November 10, 2020
Bank of Japan

Supplementary Explanation for the Outline of "Special Deposit Facility toEnhance the Resilience of the Regional Financial System"

1. Purpose and overview of the facility
The Bank of Japan decided on a plan to introduce a new deposit facility(hereinafter referred to as "the Special Deposit Facility") as a measure to ensure
financial system stability, in which excess reserve balances* of eligible financial
institutions that meet certain requirements shall be remunerated (hereinafter referredto as "special remuneration") in addition to the remuneration in the Complementary
Deposit Facility. 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.
The Special Deposit Facility shall be introduced as a three-year temporary
measure for the fiscal years ending March 2021-2023, within which the requirements
shall be met, with the aim of encouraging regional financial institutions to accelerate
their efforts to strengthen business foundations.
*Current account balances held at the Bank in excess of required reserves. Thesame 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 Shinkin Central Bank, the Shinkumi Federation Bank, theRokinren Bank, and the Norinchukin Bank), the Bank shall decide whether to allow
financial cooperatives that do not have current accounts at the Bank to use this facility.
3. Requirements 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).

1(1) Being committed to contributing to sustainable development of regional
economies
Each eligible financial institution shall express its commitment to contribute tosustainable development of regional economies.
(2) To meet any of the following:(i) To strengthen business foundations to a designated degree(a) For each of the fiscal years ending March 2021-2023, each eligible financial
institution's overhead ratio (OHR, or the ratio of overhead costs to gross operatingprofits)** shall improve by a percentage equal to or greater than a certain thresholdcompared to the OHR for the fiscal year ending March 2020.
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. The Bank shallcontinuously monitor this progress.
The Bank will set the appropriate levels of thresholds for OHR changes in linewith the preliminary figures in the table below. The specific figures will be decided
later based on the results of deliberations.
Fiscal year ending:
OHR changes tobe satisfied

March 2021

March 2022

March 2023

-1% or lower-3% or lower-4% or lower**

The OHR shall be calculated as follows (on a consolidated basis). For regionalbanks belonging to a holding company that primarily owns regional banks, theOHR shall be calculated for the said holding company on a consolidated basis.
The Bank shall make a single judgement as to whether said regional banks meetthe requirement for the OHR on that basis (the same shall apply to therequirement for overhead costs prescribed in (b)). Changes in the OHR shall becalculated as the OHR for each of the fiscal years ending March 2021, 2022, and2023 divided by the OHR for the fiscal year ending March 2020 (the same shallapply to changes in overhead costs prescribed in (b)).
Overhead costs (excluding depreciation expenses)
OHR=Gross operating profits (excluding realized gains/losses onbondholdings, gains/losses from investment trusts due to cancellations,and interest income paid in the Special Deposit Facility)2(b) For those that do not meet the requirement for the OHR prescribed in (a),business foundations shall be deemed to have been strengthened to a designateddegree if, for each of the fiscal years ending March 2021-2023, each eligible financial
institution's overhead costs (excluding depreciation expenses) shall decrease by apercentage equal to or greater than a certain threshold compared to the overhead costs
for the fiscal year ending March 2020.
The Bank will set the appropriate levels of thresholds for overhead cost changes
in line with the preliminary figures in the table below. The specific figures will bedecided later based on the results of deliberations.
Fiscal year ending:Overhead costchanges to besatisfiedMarch 2021

March 2022

March 2023

-2% or lower-4% or lower-6% or lower

Rationale behind the Chosen Benchmarks and Their Thresholds- As the benchmark to measure the degree of strengthening businessfoundations, the Bank shall use the OHR and evaluate its improvements. TheOHR can be applied regardless of regional financial institutions' businessscope and balance sheet size and can evaluate these institutions' efforts both interms of revenue increase and cost reduction.
In this context, realized gains/losses on bondholdings, gains/losses frominvestment trusts due to cancellations, and interest income paid in the Special
Deposit Facility shall be excluded from gross operating profits so that only
sustainable income is identified. Also, depreciation expenses shall be excluded
from overhead costs so that regional financial institutions' investments aimed
at strengthening their revenue bases shall not be discouraged and that
temporary fluctuations of the costs associated with such investments shall beremoved.
- The threshold for OHR changes (a reduction of 4 percent in three years) isbased on the figures achieved by approximately 10 percent of regional
financial institutions in recent years. If regional financial institutions as awhole manage to strengthen their business foundations at this pace, thesustainability of Japan's regional financial institutions into the future will besufficiently enhanced.
- However, due to the spread of COVID-19, uncertainty about future economicand financial conditions is quite high. On this basis, the requirement for theoverhead costs prescribed in 3.(2)(i)(b) is also introduced, in order to3

incentivize eligible financial institutions to strengthen business foundations
when they face huge downward pressure on gross operating profits in thefuture, due to economic stagnation. In particular, business foundations shall bedeemed to have been strengthened to a designated degree if eligible financial
institutions reduce overhead costs by a percentage equal to or greater than acertain threshold, which can be achieved through their self-reliant efforts. The
threshold for overhead cost changes shall be set based on the figures achieved
by approximately 10 percent of regional financial institutions in recent years,
which is similar to that for OHR changes.

(ii) To make an institutional decision on mergers, business integration, orcertain forms of acquisitions toward strengthening business foundations
To meet the requirements for special remuneration, eligible financial institutions
shall make institutional decisions on mergers, business integration, or certain formsof acquisitions between November 10, 2020 and the end of March 2023. The Bank
shall judge, based on such materials as business integration plans, if such mergers,
business integration, or certain forms of acquisitions shall contribute to strengthening
business foundations.
Those wishing their excess reserve balances to be remunerated by meeting thisrequirement shall submit such materials as business integration plans to the Bank inadvance and periodically report the progress to the Bank. The Bank shall continuously
monitor this progress.
(3) There being no special circumstances in which such remunerations aredeemed inappropriate
4. Methods for special remuneration(1) In the Special Deposit Facility, excess reserve balances shall be remunerated. The
Bank shall set for each eligible financial institution a limit to the amount of excess
reserve balances subject to special remuneration, with the aim of ensuring appropriate
operation of the Special Deposit Facility and conducting money market operations
smoothly.
- Such limit shall be the higher one of the following.
(i) The amount calculated by multiplying each eligible financial institution's excess
reserve balance outstanding in the past by the rate of change in the overall excess
reserve balances outstanding held by all the account holders at the Bank.
4(ii) The sum of each eligible financial institution's basic balance and macro add-onbalance.
(2) In the Special Deposit Facility, excess reserve balances shall be remunerated
according to the reserve maintenance period under the reserve deposit requirement
system.
- For eligible financial institutions that meet the requirements prescribed in 3
(2)(i) in each of the fiscal years ending March 2021-2023, their excess reservebalances shall be remunerated for one year, starting from the September reserve
maintenance period in the next fiscal year. If eligible financial institutions that
do not meet the requirements for the fiscal year(s) ending March 2021 and/or
2022 meet the requirements for the subsequent fiscal year(s) (the fiscal year
ending March 2023 at the latest), the Bank shall pay in the subsequent fiscalyear(s) the amount equivalent to special remunerations for the past fiscal year(s).
- For eligible financial institutions that meet the requirements prescribed in 3(2)(ii), their excess reserve balances shall be remunerated for three years,
starting from the next reserve maintenance period after the Bank's evaluations
and necessary preparations complete. 1 Such evaluations shall be conducted,
following institutional decisions on mergers, business integration, or certain
forms of acquisitions, as to whether the decided case shall contribute tostrengthening business foundations, based on such materials as businessintegration plans. However, if such mergers, business integration, or certain
forms of acquisitions fail to materialize, eligible financial institutions shallreturn the amount equivalent to special remunerations to the Bank.
(3) When a regional bank integrates its business with a holding company thatprimarily owns regional banks, special remuneration shall be paid to excess reservebalances held by all of the respective regional banks belonging to the said holdingcompany. When a regional bank integrates its business with a bank other than aregional bank, a banking group mainly consisting of banks other than regional banks,
or non-financial companies, only an excess reserve balance held by the said regionalbank shall be remunerated. For other forms of mergers, business integration, andcertain forms of acquisitions, the Bank will judge the scope of special remunerationin each case based on the purpose of the Special Deposit Facility prescribed in 1.
above.

1In the earliest case, special remuneration will likely be applied from April 16, 2021.

55. Interest rate
The interest rate applied to excess reserve balances in the Special Deposit Facility
shall be +0.1 percent per annum.2
6. Exception
If the Bank deems it necessary to ensure appropriate operation of the Special
Deposit Facility and to conduct money market operations smoothly, it can makeexceptions to the prescribed.
7. Disclosure
The Bank will make public the names of eligible financial institutions thatreceive special remunerations once a year, in principle.
8. Next steps
The Bank will deliberate on the facility in a prompt manner, taking into accountopinions of relevant parties. The principal terms and conditions for its implementation
will be decided at a future Policy Board meeting.3

For eligible financial institutions that meet the requirements prescribed in 3, their excess reservebalances shall be remunerated at +0.1 percent per annum (from the fiscal year ending March 2022
at the earliest in accordance with the description in 4), in addition to the remuneration in theComplementary Deposit Facility (currently +0.1 percent per annum for the basic balance, +0.0
percent per annum for the macro add-on balance, and -0.1 percent per annum for the policy-ratebalance). The application of the positive interest rate of +0.1 percent per annum under "SpecialFunds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus(COVID-19)" will not be affected.
3
The Bank will also deliberate on matters associated with government approval that arenecessary to implement the facility.
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