A general introduction to the banking regulatory regime in Japan

All the questions


As the world’s third-largest economy, Japan has a well-developed banking sector of around 200 banks. There are currently four mega banking groups: Mizuho, ​​Sumitomo Mitsui, Mitsubishi UFJ and Resona. About half of these banks are local banks, which provide more local services (mainly in one or more specific prefectures).2 There are also more than 50 overseas bank branches.

On November 4, 2015, Japan Post Bank Co, Ltd, formerly part of the government’s postal division, had its shares listed on the First Section of the Tokyo Stock Exchange, along with the listing of its parent company, Japan Post Holdings Co, Ltd and another subsidiary of the parent company, Japan Post Insurance Co, Ltd.

The regulatory regime applicable to banks

i The banking law and the law on financial instruments and foreign exchange

The primary source of regulation for banks doing business in Japan is the Banking Law,3 to which all banks are subject. It regulates their corporate governance, banking activities and capital adequacy as well as their major shareholders and subsidiaries. The Banking Law also regulates holding companies that have banks as subsidiaries (bank holding companies).

The Japanese regulatory framework regulates commercial banking activities and investment banking activities separately. The banking law is, in principle, only applicable to the former (ie the acceptance of deposits, the granting of loans and the transfer of funds: the main banking activity). Many banks also engage in investment banking activities, which typically include securities and derivatives related activities. These activities are subject to separate restrictions (discussed in Section II.iii) and these banks are concurrently regulated under the Financial Instruments and Exchanges Act (FIEA)4 for this purpose. Some banks also have affiliated securities companies engaged in investment banking; these companies are also regulated by the FIEA.

ii Regulators

The main regulator of the banking sector is the Financial Services Agency of Japan (FSA), whose power to supervise banks in Japan is delegated by the Prime Minister. The Commissioner of the FSA also delegates some of his authority to the directors of the local financial offices in relation to local banks and the supervision of investment banking activities. Onsite and offsite inspections of investment banking activities are conducted by the Securities and Exchange Surveillance Commission. The Bank of Japan also exercises supervisory authority over banks, based primarily on its contractual agreements and transactions with them.

The powers of the regulator, as prescribed in the banking law, include the receipt of various reports, the ability to carry out on-site inspections (when a bank must, in practice, disclose all information it holds to the regulator) and the power to make business improvement and suspension orders.

iii Entry into banking industries

Two organizational structures are available to foreign banks to establish a core banking business in Japan. One is the establishment of a limited liability company in Japan as a subsidiary or affiliated company according to the Company Law of Japan.5 This subsidiary or affiliated company must obtain a banking license from the Prime Minister in accordance with the Banking Law (Local Entity Bank). The alternative is to establish branches of the foreign bank in Japan and obtain a foreign bank branch banking license. For the foreign bank branch regime, the opening of subsequent branches (also known as sub-branches) is also subject to the prior approval of the FSA.6 The granting of necessary licenses and approvals is at the discretion of the competent authority in each case.

To engage in investment banking activities, such as securities and derivatives trading, a bank must also be registered with the relevant local finance office in accordance with the FIEA.7 Registered banks are generally permitted to operate a wider range of derivatives and securities business, such as brokerage of government bonds and the sale of mutual funds or non-discretionary investment advisory services; however, for historical reasons, banks are generally prohibited from engaging in certain categories of securities business, including brokerage and underwriting of corporate stocks and bonds, and discretionary securities management services. investments.8 To carry out these activities, banks must establish a subsidiary or affiliated company which is a separate legal entity and register it in accordance with the FIEA as a commercial operator of financial instruments.

In this regard, the scope of business of a subsidiary or affiliate that a bank may have is limited to certain financial and related activities,9 but it was expanded to some extent (to include fintech activities) by an amendment of the banking law in 2016 and 2021.

iv Cross-border activities of foreign branchless banks

Foreign banks may not, in principle, conduct any part of core banking business or investment banking business in Japan or with persons in Japan without establishing a branch and obtaining a banking license as a foreign bank branch. Even when a foreign bank has a licensed foreign bank branch in Japan, it is generally understood that other unlicensed foreign branches of the bank are prohibited from engaging in transactions or with persons in Japan.

In this regard, another regulatory framework – foreign bank agency activity – was introduced in December 2008, under which foreign banks without a licensed foreign bank branch and unlicensed branches of a foreign bank can engage in basic banking business with persons in Japan through either a local banking entityten or a foreign bank branch of the bank acting as agent or intermediary. Both options require the local entity bank or the foreign bank branch to obtain separate approval from the FSA.11