November 10, 2020
Bank of Japan

Introduction of "Special Deposit Facility to Enhance the Resilience ofthe Regional Financial System"
At a regular board meeting held today, the Policy Board of the Bank of Japandecided on a plan to introduce "Special Deposit Facility to Enhance the Resilience of
the Regional Financial System" (hereinafter referred to as "the Special DepositFacility") as a measure to ensure financial system stability. Its outline is shown in theattachment. This decision aims to strengthen the business foundations of regional
financial institutions so that they may firmly support regional economies into thefuture and smoothly fulfill their financial intermediation function.
Japan's financial system has been maintaining stability on the whole, while
facing the continued spread of COVID-19. Financial institutions play key roles insupporting Japan's economy through the provision of active financial intermediation
to companies and households. However, financial institutions' profitability throughdomestic deposit-taking and lending activities has continued to decline in the longterm. While this is partly due to a continued environment of extremely low interestrates, it is important to recognize that structural factors such as the shrinking and agingof the population, the decline in growth expectations, and the excess savings in thecorporate sector are significantly at play. Such structural factors have strongly
affected regional financial institutions in particular. In years to come, should financial
institutions' profitability continue to decline due, for example, to the protracted spreadof COVID-19, the smooth functioning of financial intermediation could be impaired.
The environment surrounding regional economies is undergoing significantchanges, not only due to the above-mentioned factors but also to factors such as theincreasing requests by society to address Sustainable Development Goals (SDGs),changes in lifestyle and working-style stemming from the spread of COVID-19, andadvancements in digital transformation. Against this background, regional financial
institutions play vital roles in rejuvenating local companies and households, as wellas in fostering sustainable economic growth in their respective regions and hence inJapan overall. In this context, it is essential that regional financial institutions continueto maintain sufficient capital and profitability so as to support economic activity in1

their respective regions into the future. It is also important for them to offer higher
value-added financial services to help these regions address various challenges.
At present, regional financial institutions are focusing on providing financing
support to companies and households affected by the spread of COVID-19 and areworking on strengthening their business foundations in the long term. They are
striving to boost net interest income as well as fees and commissions by meeting
financial needs in regions, such as providing solution-related services for localcompanies and supporting households' asset management in response to the rise inlongevity. They are also pushing ahead with initiatives to improve business efficiency.
Moreover, from the same perspective, an increasing number of regional financial
institutions have been implementing a wide array of initiatives through businessintegration and alliances with other financial institutions and non-financial companies,
including those to facilitate digital transformation. Although it seems likely that it willtake considerable time until their efforts bear fruit, it is necessary to accelerate efforts
to actively engage in forward-looking actions.
On this basis, the Bank of Japan has judged it appropriate to introduce the Special
Deposit Facility to encourage regional financial institutions' initiatives to strengthen
their business foundations. The Bank will establish this facility as a three-year
temporary measure for the fiscal years ending March 2021-2023 and pay extra interest
on current account balances held by regional financial institutions that meet certain
requirements. The Bank expects that many regional financial institutions will makeuse of this facility, which will contribute to strengthening the functioning of financial
intermediation in regional economies and ensuring financial system stability. TheBank will also deepen dialogue with regional financial institutions and support theirwide-ranging initiatives to support regional economies.
The Bank of Japan will deliberate on the details of the facility in a prompt manner.
The principal terms and conditions for its implementation will be released following
the Policy Board's decision.1Media inquiries
Financial System and Bank Examination Department
E-mail: post.fpso1@boj.or.jpThe Bank will also deliberate on matters associated with government approval that arenecessary to implement the facility.
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Attachment

Outline of "Special Deposit Facility to Enhance the Resilience of
the Regional Financial System"
1. Purpose and overview of the facility
The Policy Board of the Bank of Japan decided on a plan to introduce a newdeposit facility (hereinafter referred to as "Special Deposit Facility") as a measure toensure financial system stability, in which excess reserve balances* of eligible
financial institutions that meet certain requirements shall be remunerated (hereinafterreferred to as "special remuneration") in addition to the remuneration in theComplementary Deposit Facility. This facility will be introduced as a three-year
temporary measure. This decision aims to strengthen the business foundations ofregional financial institutions so that they may firmly support regional economies into
the future and smoothly fulfill their financial intermediation function.
*Current account balances held at the Bank in excess of required reserves. The
same shall apply hereinafter.

2. Eligible financial institutions
Regional banks and shinkin banks that have current accounts at the Bank andwish to use the Special Deposit Facility.
After consultations with relevant parties, such as the central organizations offinancial cooperatives, the Bank shall decide whether to allow financial cooperatives
that do not have current accounts at the Bank to use this facility.
3. Requirements and methods for special remuneration
In the Special Deposit Facility, special remuneration shall be paid, provided thateligible financial institutions shall meet all of the following requirements in (1)-(3).
The methods for special remuneration shall be prescribed in (2).
(1) Being committed to contributing to sustainable development of regional
economies(2) To meet any of the following:(i) To strengthen business foundations to a designated degree1For each of the fiscal years ending March 2021-2023, excess reserve balances of
eligible financial institutions that meet certain requirements for strengthening businessfoundations shall be remunerated for one year, starting from the September reserve
maintenance period in the next fiscal year. The Bank shall prescribe such requirements
by using the overhead ratio (OHR, or the ratio of overhead costs to gross operatingprofits), etc. If eligible financial institutions that do not meet the requirements for thefiscal year(s) ending March 2021 and/or 2022 meet the requirements for thesubsequent fiscal year(s) (the fiscal year ending March 2023 at the latest), the Bank
shall pay in the subsequent fiscal year(s) the amount equivalent to special
remunerations for the past fiscal year(s).
Those wishing their excess reserve balances to be remunerated by meeting thisrequirement shall submit "Initiatives to Strengthen Business Foundations" to the Bankin advance and periodically report the progress to the Bank.
(ii) To make an institutional decision on mergers, business integration, orcertain forms of acquisitions toward strengthening business foundations
For eligible financial institutions that make institutional decisions on mergers,
business integration, or certain forms of acquisitions between November 10, 2020 andthe end of March 2023, their excess reserve balances shall be remunerated for threeyears. Such remunerations shall be subject to the Bank's evaluations as to whether
such mergers, business integration, or certain forms of acquisitions shall contribute tostrengthening business foundations, based on such materials as business integrationplans.
(3) There being no special circumstances in which such remunerations are
deemed inappropriate
4. Interest rate
The interest rate applied to excess reserve balances in the Special Deposit Facility
shall be +0.1 percent per annum.
Specifically, for eligible financial institutions that meet the requirements
prescribed in 3, their excess reserve balances shall be remunerated at +0.1 percent perannum (from the fiscal year ending March 2022 at the earliest), in addition to theremuneration in the Complementary Deposit Facility (currently +0.1 percent perannum for the basic balance, +0.0 percent per annum for the macro add-on balance,and -0.1 percent per annum for the policy-rate balance).

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