Japan

Author: | Published: 9 Jul 2001
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Market Transactions & Trends

Syndicated loans

Although until 1998 the total amount of outstanding syndicated loans in Japan was not more than ¥1 trillion ($8 billion), it rapidly increased to ¥5 trillion in 1999. The total amount of syndicated loans in Japan now is approximately ¥13 trillion.

One of the reasons for this increase is that the decline in the price of real property has made it difficult for banks to continue making traditional loans, under which one bank loans a large amount to a company in exchange for a security interest in such company's real property. A syndicated loan makes it possible for a bank to share the default risk of the borrower with other banks. On the other hand, it also increases the possibility of the other banks increasing their customer base.

The Japan Syndication and Loan-trading Association (JSLA) was established by domestic and foreign banks and other financial institutions on January 1 2001 for the purpose of advancing syndicated loans and establishing a resale market of loan receivables through the standardization of: (i) syndicated loan agreements; and (ii) sale and purchase agreements of loan receivables. The JSLA also plans to create and operate a website through which an arranger may offer participation in syndicated loans and financial institutions may apply to participate in such loans.

It is hoped that, through these attempts to standardize syndicated loan agreements and further advance the syndicated loan market, some outstanding issues, including those regarding liabilities of agents and arrangers of syndicated loans, will be sufficiently addressed.

Project finance

As discussed above, as a result of the decline in the price of real property, Japanese banks have been obliged to change their traditional loan method and have begun adopting project finance as a method for expanding their business fields. In this context, project finance has been an area that has recently been in the spotlight in Japan.

In terms of legislative measures, the PFI Promoting Law (the Law regarding Promotion of Arrangement etc of Public Facilities by Way of Utilizing Private Resources etc) became effective in July 1999 for the purpose of promoting the so-called private financial initiative (PFI) system in Japan. The underlying principle of PFI is risk optimization between public and private entities, where a private institution (project manager) undertakes the management risk of a project. Project finance refers to financing a specific project, in principle with recourse limited to any profits or cash flow that might arise from such project and security interests in the assets of the project, and under which the financial institution takes a portion of the risk of such project. Taking into consideration the characteristics of both PFI and project finance, it can be said that project finance is a financing method that allows a project manager who undertakes certain risk to re-allocate such risk to a financial institution.

Under this law, many local authorities have selected certain public projects – for example, the establishment and management of museums, elementary schools and environmental facilities etc. – to be subject to this law. It is obvious that using project finance arrangements in relation to these public projects will promote the concept of project finance in the Japanese market.

Management buy-out (MBO)

Recently, Japanese banks have also launched advisory and/or financing services in MBO transactions. As more Japanese companies are restructuring their operations, the number of companies deciding to sell their non-core businesses to outside entities has increased.

The Industrial Revitalization Special Measure Law (Sangyo-Katsuryoku-Saisei-Tokubetsu-Sochi Hou) (IRL) came into force in November 1999. The IRL has facilitated MBO transactions by, among other things, streamlining certain procedures necessary for a business transfer under the Japanese Commercial Code, and granting certain tax benefits to any "Business Reconstruction Plan" submitted by March 31 2003 and subsequently approved by the relevant supervisory authority.

In addition, corporate spin-off procedures adopted in the amendment of the Commercial Code in 2000, together with the IRL, are expected to promote the use of MBOs in Japan.

Asset finance

In the area of asset finance transactions, transactions of real estate finance regarding commercial real estate – office buildings, hotels, department stores, shopping centres, petrol stations and rental apartments etc – have recently increased. In addition to commercial real estate securitizations, non-recourse loans have been actively adopted to finance new large-scale developments in urban areas.

Derivatives

The last trend in the Japanese market this year that we wish to discuss is weather derivatives. The use of weather derivatives has been spreading throughout theme parks and other businesses that are likely to be affected by the weather.

No provisions exist in any statutes or relevant ordinances that directly refer to weather derivatives, but in principle it is possible to interpret them so that banks and insurance companies may participate in such transactions as a type of credit derivative transactions stipulated as an authorized ancillary business under relevant laws and ministry ordinances. The participation by securities companies in weather derivatives must be approved by the relevant local finance bureau of the Ministry of Finance under the Securities and Exchange Law.

With respect to financial institutions, such credit derivative transactions are interpreted as a "statutory or legitimate business action" and therefore the issue of whether such transactions are an illegal form of gambling under the Japanese Criminal Code does not arise. However, in the absence of specific legislation, it is still unclear how such credit derivative transactions conducted between business corporations will be interpreted under Japanese law, especially in terms of whether they are a "statutory or legitimate business action", in relation to the gambling prohibition in the Criminal Code.

The main regulatory bodies and their powers

Financial Services Agency (FSA)

The FSA is the principal regulator supervising financial institutions in Japan. As an agency of the Cabinet Office, a newly-created government office led by the Prime Minister, the FSA has three bureaus: the Planning and Coordination Bureau, the Inspection Bureau and the Supervisory Bureau. Through these bureaus, the FSA inspects and supervises financial institutions and engages in planning and policy making regarding the Japanese financial system, including the framework dealing with failed institutions and financial crisis management.

Matters relating to failed institutions and financial crisis management were the responsibility of the Financial Reconstruction Committee (FRC) until the beginning of this year, when the FRC was consolidated into the FSA.

Securities and Exchange Surveillance Commission (SESC)

As a commission of the FSA, the SESC conducts inspections regarding the fairness of trades made by securities companies and investigates alleged violations of Japanese securities regulations.

Ministry of Finance (MOF)

Through some financial administration reform initiatives undertaken by the government over the last few years, the MOF has transferred its supervisory function to the FSA. However, the MOF still occupies a regulatory position to some extent; notably, through local finance bureaus (which are the MOF's local divisions), the MOF is in a position to accept disclosure documents under securities regulations. In addition, the FSA has delegated some of its power concerning securities firms and investment advisers to local finance bureaus.

Types of Financial Institutions and Key Legislation/Regulatory Developments

Types of financial institutions

Financial institutions generally refer to banks and other organizations authorized to accept deposits under the relevant statutes. In addition to these institutions, the FSA supervises, among other things, insurance companies, securities firms and asset management firms (consisting of investment trust management companies, which act as managers of mutual funds, and investment advisers).

Key legislation/regulatory developments

Legislation to deal with failed financial institutions
The temporary measures dealing with failed financial institutions under the so-called Financial Revitalization Law and the Early Strengthening Law ceased to be effective at the end of March 2001. In their place, permanent measures under the amended Deposit Insurance Law became effective in April 2001. The Law Concerning Exceptions etc to Reorganization of Financial Institutions etc, a law that sets forth the exceptional application of insolvency procedures to banks and other financial institutions, was also amended and such amendments also took effect in April 2001. These laws are discussed in more detail on page 44.

Emergency economic measures
Concerned about the slow recovery of the Japanese economy, the government announced on April 6 2001 an emergency economic package implementing some reform measures.

The package emphasizes the necessity for banks' removal of non-performing loans (NPLs) from their balance sheets. In principle, the major banks are asked to take, within the next two fiscal years, measures to remove from their balance sheets NPLs already classified as "in danger of bankruptcy" or below. They are also asked to take measures to remove NPLs newly-classified as such within the next three fiscal years. On the other hand, the government will explore appropriate measures to facilitate banks' forgiving debts.

In addition, the government has proposed, as a temporary measure, a share purchasing scheme, in which an organization tentatively called the Bank Equity Purchasing Corporation (BEPC) (to be established jointly by banks and other institutions) will purchase shares held by banks. It is proposed that, as a prerequisite for the BEPC purchasing shares from a bank, the amount of shares that such bank can hold in the future is to be limited, for example, to the equivalent of the bank's capital. The banks will be required to dispose of the shares held in excess of the limitation. Among the investors that the government expects to ultimately purchase such shares from the BEPC are exchange-traded investment trust funds (ETFs) and "defined contribution pension funds" (the Japanese version of so-called 401k plans, or defined contribution plans or DC plans). In a DC plan, the amount of an employee's contribution is fixed and the benefit that he or she receives depends on the performance of the fund manager. In contrast, in a defined benefit plan or DB plan now in place, an employee receives a fixed amount of benefit while his or her contribution varies.

The purpose of the share purchasing scheme and the shareholding limitation on banks is to weaken the influence of stock prices on banks' financial performance, thereby establishing a financial system less vulnerable to stock price fluctuations.

Amendments to the investment trust regulations to introduce ETFs took effect in June 2001. Some ETFs linked to indexes comprising stock prices of Japanese companies will be introduced this year. The bill to introduce DC plans was presented in the ordinary session of the Diet in 2000 but was not adopted. The government is eager to enact the relevant statutes during this year's session.

The government has also proposed some other measures such as a structural reform in the securities market (including the review of the rules against insider trading and price manipulation, and the improvement of the securities settlement systems), promotion of real estate securitization and more active utilization of private finance initiatives.

Banking Law amendments
The Banking Law is in the process of being amended to deal with the recent movement of firms engaging in other business to enter into the banking business (see page 43). Similar amendments are also being made to the Insurance Business Law.

Incidental to these amendments, the Banking Law's licensing requirement for foreign banks will be relaxed. At present, a foreign bank that intends to conduct its banking business through more than one branch in Japan must be licensed for each such branch. It is proposed that the licence for a foreign bank be required only for its principal Japanese branch and that any other branches in Japan operated by such bank will only be subject to a less restrictive approval process.

Financial services online/e-banking

Facing the increase of online financial services accompanying recent rapid developments in the area of e-commerce, the Financial Supervisory Agency (now the FSA) has studied legal and regulatory issues concerning these online financial services as well as necessary and appropriate measures to ensure the good management and sound development of e-commerce in financial areas. The report entitled Progress of E-business of Financial Services and Supervisory Administration, published on April 18, 2000 by the Financial Supervisory Agency, states four basic policies that should guide supervision in this new field: (i) the necessity to take advantage of e-business instead of disturbing progress thereof; (ii) the necessity to protect consumers from risks arising from the unique characteristics of e-business; (iii) consideration of the international, or rather, borderless, aspects thereof; and (iv) consistency with other global administrative areas, including protection of privacy etc. In addition, as a result of such studies, the report focused on the following matters, among others:

  • the conditions necessary for the use of electronic (instead of paper-based) documentation in electronic financial transactions, required to be provided to customers under laws and regulations;
  • disclosure by means of electronic (instead of paper-based) media and related matters to be considered;
  • appropriate ways of providing necessary information to customers in terms of non face-to-face transactions;
  • measures dealing with electronic system breakdown and other technical problems;
  • risks of outsourcing of a part of a financial business and necessary supervision of such outsourcing;
  • measures against preventing user misunderstanding where the homepage (HP) of a financial institution is linked to HPs of other entities; and
  • the necessity of reviewing regulations that assume the existence of offices with personnel handling customer service and transactions.

Necessary measures for the development of financial online services have two aspects: (a) the removal of impediments to the sound development of financial online services from existing laws and regulations; and (b) the establishment of additional regulations against new problems arising from such services. Issues in category (a) include the requirements that paper documentation be delivered to customers (see (i) above) and that disclosure be made by means of paper-based media (see (ii) above). The necessity of taking measures for system risks (see (iv) above) and outsourcing of a part of a banking business (see (v), (vi) and (vii) above) are issues falling in category (b).

Removal of impediments

The ministry ordinances of the Banking Law and of the Insurance Business Law (Ministry Ordinances) were amended in June 2000, in part to relax the rules regarding ways of providing information to customers and removing impediments thereto.

In addition, the Law Concerning the Coordination of Related Laws for Use of Information Technology in relation to Deliveries of Documentation etc, the so-called IT Comprehensive Law (ITCL), became effective on April 1 2001. Under the ITCL, 50 statutes requiring deliveries of paper-based documents in B2B or B2C transactions were amended, including important statutes such as the Securities and Exchange Law, the Insurance Business Law and certain other laws pertaining to finance.

Additional regulations

The Ministry Ordinances amended in June 2000 also imposed obligations on financial institutions to take appropriate measures to prevent the risk of mistaking a financial institution for another when they operate their business by means of electric correspondence.

In addition, the Operational Guidelines, published by the FRC and the FSA in August 2000 (see page 44), also cover matters to be reviewed in the process of granting licences in the banking business, especially where such business operates mainly by means of the internet, ATMs or other non face-to-face media, without use of offices with customer service personnel. Under these guidelines, in October 2000, the first bank engaging in solely online banking services, without any business office for customer visits, was established.

On May 30 2001, the FSA proposed an amendment to a ministry ordinance under the Insurance Business Law establishing additional conditions to obtain licenses to conduct insurance business, to ensure the protection of customers and the appropriate operation of business.

On the self-regulation level, the Japanese Bankers Association, a self-regulatory organization of banks in Japan, established new guidelines in 2000, and the Japan Securities Dealers Association, a self-regulatory organization of securities firms, updated their guidelines in 2000 mainly by adding new regulations. These guidelines regulate in detail certain matters of concern in respect of transactions through the internet, including the following:

  • reinforcement of security systems;
  • alternative measures against system breakdown and other technical problems;
  • necessary means of recourse in the event of incorrect information inputs by customers;
  • measures to prevent mistaking one relevant financial institution for another when the HP of such financial institution is linked to, or is allowed to be linked on, the HP of another entity; and
  • ways of identifying customers.

Furthermore, examination manuals applicable to financial institutions dealing with deposits and to insurance companies, including matters related to internet transactions, are now under discussion in the FSA.

Consistent application of regulations to online transactions

The third aspect of interest in regulating electronic financial transactions concerns the principle that online transactions and other paper-based/face-to-face transactions should generally be treated equally and consistently. For example, the requirement of providing necessary information to customers in the context of solicitation of financial products by financial institutions will apply to both transaction types equally. The Law on Sales of Financial Products (FPSL), which intends to ensure that the risks involved in various financial products be properly disclosed to customers, came into effect in April 2001 and applies equally to electronic and non-electronic transactions regarding certain financial products.

Remaining areas

Regulations assuming the existence of business offices with customer service personnel (for instance, an obligation to make available for inspection certain documents in a certain place during business hours) should be reviewed in terms of online financial transactions.

Regulations regarding acquiring shares of banks

This year, one of the main topics in banking law is the entry into the banking business of non-financial entities by way of acquiring controlling shares of an existing bank or by establishing a new bank as its subsidiary. In April 2001, two new banks – IY Bank and Sony Bank, the parent companies of which are non-financial business corporations – obtained licences and recently commenced operations. The presence of non-financial entities into the banking business raises several issues in terms of ensuring the independence of subsidiary banks, as well as other issues requiring considerable review and close scrutiny by policymakers. However, Japanese regulations have yet to take much of this situation into account, and the standards regarding qualifications for licences and continuing supervision by the supervisory authority over these cases are far from clear. In addition, as there are no directly applicable or comprehensive regulations governing shareholdings in banks under existing Japanese law, the need for discussion and legislation regarding this issue has taken on an air of greater urgency.

Regulations under the existing Banking Law

Under the existing Banking Law, there are no regulations that apply directly to shareholdings in banks, except for the regulations on "bank holding companies" that were adopted by amending the Banking Law as a part of the Financial System Reform Act in 1998. A bank holding company is defined as a company that has as its subsidiary a bank, and in respect of which the total amount of the purchase price of all of its subsidiaries' shares exceeds 50% of the total assets of the company. The regulations applicable to bank holding companies include the following features:

  • permission is required for becoming or establishing a bank holding company;
  • limitations on the business areas in which subsidiaries of the bank holding company may engage;
  • limitations on acquiring shares of non-financial business corporations;
  • the supervisory authority has the right to require the bank holding company to report and submit materials; and
  • the bank holding company is obligated to periodically submit a business report to the supervisory authority.

These regulations do not apply to every parent company of a bank, but rather only apply to the parent company of a bank that fits in the definition of bank holding company. Therefore, if a non-financial company acquires shares in a bank but does not fall within that definition, the above regulations would not apply.

Another aspect of the government's supervision in this context is that, if a corporation applies for a licence for conducting banking business in Japan, the Prime Minister may establish conditions for granting such licence, to the extent necessary, if such conditions are deemed necessary in terms of the public interest taking into consideration the existing standards applicable to licence grants. The Prime Minister may change such conditions at any time under the Banking Law. Assuming that the Prime Minister is allowed to establish conditions regarding the shareholders of the company applying for the licence (such as restrictions on the identity of shareholders or on the portion of shares that a principal shareholder may possess), it will be possible for the supervisory authority to have a certain control over shareholding changes. However, it is not yet clear what conditions on shareholding, if any, the Prime Minister has the power and authority to establish.

As indicated above, there are no directly-applicable or comprehensive regulations governing shareholdings in banks or changes to the percentage of shares held by a shareholder of a bank under the existing Banking Law.

New operational guidelines

In order to deal with licence applications of new banks to be established as subsidiaries of non-financial business corporations, on August 3 2000, the FRC and the FSA published Basic Principles concerning New Types of Banks including Entries into Banking Business by Non-Financial Entities and formulated certain operational guidelines (Operational Guidelines).

The Operational Guidelines highlighted the following three issues, among others, to be examined, and considered various factors to be reviewed in the process of licensing or continuing supervision:

  • ensuring the independence of a subsidiary bank from its non-financial parent entities;
  • shielding the subsidiary bank from the risks of its parent entities' operations; and
  • protecting customer privacy when the subsidiary bank is involved in comprehensive business operations with its non-financial parent entities.

In terms of continuing supervision, the Operational Guidelines pointed out that the supervisory authority will require, as a condition to granting a licence, that the banking subsidiary of any non-financial entity report any change in such subsidiary's principal non-financial shareholders. This condition clarifies, to some extent, the present unclear regulations concerning principal shareholders of banking subsidiaries.

These Operational Guidelines concern measures for licensing and supervising new types of banks under existing laws and regulations. However, they indicate that it is necessary to take measures by way of legislation instead of operational solutions in order to empower the supervisory authority to get prior notice of problematic shareholder changes and to exclude principal shareholders that are not fit and proper to ensure sound bank management.

Amendments to Banking Law

On March 6 2001, a bill amending the Banking Law and related statutes was submitted to the Diet. This bill, which includes the establishment of regulations regarding main shareholders of banks, may be summarized as follows:

  • in respect of shareholders who are holding shares in a bank in excess of 5% of the bank's total issued shares, notification is required;
  • in principle, permission of the supervisory authority is required in advance for any share transfer resulting in a shareholder holding 20% or more of all issued shares of a bank (the bank's main shareholder). In determining whether to grant permission, financial soundness, the purpose of the share transfer and social benefit resulting from the transfer, are among the factors that the supervisory authority will review;
  • investigation rights are granted to supervisory authorities for and reporting requirements are imposed on the bank's main shareholder;
  • The bank's main shareholder may be ordered to take necessary measures to meet the required standard for permission; and
  • in the case of poor management, the supervisory authority may require the bank's main shareholder who holds in excess of 50% of the total issued shares of such a bank to take measures for ensuring the sound management of the subsidiary bank.

The bill also covers amendments to the Insurance Business Law that include parallel provisions regarding shareholders of insurance companies.

When a bank becomes insolvent

Relevant legislation

In response to the problem of failed financial institutions in the late 1990s, the Japanese government enacted in October 1998 the so-called Financial Revitalization Law and the Early Strengthening Law to restore trust in the financial system and to prevent a massive economic crisis.

These laws contained temporary measures that were only effective until the end of March 2001. When these laws were enacted, the Deposit Insurance Law (DIL), which in principle insures deposits only up to ¥10 million per depositor at one institution, was amended to provide 100% deposit protection until the end of March 2001 as an exceptional measure. The temporary measures were intended to intensively "clean up" failed financial institutions while the DIL was providing the 100% deposit protection.

To further these temporary measures, a permanent system was established to deal with the failure of financial institutions in May 2000 by substantially amending the DIL. In particular, the 100% deposit protection provided under the DIL has been extended until the end of March 2002. In addition, the amended DIL offers more expedited and diversified methods for coping with the failure of financial institutions.

We begin by briefly describing these temporary measures and then discuss the permanent measures that have been adopted.

Principles under the temporary measures

With the aim of "cleaning up" financial institutions in difficulty while protecting deposits and maintaining those institutions' financial intermediary functions, the underlying principle of the temporary measures under the Financial Revitalization Law and the Early Strengthening Law was for the FRC to appoint financial administrators (Kinyu-Seiri-Kanzainin) and liquidate failed institutions. Once financial administrators were assigned, all of the rights of the original management of the failed institution to represent the institution, to manage its business and to administer and dispose of its assets belonged exclusively to the administrators. The financial administrators' role was, among other things, to find another financial institution ("recipient institution") to which the business of the failed institution could be transferred, and such transfer was generally to be carried out within one year. Tokyo Sowa Bank is an example of a failed institution that was subject to this process. If no recipient institution could be found, the business of the failed institution was temporarily transferred to a so called bridge bank that continued to extend credit to financially sound borrowers until a recipient institution could be found.

If, however, the failure was threatening to substantially harm the maintenance of the financial system or in certain other cases, the government had the power to file a petition with the court for "special public management" (which is a form of temporary nationalization) to deal with the situation. Under the "special public management" procedure, the government temporarily nationalizes stocks of the failed institution by acquiring them for a price determined by the Stock Price Calculation Committee placed under the FRC. This procedure was used with respect to the Long-Term Credit Bank of Japan and Nippon Credit Bank.

Permanent measures under the amended DIL

Financial assistance
The main measure for coping with failed financial institutions under the amended DIL is financial assistance to be provided by the Deposit Insurance Corporation (Yokin-Hoken-Kiko) (DIC). In principle, the DIC will give money or provide various other forms of financial assistance to a financial institution ("rescuing institution") that rescues a failed institution by means of merger, business transfer, assumption of insured deposits or certain other transactions, to compensate any loss that may be incurred by the rescuing institution in connection with such rescue.

Although financial assistance from the DIC was available under the DIL before this amendment, the following modifications have been made to facilitate business transfers and other means employed to rescue failed institutions:

The DIC may provide financial assistance not only when all of the business of a failed institution is transferred, but also when a portion of the business (including insured deposits) or only insured deposits (without any other assets or liabilities) are transferred, so as to give a rescuing institution a variety of options, such as the option not to assume bad assets or to assume only deposits but not business operations. This is designed to attract more rescuing institutions.

If only a portion of the business or only insured deposits are transferred, the DIC may provide financial assistance directly to the failed institution to ensure equity among its creditors. Without such assistance, the transfer of sound assets to the rescuing institution would reduce the possibility of the remaining creditors of the failed institution being paid back in full, and could lead to the denial of the transfer as preferential in subsequent bankruptcy procedures. This assistance to the failed institution is designed to eliminate the possibility of the business transfer being unwound in the bankruptcy procedures.

If loans assumed by the rescuing institution later become uncollectible, the DIC may, pursuant to a pre-arranged loss sharing agreement, compensate the rescuing institution for a part of the loss arising from such uncollectible loans. This loss sharing provides a would-be rescue institution with a certain comfort in its due diligence review of the assets it will assume, thereby expediting the process. This also works to attract potential rescuing institutions.

In order to expedite the business transfer, the amended DIL allows the transferor and transferee to obtain the consent of creditors whose loans are assumed by the rescuing institution only after the assumption, which would not otherwise be possible.

Administration by financial administrators
When a failed financial institution is deemed to be insolvent or fails to repay its deposits when due (or there is a risk that either will happen), the Prime Minister may direct financial administrators to manage the business and assets of the institution. Once financial administrators are assigned, the original management of the failed institution is deprived of all powers to represent it or to operate its business. The administration by the financial administrators, as well as the "special crisis management" mentioned below, are designed to avoid any decrease of the value of the failed institution that may be caused by the mismanagement or resistance of the original management. These measures were in essence a part of the temporary measures described above, and have now been permanently adopted under the amended DIL.

The financial administrators are required to seek necessary civil and criminal legal measures to clarify the liabilities of the original management.

In order for a failed institution with respect to which financial administrators have been appointed to promptly determine to make a business transfer or capital decrease, the amended DIL has relaxed the corporate action requirements that would otherwise be applicable.

Financial administrators must complete their administration of the institution by means of merger, business transfer or certain other transaction with a rescuing institution within one year of their assignment (with a possible one-year extension).

If no rescuing institution is found within that period, the DIC may establish a subsidiary (or "bridge bank") to assume the business of the institution, which is intended to continue operating the business while seeking a rescuing institution. The DIC may provide the bridge bank with a loan or guarantee in order to facilitate its business or compensate any loss that it has incurred in conducting its business. The duration of the operation of a bridge bank is limited to two years (with a possible one-year extension).

Special crisis management
If the failure of a financial institution could put the whole financial system at risk, the Prime Minister may acknowledge the necessity of adopting certain exceptional measures depending on the particular situation of the financial institution. Such exceptional measures include the DIC's subscription for shares in that institution to strengthen shareholders' equity, and the DIC's "special financial assistance" in excess of the DIC insured amount. Among those exceptional measures, the ultimate one is the "special crisis management" system.

The Prime Minister commences "special crisis management" procedures for a failed institution by determining that the DIC will acquire all of the shares in such institution. Once the Prime Minister officially acknowledges the need for special crisis management with respect to a failed institution, it must give public notice in the official gazette. At the time of such public notice, the DIC automatically acquires all of the shares in the institution. In the same way as when administration by financial administrators is invoked, necessary civil and criminal legal measures have to be taken to clarify the liabilities of the original management of the institution. This special crisis management process terminates as soon as possible upon the transfer of the business or the shares in the institution to a rescuing institution. The DIC may provide financial assistance to the rescuing institution in excess of the DIC insured amount at the time of the transfer.

Court-initiated insolvency procedures
So far we have explained the procedures dealing with failed institutions that have been adopted by the government. In this sub-section, we briefly explain certain court-initiated insolvency procedures available under Japanese law.

Under Japanese law, there are three major insolvency procedures: (i) bankruptcy, which is a liquidation procedure; (ii) corporate reorganization, which is a reorganization procedure in which a reorganization trustee is appointed; and (iii) civil rehabilitation, which is a reorganization procedure under which the debtor remains in possession. These procedures are modified to some extent when applied to banks.

The Law Concerning Exceptions etc to Reorganization of Financial Institutions etc (the Reorganization Exception Law) grants the Prime Minister, in addition to the debtor or a creditor, the right to file a petition for the commencement of any of these procedures. This is designed to enable the regulator (rather than only the creditors and the debtor) to commence these procedures and, because the regulator has more information on banks' financial situation than creditors, to deal with failed financial institutions at an earlier stage.

The Reorganization Exception Law authorizes the DIC to exercise the depositors' rights on their behalf. For example, the DIC must prepare a list of the depositors and file it with the court, whereupon the claims for deposits are deemed to be filed for the purpose of the insolvency procedures.

In a reorganization procedure, a provisional method is generally available to freeze payments by the debtor. In the case of a bank, however, that method is very inconvenient because it prevents withdrawals by depositors. The Reorganization Exception Law was amended in May 2000 to enable the DIC to provide the debtor bank with a loan necessary to cover the withdrawals to the extent of the amount of the insured deposits.

Conclusion

The developments of banking regulations this year seem to have been driven by the serious need to restore trust in Japanese financial institutions and maintain the soundness of the Japanese financial system. This situation requires further restructuring and initiatives of the banking industry, which in part has contributed to the emergence of online/e-banking services and the entry of non-banking entities in the banking industry. Such need has also promoted banks' involvement in transactions outside the scope of their traditional activities, such as private finance initiatives. We are anxious to see how the restructuring will proceed and to what extent regulatory developments will allow progress to be made.


Nishimura & Partners

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Akasaka 1-chome, Minato-ku,
Tokyo 107-6029
Japan

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