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Japan: GLAC and the bail-in mechanism

Yuichi Miyashita
The Financial Stability Board (FSB) is developing proposals addressing gone-concern loss-absorbing capacity (GLAC) for consideration and action at the G20's summit in Brisbane, Australia in November 2014. Although still under discussion at the time of writing, global systemically important banks (G-Sibs) may, in the future, be required to maintain a certain amount of GLAC to offset losses in the event such G-Sibs fail. The FSB has stated that GLAC is vital for authorities to have confidence and for private markets to recognise, that systemically important banks can be resolved in times of crisis without the support of public funds, while taking account of the differences in national resolution regimes.

If the scope of GLAC covers senior debts that can be bailed in, a new bail-in mechanism will likely need to be introduced in Japan. The existing resolution regime, which was introduced in March 2014 through an amendment of the Deposit Insurance Act of Japan, only provides for bail-in mechanisms (write-downs or conversions of a financial institution's capital instruments) in relation to certain qualified preferred shares and subordinated debts.

The existing bail-in mechanisms are as follows.

Under the Deposit Insurance Act of Japan, in circumstances where the Prime Minister of Japan determines that specified item 2 measures need to be applied with respect to a financial institution (or item 2 measures, or item 3 measures need to be applied with respect to a bank), the write-downs or conversions of a financial institution's capital instruments will be triggered. Specified item 2 measures consist of: (i) supervision by the Deposit Insurance Corporation of Japan (DIC) over the business operations of, and the management and disposal of assets of, the relevant financial institution; and (ii) financial aid provided by DIC for such financial institution's reorganisation. The capital instruments subject to the write-downs or conversions are preferred shares and subordinated debts that meet certain conditions.

Under the Deposit Insurance Act of Japan, the Prime Minister may order specified item 2 measures to be taken only after deliberations at the Financial Crisis Response Council have occurred, in the case where the Prime Minister recognises that the failure of a financial institution (which has or will likely have negative net worth, or has ceased or will likely cease to pay its obligations as they come due) may severely disrupt the financial systems in Japan.

Yuichi Miyashita

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