, and risks associated withsuch coordination may rise in the future.
Based on the above, it is important for electronic payment handling service providers to establish acontrol environment to cope with the above-mentioned risks in cooperation with their coordination
partners, from the perspective of the proper and reliable performance of electronic payment handing
services, including the protection of interest of users of electronic payment handling service providers
and those of their coordination partners. In supervising electronic payment handling service providers
who offer the electronic payment handling coordinated service, the FSA will pay close attention to
IX-3 and will also refer to II-2-5 in “14 Guideline for Supervision of Funds Transfer Service Providers”
for Administrative Processes Part III: Concerning Financial Companies.

479

(2) Obligation to conclude a contract with an entrusting bank (Article 34-63-27 of the Banking Act
Enforcement Regulation)(i)Each electronic payment handling service provider should conclude a contract which stipulates
matters regarding the sharing of compensation liability between the electronic payment
handling service provider and its entrusting bank to prepare for cases where a customer suffers
damage in their electronic payment handling coordinated service. Based on the contract, theelectronic payment handling service provider must engage in its electronic payment handlingservices relevant to its entrusting bank. For example, the contract may set forth the following
matters:(A) Contact point for any relevant customer to file his/her damage(B) Criteria and procedure for compensation in cases where compensation is made(information to be received from the user in question, judgement as to whether or not thealleged negligence exists)(C) Compensation method in cases where compensation is made (including the person or
persons to make compensation, how to calculate the damage)(D) Compensation coverage in cases where compensation is made(E) Claim for compensation in cases where one of the parties has made compensation (sharingof the damage)(ii) In addition, each electronic payment handling service provider should conclude a contract with
its entrusting bank, which sets forth necessary matters for the electronic payment handlingservice provider to promptly provide the entrusting bank, upon the bank’s request, withinformation necessary for the entrusting bank to identify relevant depositors. (Such matters
include the frequency and timing to provide the information.) Based on the contract, theelectronic payment handling service provider must engage in its electronic payment handlingservices relevant to its entrusting bank. As for necessary information for the entrusting bank to
identify any depositor relevant to the liability for the bank to bear, conceivable examples include
the transaction records as prescribed in Article 34-63-61(1)(ii) and information related to the
documents as prescribed in Article 34-63-61(1)(iii). It should be noted that the informationneeds to be handled based on III-3-3-3.
IX-7
IX-7-1OthersMeasures to Ensure Precise Execution of Entrusted Business (Article 34-63-20)

Each electronic payment handling service provider should basically conform to III-3-3-4 in the casewhere it entrusts a third party with part or whole of its services. It should be noted that the electronic
payment handling service provider must take measures to ensure precise execution of entrusted business,matching the content of its entrusted business.

480

IX-7-2

Prohibition of Name-Lending

When judging whether the use of a name corresponds to “the name of that electronic payment handlingservice provider” prescribed in Article 52-60-10 of the Banking Act, it should be noted the use of a namecorresponds to “the name of that electronic payment handling service provider” even if, for example, theelectronic payment handling service provider permits the use of the abbreviated name of the electronic
payment handling service provider.
IX-7-3Special Provisions concerning Electronic Payment Services Involving Entrusting Banks, etc.

An electronic payment handling service provider may engage in electronic payment services involving
its entrusting bank only when a customer of its electronic payment handling services entrusts it with suchagency services who has opened a deposit account with the entrusting bank. In this case, provisions from
X-1 to X-5 are applied mutatis mutandis.
IX-8

Application Mutatis Mutandis of the Supervisory Guidelines

For supervision over electronic payment handling service providers, in addition to the matters set forth
below, the above sections II and III as well as the Forms and Reference Information are timely appliedmutatis mutandis, if necessary.
(1) Concerning electronic payment handling service providers, II-1-1 is applied mutatis mutandis to theinspection and supervisory processes, III-1-2 is applied mutatis mutandis to specific methods for theinspection and supervisory processes, III-1-3 is applied mutatis mutandis to quality control, II-2 isapplied mutatis mutandis to grievance and provision of information, II-3 is applied mutatis mutandis
to responding to inquiries about interpretation and application of laws and regulations, and II-4 isapplied mutatis mutandis to points to note in providing administrative guidance or implementing
equivalent actions, respectively.
(2) Regarding the coordination with inspection by the Deposit Insurance Corporation of Japan
concerning electronic payment handling service, II-1-5 is applied mutatis mutandis.
(3) When invoking an administrative disposition to electronic payment handling service providers, II-5
is applied mutatis mutandis.

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X

Electronic Payment Services

X-1

Purpose and SignificanceAmid the accelerating development of fintech on a global scale, the registration system for electronic
payment service providers was introduced as an institutional framework for promoting open innovation
through cooperation and collaboration between financial institutions and fintech companies while securing
the protection of users, and enforced as of June 1, 2018, under the Banking Act for the Partial Amendmentof the Banking Law (Act No. 49 of 2017, referred to as the “Amendment Act” in the following X-2-2(1)).
Electronic payment service providers are expected to serve as a center that expands services based on theneeds of users and to achieve innovation in financial services agilely while securing the protection of users
and the stability of the system.
X-2
X-2-1

Key Principles
Key Principles in Supervising Electronic Payment Service Providers

The registration system for electronic payment service providers is different from other finance-related
systems and requires only that the amount of net assets not be negative on a financial basis, and does not
ask for staffing requirements. The conditions for new entry are set very low and the system design isimplemented assuming that individuals, and micro, small, and medium-sized enterprises will apply forregistration. The main purport is to encourage various participants, including IT companies, to promote
innovation in financial services. From the perspective of protecting users, the regulation is reduced to therequired minimum.
On the other hand, electronic payment services are located between users and banks, give instructions
for settlement, acquire account information and provide it to customers. Therefore, the stability of thesystem is needed to secure the protection of users.
Thus, from the perspective of protecting users, when supervising electronic payment service providers,major risks should be focused on, and the efforts to improve the system along with business expansion,
should be monitored.
Electronic payment services are basically engaged in business operations using information technology(IT), and their major risk is IT system risk. In addition, since there are risks associated with cooperation
between electronic payment and other agency services and banks (in addition, there are cases where anelectronic payment and other agency service subcontractor intervenes), efforts to protect users amongproviders are also important. In supervising electronic payment service providers, monitoring should begiven mainly to the control environment for managing IT system risk and for measures to secure theprotection of users, and the electronic payment service providers should take the lead in advancement oftechnology and be encouraged to provide services contributing to improvement of user convenience while482

securing the stability of the system and the protection of users.
X-2-2

Key Principles in the Administration of Supervision(1) Supervisory approaches
The supplementary resolution of the Amendment Act requires that report requests and inspections
not inhibit the activities and innovation of relevant enterprises, etc. from the perspective of helping
to encourage various participants, including IT companies, to promote innovation in financial
services, amid the rapid development of fintech. From the perspective of easing the burden on
businesses in light of the above and based on the large number of small businesses and the businesscharacteristics of not keeping money from users, while taking care to avoid mechanical and uniform
operation, off-site monitoring, in principle, should be given to IT system risk, which is one of the
major risks and status of efforts to secure the protection of users.
(2) Cooperation between supervisory departments
In cases where a registered electronic payment service provider submits a notification based on the
Shinkin Bank Act and engages in electronic payment services for a Shinkin bank, and its supervisorydepartment finds a problem in the business operations of the electronic payment service provider,including the control environment for managing IT system risk, the supervisory department of theregistered electronic payment service provider should reduce the paperwork burden on the electronic
payment service provider by cooperating closely with the supervisory departments of the electronic
payment service providers for Shinkin banks, including informing the relevant department of thesituation of the problem without delay.
Information should be provided without delay, regardless of the method.
(3) Internal delegation of part of the authority of the Director-General of Local Finance Bureau to thedirector-general of the competent finance office
When the principal office or other office of the electronic payment service provider is located within
the jurisdictional district of the local finance office or branch office, the authority delegated to the
Director-General of Local Finance Bureau can be delegated internally to the director-general of thefinance office or the head of the branch office, according to the judgment of the director-general.
Written applications and notifications under laws and regulations should be submitted to the
Director-General of Local Finance Bureau.
(4) Coordination with the FSA
The Director-General of Local Finance Bureau should coordinate in advance with the FSA withregard to the following matters (which does not preclude the coordination with the FSA with othermatters on an as-needed basis), the authority over which is delegated to them as a matter ofsupervisory process concerning electronic payment service providers. It should be noted that the483

directors-general should report the results of the deliberations made by their bureau and express
opinions thereof in the coordination.
(i)

Business improvement orders under Article 52-61-16 of the Banking Act(ii) Revocation of registration or business suspension orders based on Article 52-61-17(1) of the
Banking Act(5) Administrative report
The Director-General of Local Finance Bureau should report to the FSA the situation of theelectronic payment service providers as of the end of each quarter by the 20th day of the following
month.
Moreover, the Director-General of Local Finance Bureau should report to the FSA, without delay,
the content of supervision of electronic payment service providers if the content falls under any of
the following cases (i) to (v). In addition, if the content falls under the following case (vi), thedirector-general of the local finance bureau should report the content to the FSA, without delay, andsend the relevant materials to other finance bureaus. In doing so, the director-general should also
report and send the materials related to the names of persons working as officers within 30 days
before the revocation.
(i)Case where a registration under Article 52-61-4(1) of the Banking Act has been applied for(ii) Case where a notification of discontinuance of business, etc. under Article 52-61-7(1) of the
Banking Act has been received(iii) Case where a submission of reports or materials has been requested under Article 52-61-14 of
the Banking Act(iv) Case where a business improvement order under Article 52-61-16 of the Banking Act has been
issued(v)

Case where a business suspension order under the provisions of Article 52-61-17(1) of the
Banking Act has been issued(vi) Case where a registration under the provisions of Article 52-61-17(1) of the Banking Act has
been canceled(6) Points to note in preparation of written applications and written notifications submitted by electronic
payment service providers
When entering the names of directors or officers in written applications or written notifications
submitted by an electronic payment service provider, the current name of a person who has changed
his/her surname may be accompanied by his/her old name in parentheses.
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X-3-1

Information Technology (IT) System Risk
Background484

(1) Information technology (IT) system risk is the risk that users and electronic payment service
providers and banks will incur losses because of a computer system breakdown due to a programming
error, vulnerability or other inadequacies, or because of malfunction, or the risk that users andelectronic payment service providers and banks will incur losses because of inappropriate or illegal
use of computer systems. Electronic payment service providers are required to address various
challenges related to IT systems in a clear-cut way, mainly due to expanded provision of new products
and services. If electronic payment service providers were to have system failures and cybersecurity
incidents (hereinafter referred to as “system failures”), there might be problems that would not only
impair availability in users’ socioeconomic life and the economic activities of companies but also thatwould have serious effects on the protection of users. Therefore, it is important for the electronic
payment service provider who performs auxiliary functions for settlement systems to enhance andreinforce the control environment for managing IT system risk.
(2) However, even if an electronic payment service provider does not literally comply with what is written
in the following viewpoints, with due consideration for the scale and business nature of the electronic
payment service provider, or in case where only the system of the electronic payment service provider
stops, users can issue remittance instructions or acquire account information if they use the bank’ssystem directly, without passing through the system of the electronic payment service provider. In
light of this, it is not necessary to require the electronic payment service provider to improve its system
immediately, if no significant problems, such as erroneous money transfer, have been found from thestandpoint of user protection.
Or even if the electronic payment service provider alone cannot, in light of its capability, meet somepart of the necessary standards for electronic payment services in which it engages, the electronic
payment service provider is judged to meet the necessary standards if the bank that cooperates andcollaborates in performing the services shares the part (however, if the electronic payment service
provider newly cooperates and collaborates with another bank, it should be noted whether the bankcan share the part).
(Note)"Cybersecurity incidents" refer to instances of cybersecurity being threatened by so-called“cyberattacks” including unauthorized intrusion, theft, modification and destruction ofdata, failure or malfunction of information systems, execution of illegal computer
programs and DDoS attacks, committed via the internet through malicious use of
information communication networks and information systems.

X-3-2

Major Supervisory Viewpoints(1) IT system risk management(i)Whether the division in charge of managing IT system risk recognizes and assesses risks

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periodically and in a timely manner by recognizing the fact that impacts are more complicatedand extended as seen in the examples of system failures induced by large-scale transactions as aresult of increased services and efforts to enhance information networks.
In addition to undertaking regular review, when providing new services (including making
changes seriously affecting users, conducting large-scale sales promoting activities notaccompanied by system changes), whether the division conducts review of each new service.
(ii) Whether the electronic payment service provider recognizes measures to prevent damage fromspreading during system failures and rapid recovery from such failures as an importantmanagerial issue and provides a system to handle failures.
In particular, whether the electronic payment service provider recognizes the prevention of
cybersecurity incidents as an important managerial issue and provides a system to prevent them.
(iii) When system failures that may significantly affect business operations occur, whether theelectronic payment service provider reports the failures swiftly to the persons responsible forthe business operations.
In addition, whether it is prepared to launch a task force and consider developing a system toseek resolution of the issue in a swift manner.
(iv) Whether the management works out and carries out plans on technological improvements
required to continue business operations including the inheritance of the current system
structure and development technology.
(v)

Whether the electronic payment service provider sets and verifies the test scenarios based on
the operation environment of the user side with regard to new services provided, changes in the
bank’s API specification, and changes in the certification system.

(vi) Whether the electronic payment service provider uses objective benchmarks as a basis for thedevelopment and revision of its control environment for managing IT system risk, including
evaluations by a third party and the standards shown by the Center for Financial Industry
Information Systems concerning the contents of such development and revision. Also, whether
the electronic payment service provider revises, on a continual basis, its control environment
for managing IT system risk according to identification and analysis of system failures, resultsof implementation of risk management, progress of technology, etc.
(2) Management of information security(i)Whether the electronic payment service provider has developed a policy, preparedorganizational readiness, introduced in-house rules, and developed an internal control
environment in order to appropriately manage information assets, and whether it regularly
revises these policies, rules, and control environment. Also, whether it makes continuous efforts
to improve its information security control environment through the PDCA cycle, taking noticeof illegal cases at other companies.

(ii) Whether the electronic payment service provider manages information security by designating486

individuals responsible for business execution related to safety management of information
assets and clarifying their roles/responsibilities in efforts to maintain the confidentiality,
integrity and availability of information. Also, whether the individuals are responsible for thebusiness execution tasked to handle the security of IT systems, data, and network management.
(iii) Whether the electronic payment service provider takes measures to prevent unauthorized useof computer systems, unauthorized access, and intrusion by malicious computer programs suchas computer viruses.
(iv) Whether the electronic payment service provider identifies, in a comprehensive manner, theimportant user information that the electronic payment service provider should be responsible
for, keeps its records, and manages them. In identifying important user information, whether
the electronic payment service provider considers setting business operations, IT systems,
outsourcing contactors, and subcontractors for the electronic payment service provider as thescope of protection when necessary.
(v)

Whether the electronic payment service provider assesses the importance and risks regarding
important user information that has been identified.
Also, whether it has developed rules to manage information, such as those listed below, in
accordance with the importance and risks of each type of information.
• Rules to encrypt or mask information;• Rules for utilizing information; and• Rules on handling data storage media, etc.

(vi) Whether the electronic payment service provider has introduced measures to discourage or
prevent unauthorized access, unauthorized retrieval, data leakage, etc. such as those listed
below, for the important user information that has been identified.
• Provision of access rights only to employees who need to access according to their authority;• Storage and monitoring of access logs; and• Introduction of mutual checking functions such as by separating the individuals in charge ofdevelopment and those responsible for operations, or system administrators and system users,etc.
(vii) Whether the electronic payment service provider has introduced rules for controlling
confidential information, such as encryption and masking. Also, whether it has introduced rules
regarding the management of encryption programs, encryption keys, and design specifications
for encryption programs. Moreover, whether it has set rules to manage information inaccordance with the importance of information.
Note that "confidential information" refers to any information, which may cause damage orloss to users if it is disclosed or stolen, such as passwords, tokens, etc.
(viii) Whether the electronic payment service provider gives due consideration to the necessity ofholding/disposing of, restricting access to, and taking outside, confidential information, andtreats such information in a strict manner.

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(ix) Whether the electronic payment service provider periodically monitors its information assets tosee whether they are managed properly according to management rules, etc. and reviews thecontrol environment on an ongoing basis.
(x)

Whether the electronic payment service provider conducts security education (including
confirmation of whether security education has been conducted at outsourcing contractors) to
all officers and employees in order to raise awareness of information security.

(xi) When selecting and using one from among cloud services provided by third-party organizations,
whether the electronic payment service provider properly assesses the safety of information
security on the basis of its characteristics.
(xii) Whether the bank has taken measures to comply with Article 12 of the Financial Sector Personal
Information Protection Guidelines and other applicable provisions with regard to the provision
to third parties of the personal data which is acquired concerning the electronic payment
services. In particular, whether the electronic payment service provider obtains consents fromindividual users while paying attention to the following points according to the nature andmethods of the business.
(a)When obtaining consent from an individual user for the provision of his/her information
to a third party in a non-face-to-face manner such as via smartphone, etc., whether theelectronic payment service provider has prepared it so that individual users can easily
understand and consent to the content and purpose of use of information provided to suchthird party by making it more user-friendly in terms of the text of consent, font size, screen
specifications, manner of giving consent, etc. in accordance with Article 3 of the Financial
Sector Personal Information Protection Guidelines.

(b) Even in the case where the electronic payment service provider has obtained consent forthe provision of personal information to a third party from an individual user in the past,
if the third party to which the information is provided or the content of information to beprovided is different from the past case or if the scope of provision of such information
exceeds the necessary extent to achieve the purpose of utilization specified before,
whether the electronic payment service provider obtains consent from such individual user
again.
(c)

In cases where personal information is provided to multiple third-party contractors or
where the purpose of use of personal information varies at each third-party contractor,
whether the electronic payment service provider properly considers how and when to
obtain the users’ consent so that individual users can understand the fact that theirinformation will be provided to multiple third parties, as well as the purpose of use at eachthird-party contractor. Also, whether an individual user is forced to give consent to thethird parties beyond the reasonable scope of provision in terms of the third parties towhich the personal information is provided, the purpose of use, or the content of
information to be provided.

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(3) Cyber security management(i)Whether the person responsible for the business operations has recognized the importance ofcybersecurity amid increasingly sophisticated and cunning cyberattacks and introduced thenecessary control environment.

(ii) Whether the electronic payment service provider has introduced systems to maintaincybersecurity, such as those listed below, in addition to making the organization more secureand introducing in-house rules.
• Monitoring systems against cyberattacks;• Systems to report cyberattacks and a public-relations system when attacks occur;• Emergency measures by an in-house Computer Security Incident Response Team (CSIRT)
and systems for early warning; and• Systems of information collection and sharing through information-sharing organizations,etc.
(iii) Whether the electronic payment service provider has introduced a multi-layered defense systemagainst cyberattacks that combines security measures respectively for inbound perimeter
control, internal network security control, and outbound perimeter control.
• Security measures for inbound perimeter control (e.g., introduction of a firewall, anti-virus
software, unauthorized intrusion detection system, unauthorized intrusion prevention system,etc.);• Security measures for internal network security control (e.g., proper management ofprivileged IDs/passwords, deletion of unnecessary IDs, monitoring of execution of certain
commands, etc.); and• Security measures for outbound perimeter control (e.g., retrieval and analysis ofcommunication/event logs, detecting/blocking inappropriate communication, etc.)(iv) Whether measures such as those listed below are implemented to prevent damage fromexpanding when cyberattacks occur.
• Identification of IP addresses from which the cyberattacks originate, and blocking-off ofattacks;• Functions to automatically decentralize access against DDoS attacks; and• Suspension of the system in whole or in part, etc.
(v)

Whether necessary measures for vulnerabilities in the system, such as updating of the operating
system and application of security patches, are introduced in a timely manner.

(vi) Whether the electronic payment service provider, as part of cybersecurity measures, assesses its
security levels periodically by using relevant vulnerability scanning or penetration tests, etc. andmakes efforts to improve security.
(vii) Whether the electronic payment service provider has developed contingency plans against
potential cyberattacks. And whether it conducts exercises and reviews such plans in order to489

enhance security management.
(4) Management of outsourcing relating to IT system(i)

Whether the electronic payment service provider, in selecting the outsourcing contractors,
assesses them based on selection standards and gives careful consideration.

(ii) Whether the electronic payment service provider, in entering an outsourcing contract with anoutsourcing contractor, sets out division of roles and responsibilities with the contractor,
supervising authority to audit outsourced work, subcontracting procedures, level of services
provided, etc. in the contract. Also, whether the electronic payment service provider presents
to the outsourcing contractor the rules and security requirements which all of its officers andemployees are required to adhere to, and defines them in the contract, etc.
(iii) Whether risk management is carried out properly in outsourced IT system work (including work
further subcontracted)
In particular, in cases where the electronic payment service provider outsources its IT system
work to two or more contractors, related administrative work becomes complicated and higher
risk management is required. In this context, whether the electronic payment service provider
has developed a control environment upon fully understanding such fact.
In cases where the electronic payment service provider outsources IT system-related
administrative work to contractors, too, whether the electronic payment service provider
properly manages the risk thereof in the same manner as outsourcing of IT system work.
(iv) Whether the electronic payment service provider, as an outsourcer, periodically monitors
whether outsourced work (including work further subcontracted) is carried out appropriately.
(5) Measures to prevent damage from spreading(i)

Whether the electronic payment service provider considers taking appropriate measures toavoid causing unnecessary confusion among users (including measures to prevent the spreadof damage) when system failures occur. In cases where only the system of the electronic
payment service provider stops, users can issue remittance instructions or acquire accountinformation if they use the bank’s system directly, without passing through the system of theelectronic payment service provider. In light of this, whether the electronic payment service
provider is able to properly guide users and respond to consultation and inquiry from users.
Also, whether the electronic payment service provider makes efforts to establish its
communication system between the electronic payment service provider and the cloud provider
when some failure occurs in the cloud service. The electronic payment service provider isrequired to recognize the importance of considering the measures to be taken and timely andappropriate arousing of the attention to users in such cases.

(ii) Also, whether it considers a control environment, upon assuming a worst-case scenario in
preparation for system failures, to take necessary measures accordingly.

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Whether the electronic payment service provider has introduced backup systems, etc. inadvance, particularly for important systems whose failure could seriously affect business
operations. And whether it has developed a control environment to address disasters and system
failures so that normal business operations can be speedily brought back.
(iii) Whether the electronic payment service provider considers analysis of causes of system failuresthat occurred, investigation about impact until recovery, corrective actions, and preventive
measures for recurrence in a proper manner.
(iv) Whether the electronic payment service provider performs a risk evaluation in terms ofinfluence spread, for example, by understanding the spread of effects of partial system failures
and a single point of failure that cannot be circumvented, in order to mitigate the effects ofsystem failures. And whether the electronic payment service provider considers establishing aservice system mechanism for minimizing the damage to users by using a cloud service
mechanism properly to mitigate risks.
X-3-3

Supervisory Methods and Measures after Registration(1) When a system failure related to electronic payment services has occurred(i)Immediately after recognizing the occurrence of a system failure, etc., the electronic payment
service provider is required to report the fact to the FSA.
In addition, the electronic payment service provider is required to report on causes of thesystem failure when they are identified and resolved upon recovery of the system. However,even in cases where the causes are not identified, the electronic payment service provider isrequired to report the current situation within one month from the occurrence of the system
failure.
In particular, when a system failure that has a great impact on society has occurred, or when
it takes time for the electronic payment service provider to solve the causes of the failure, the
FSA, while monitoring the electronic payment service provider activate its contingency plan
including a general announcement of the details of the failure to the public and responses tousers on its website, etc., requires the electronic payment service provider the prompt
clarification of the cause and restoration of operations.
(Note)

System failures that must be reported

Problems that must be reported are those which, no matter what the causes are, affectsystems and equipment (including both hardware and software) which are currently usedby electronic payment service providers (including outsourcing providers and cloud service
providers used by the electronic payment service providers) and whose functions are or
could be delayed or stopped.
However, even though some of the systems and equipment have such troubles, thereporting requirement is not applicable in cases where a backup system has quickly started491

up and effectively prevented adverse effects.
Even though a failure or trouble does not actually occur, the electronic payment service
provider is required to report when the users or business operations are affected or highly
likely to be affected because it receives an advance notice of cyberattack or it has found acyberattack in its IT system. (Response is done based on the business characteristics of theelectronic payment service provider.)(ii) The FSA requires the electronic payment service provider to make an additional report pursuant
to Article 52-61-14(1) of the Banking Act, as needed, and if it is found that the electronic
payment service provider has a serious problem, the FSA issues a business improvement orderpursuant to Article 52-61-16 of the Banking Act. (When implementing administrative
dispositions, they shall be subject to II-5.)(2) Illegal remittance, wrong remittance, information leakage, etc.
If the electronic payment service provider finds a problem which affects users and the management,such as illegal remittance through the abuse of a privileged ID and wrong remittance due to a program
error of the system, the FSA requires the electronic payment service provider to report the fact to the
FSA within 30 days after finding the problem. If a serious problem is found, the FSA issues a business
improvement order pursuant to Article 52-61-16 of the Banking Act. (It should be noted that withregard to an information leak related to individual users, responses will be made based on the Banking
Act, and other necessary measures will be taken according to the situation of authority delegation to
the minister in charge based on the Personal Information Protection Act.)(3) Response to outsourcing providers
In cases where there is concern that outsourcing providers will fail to properly operate the IT system
work outsourced to them and the FSA deems it necessary to take actions, it takes the actions describedin the following:(i)Cases where a problem is found in the control environment of the electronic payment service
providerIf a problem is found in the internal control environment of the electronic payment service
provider relating to the outsourcing provider from the report to the FSA mentioned in (2) above,
the FSA requires the electronic payment service provider to submit a report based on Article
52-61-14(1) of the Banking Act, as needed. If a serious problem is found, the FSA will issue abusiness improvement order or implement any other measures based on Article 52-61-16 of
Banking Act.

(ii) Cases where a problem is found in the control environment of business operation, etc. of theoutsourcing provider.
The FSA makes efforts to understand the situation through the electronic payment service
provider which has entrusted operations to the outsourcing provider. In this case, too, the FSA

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will require the electronic payment service provider, as needed, to submit a report based on
Article 52-61-14(1) of the Banking Act, and if a serious problem is found, the FSA will issue abusiness improvement order based on Article 52-61-16 of the Banking Act. However, when thecase involves an urgent and substantially important matter or when the FSA considers that it isdifficult to grasp the actual situation of the outsourcing sufficiently only by asking for
confirmation from the electronic payment service provider, the FSA will make efforts to grasp
the situation by holding a direct interview with the outsourcing provider. When it is deemed
particularly necessary (for example, in cases where multiple electronic payment service
providers entrust similar work to such outsourcing provider), the FSA will request suchoutsourcing provider to submit a report based on Article 52-61-14(2) of the Banking Act withregard to necessary matters, such as the fact of occurrence of a problem, analysis on causes ofoccurrence of the problem, and improvement measures.(When implementing administrative
dispositions, they shall be subject to II-5.)(Note)

When conducting an interview with an outsourcing provider, the FSA asks theelectronic payment service provider that has entrusted operations to the outsourcing
provider to attend the interview as needed.

X-4
X-4-1

Rules for Protection of Users
SignificanceSettlement services provided by an electronic settlement agency as an act set forth in Article 2, paragraph(21), item (I) of the Banking Act (including services provided by an electronic settlement agency,
hereinafter referred to as "electronic settlement services") may increase the convenience of users' socioeconomic lives and economic activities of businesses and other entities.
On the other hand, as described in (III-3-9) above, there are crimes committed by banks and payment
service providers other than banks that aim to provide collaborative services. Therefore, it is important for
both banks and payment service providers to understand the risks of electronic payment services as a wholeand ensure their safety.
Based on the above, electronic payment and settlement service providers that provide electronic payment
and settlement services should provide services to users of electronic payment and settlement services andusers of cooperating banks (hereinafter referred to as "users, etc." in X-4 and X-5), from the viewpoint of
ensuring the sound and appropriate management of electronic payment and other agency services,
including the protection of the interests of the users, etc., it is important to establish a control environment
suited to such risks. In supervising electronic payment and other agency services, for example, the following
points shall be noted.
X-4-2

Main Focus

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(1) Development of internal control(i)

Whether the management, at the time of introduction of electronic settlement services and at
the time of changes to the contents and methods thereof, has the department in charge of internal
control identify any inherent risks, including problems related to the protection of the interestsof users, etc., with regard to the electronic settlement services as a whole, and develop a control
environment for reducing risks in a timely manner, based on the following:(ii) Whether the division in charge of internal control collects and analyzes information on theoccurrence status and modus operandi of related crimes based on the types of crime expected tooccur in electronic settlement services, and improve the control environment for the
implementation of services related to electronic settlement services (including measures toprevent fraud) by taking into consideration the possible future crime modus operandi.
Also, whether the Financial Instruments Business Operator reports the details thereof to the
management in a regular and timely manner.
(iii) Whether the division in charge of internal audit regularly and in a timely manner audits thecontrol environment for services related to electronic settlement services (including measures toprevent fraud) and reports the audit results to management.
(iv) Whether the management creates an environment in which the so-called PDCA cycle comprisingrisk analysis, formulation and implementation of risk mitigation measures, and evaluation andreview of such mitigation measures functions as described above.
(2) Ensuring security(i)From the viewpoint of preventing illegal transactions, when introducing electronic settlement
services and when changing their contents and methods, whether risk assessments are
conducted for the entire electronic settlement services in cooperation with cooperating banks.
Also, whether it cooperates in risk assessment work at cooperating and collaborating banks.

(ii) Whether the Financial Instruments Business Operator has clarified the division of roles andresponsibilities with the cooperating and collaborating banks.
(iii) Based on risk assessment, whether the credit rating agency, in cooperation with cooperating
and collaborating banks, collates information pertaining to users and takes appropriate andeffective measures to prevent fraud in line with risks.
For example, when cooperating with banks in electronic settlement services, informationnecessary for authentication by electronic settlement agencies may be sent to the telephone
numbers and addresses of depositors registered with the cooperating banks, and the upper limit
of usage may be used to prevent illegal transactions.
Whether the TR has taken appropriate and effective measures to prevent fraud, such as
setting the level at which the TR can prevent fraud.
(Note)

When collating information with cooperating banks, it is desirable to include the494address and telephone number in addition to the user's name and date of birth,
except when using public personal identification.
Also, whether the TR has confirmed that multi-factor authentication and otherauthentication methods that combine effective elements have been introduced at cooperating
and cooperating banks, such as the use of variable passwords using hardware tokens andsoftware tokens in addition to personal authentication using fixed IDs and passwords, and theuse of electronic certificates such as public personal authentication.
(Note)It should be noted that anti-fraud measures taken by electronic payment service
providers must not overlap with anti-fraud measures taken by cooperating banks.In
addition, it should be noted that a robust authentication method must be introduced
for the registration and change of information used for authentication, such as
telephone numbers, in cooperating banks.

(iv) Whether the credit rating agency recognizes and reassesses risks on a regular and timely basis
and improves measures to prevent fraud, including the introduction of public individual
certification, based on environmental changes, including the sophistication and sophisticationof criminal methods, and the occurrence of incidents at its own company or at other business
operators.
(v)

As a result of the risk assessment, if it is found that there is a problem from the viewpoint of
ensuring sound and appropriate management of electronic payment and other agency services,
including the protection of the interests of users, etc., temporary suspension of all or part ofservices, including electronic payment and other services, or other measures, whether
appropriate measures are taken.

(3) Notification to users, etc.
In order to enable users, etc. to recognize damage at an early stage, when coordinating andcollaborating with banks related to electronic settlement services, whether measures are taken forusers, etc. to confirm the fact of collaboration and the content of collaboration in a timely manner,such as by cooperating with the banks and notifying the contact information of users, etc. registeredwith the banks in advance.
(Note)

When taking the above measures by notifying the contact information registered in thecooperating bank, it should be noted that the bank must have a robust authentication
method for registering and changing the contact information, such as the phone number(including the mobile phone number) and email address.

(4) Detection of illegal transactions
With regard to electronic settlement services, from the viewpoint of preventing illegal transactions,
whether a control environment for appropriately conducting the following measures in cooperation
with cooperating banks is established.

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・ To quickly detect suspicious transactions by setting appropriate scenarios and thresholds basedon environmental changes, including the elaboration and sophistication of criminal methods, andon the occurrence of incidents at the agent and other business operators.
・ To share information on transactions detected based on the above in a timely manner withcooperating and cooperating banks, implement temporary suspension of use of services and othermeasures as necessary, and conduct investigations.
・ To promptly contact those who are likely to be aﬀected.
・ To suspend IDs that have been found to be fraudulent.
(5) Responding to inquiries from users, etc.
(i)

Whether a control environment is developed for accumulating and analyzing consultations
regarding electronic settlement services from users, etc. (hereinafter referred to as"consultations"), early detection of risks, implementation of measures to prevent fraud, andimprovements in response to consultations from users.

(ii) Whether a control environment is developed for sincere responses to consultations, including
consultations about cooperating and collaborating banks. Also, whether specific methods ofcooperation and responsibilities with the cooperating and collaborating banks are clarified.
(iii) Whether the agent examines whether the cooperating and collaborating banks do not encourage
users to consult with other parties, and when such inappropriate responses are found, together
with the cooperating and cooperating banks, whether the agent takes appropriate measures,such as clarification of the cause of occurrence, improvement measures and recurrence
prevention.
X-4-3

Supervisory Measures

With regard to issues related to electronic settlement services that have been identified through daily
supervisory processes, such as the reporting of misconduct, the FSA will, based on the above-mentioned
points, conduct in-depth dialogues on the causes and improvement measures, and, if necessary, require
reports based on Article 52-61-14 of the Banking Act, in order to identify the status of voluntary business
improvement by electronic settlement service providers.
In addition, when it is deemed that there is a serious problem from the viewpoint of ensuring sound andappropriate management of electronic settlement services, including protection of the interests of users,
etc., the FSA will issue a business improvement order based on Article 52-61-16 of the Banking Act. Also,
when serious or malicious violations of laws or regulations are found, the FSA will consider whether to issue
a business suspension order based on Article 52-61-17 of the Banking Act. (When implementing
administrative dispositions, they shall be subject to II-5.).
X-5Compensation for Fraudulent Transactions

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There is a risk of harm to users, etc. due to fraudulent transactions related to electronic settlement agents.
In the event of such damage, an electronic settlement agent should take appropriate and prompt actions(including measures in cooperation with the cooperating and collaborating banks) for victims from theviewpoint of ensuring sound and appropriate management of electronic settlement services, including
protection of interest of users, etc.
The following points shall be taken into consideration, for example, when supervising an electronic
settlement agent in response to fraudulent transactions.
X-5-1
(i)

Major Supervisory Viewpoints
Whether the electronic settlement agent establishes a policy regarding compensation for losses
caused by fraudulent transactions in relation to electronic settlement services (hereinafter referred
to as the "Compensation Policy") and provides information about the policy to users, and whether
it is possible for other users to know about the policy.

(Note)The "losses caused by fraudulent transactions in relation to electronic settlement services"
are not limited to losses incurred by users of electronic settlement services due to
instructions given by unauthorized persons against users’ will, but include losses incurredby users of cooperating and collaborating banks due to the provision of electronic
settlement services, such as losses incurred by a depositor caused by transmission of asettlement instruction against the depositor's will by disguising a user of an electronic
settlement service as a depositor of a linked account, etc.

(ii) With regard to the matters concerning compensation for damages prescribed in Article 52-61-8,
paragraph (1), item (iii) of the Banking Act, whether at least the following matters are prescribed(including cases where such matters are prescribed in contracts pertaining to electronic settlement
services concluded with cooperating and collaborating banks pursuant to the provisions of Article
52-61-10 of the Banking Act):
A.

Whether or not compensation for losses will be provided to victims in each specific case where
losses are likely to occur, the details thereof, and if there are any requirements forcompensation, the details thereof, in accordance with the contents of the services of electronic
settlement services

B.

Details of compensation proceduresC.

In the case of providing electronic settlement services, matters concerning the sharing ofcompensation between the cooperating and collaborating banks and the electronic settlement
agent (including persons who implement compensation for victims)

D.

Contact information regarding compensation

E.

Disclosure standards for illegal transactions(Note)

With regard to the matters specified in sub-item (c), it is not necessary to provide
information, etc. to users regarding all of the contents of the contract with the497

cooperating and collaborating bank related to said matters. However, it should be notedthat it is necessary to provide information, etc. to users at least for those who provide
compensation to victims.
(iii) Whether a control environment for implementing compensation appropriately and promptly inaccordance with the established compensation policy is established (including systems forcooperation with the cooperating and collaborating bank).
X-5-2

Supervisory Methods and Responses(1) Problem recognition
With regard to issues related to responses to fraudulent transactions identified through daily
supervisory processes, such as the filing of reports on misconduct, the FSA will conduct in-depth
dialogues on the causes and measures for improvement, based on the above points of view, and if
necessary, require reports based on Article 52-61-14 of the Banking Act in order to identify the status
of voluntary business improvement made by an electronic settlement agent.
In addition, when it is found that there are serious problems from the viewpoint of ensuring soundand appropriate management of electronic settlement, including protection of the interests of users,
etc., the FSA will issue a business improvement order based on Article 52-61-16 of the Banking Act
to an electronic settlement agent. Also, when a serious or malicious violation of laws or regulations isfound, the FSA will consider whether to issue a business suspension order based on Article 52-61-17of the Banking Act (in the case of implementing an administrative disposition against an electronic
settlement agency, etc., it will be subject to II-5.).
(2) When a fraudulent transactions occurs
As soon as a fraudulent transaction is detected related to an electronic settlement agent etc., the
FSA shall promptly request the agent to submit a report on the occurrence of the transaction by the"Report on the Occurrence of Illegal Transactions."

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