During the recent global financial crisis triggered by the failure of Lehman Brothers, etc., it was revealed that there is a potential risk that distress and failure of systemically important financial institutions may spread across domestic and foreign financial markets and cause a serious impact on the real economy.
Based on this experience, international debates were held on the development of a framework that would enable orderly failure resolution should a financial institution fail. In October 2011, the Financial Stability Board (FSB) adopted a new guideline called “Key Attributes of Effective Resolution Regimes for Financial Institutions,” which was internationally agreed upon at the G20 Summit in Cannes in November 2011.
In parallel with such international debates, efforts have been underway in the United States and major European countries to develop a new comprehensive framework for effective resolution of the failure of financial institutions.
In Japan as well, the Deposit Insurance Act was revised in June 2013 in light of those international developments in order to develop a framework for orderly resolution of financial institutions in the event of a crisis that could spread through markets.
In March 2014, with the enforcement of the revised Deposit Insurance Act, “Measures for Orderly Resolution of Assets and Liabilities of Financial Institutions for the Purpose of Ensuring Financial System Stability (hereinafter referred to as “Orderly Resolution”)” were newly introduced.
The Prime Minister shall recognize the necessity of implementing measures for orderly resolution of assets and liabilities of financial institutions subject to a resolution by the Financial Crisis Response Council (members:themembers: the Prime Minister [chair], the Chief Cabinet Secretary,theSecretary, the Minister for Financial Services, the FSA Commissioner,theCommissioner, the Minister of Finance and the Governor of the Bank of Japan), since this matter requires a very high level judgment just as the implementation of measures against financial crisis under the current Deposit Insurance Act does, when necessary to stabilize the financial system.
(Reference) The Financial Crisis Response Council is responsible for holding deliberations on policy concerning measures to deal with financial crises, such as a chain reaction of large-scale failures of financial institutions, and other important matters upon consultation by the Prime Minister and for overseeing the implementation of measures by relevant administrative agencies based on the policy.
In light of the experience of the recent global financial crisis, we believe that in order to maintain the financial system’s resilience by preventing a rapid decline in trust in the financial market or the failure of a financial institution from causing disruptions to the market or affecting the real economy, it is important to safeguard the whole of the financial market and the financial industry. Based on this belief, the measures for orderly resolution of assets and liabilities of financial institutions shall be applicable to the whole of the financial industry (deposit taking financial institutions, insurance companies, financial instruments business operators, financial holding companies, etc.; these institutions shall be hereinafter collectively referred to as “financial institutions”).
Financial institutions to which the measure is applicable are placed under special oversight(Note) and receive supply of liquidity.
The measure may be invoked when it is recognized that serious disruptions could be caused to the financial market and other parts of the financial system in Japan and when the financial institutions in question are solvent.
Note: Under the framework for orderly resolution of financial institutions, financial institutions recognized as targets of the specified measure upon a resolution by the Financial Crisis Response Council may be designated by the Prime Minister as entities whose execution of business operations and management and disposal of property should be monitored by the DICJ. The entities designated as such shall be called “financial institutions under special oversight.”The DICJ may provide necessary advice, etc. （advice, guidance and recommendations） with regard to the execution of business operations of financial institutions under special oversight as well as the management and disposal of their property.
Type Ⅰ Measures （in a typical case）
Source: Financial Services Agency, Japan
Financial institutions are placed under special oversight, and the DICJ, while acquiring the right to manage and dispose of their property,(Note 1) transfers the debts, etc. that are essential to stabilizing the financial system to specified bridge financial institutions(Note 2) and has the debt obligations performed by providing specified financial assistance at the time of the transfer.(Note3)
The measure may be invoked when it is recognized that serious disruptions could be caused to the financial market and other parts of the financial system in Japan and when the financial institutions in question are insolvent or may become so, or repayment have been or may be suspended.
Notes:1 Disposition ordering specified administration: When financial institutions have been recognized as targets of Specified Type Ⅱ Measures and when it is recognized that the situation fits the description of either of the following (ⅰ) and (ⅱ), the Prime Minister may make a disposition ordering the administration of their business and property (hereinafter referred to as the “disposition ordering specified administration”).
|(ⅰ)||The management of the business operations of the financial institutions recognized as targets of Specified Type Ⅱ Measures is substantially inappropriate.|
|(ⅱ)||There is the risk that if all of the business operations of said financial institutions are abolished or dissolved without a specified merger, etc. regarding the business operations and debts of said financial institutions, the abolition or the failure to perform the debt obligations could cause serious disruptions to Japan’s financial system.|
2. The DICJ may establish the following subsidiaries subject to a decision by the Prime Minister in order to take over the business operations or debts of financial institutions under special oversight through transfer of debts, etc. and provisionally continue the business operations or facilitate debt repayment. The following subsidiaries shall be collectively referred to as “specified bridge financial institutions”
*Specified bridge banks
*Specified bridge insurance companies
*Specified financial instruments
3. “Specified financial assistance” refers to a measure taken by the DICJ to support a specified merger, etc.(Note 4) implemented by financial institutions which are different from financial institutions recognized as targets of Specified Type Ⅱ Measures (hereinafter referred to as “specified failed financial institutions”) (the financial institutions implementing the specified merger, etc. shall be hereinafter referred to as “specified assuming financial institutions”).
Upon the receipt of applications from specified assuming financial institutions, the DICJ may decide to provide specified financial assistance subject to a resolution by the Policy Board on the premise that the Prime Minister recognizes the need for a specified merger, etc. only when the prescribed criteria are satisfied. It should be noted that as specified financial assistance, the DICJ may implement measures prescribed under the Deposit Insurance Act, such as monetary grant.
4. A “specified merger, etc.” refers （refers to a merger between a specified failed financial institution and another financial institution, the transfer of businesses, and the assumption of debts and other similar measures.
Type Ⅱ Measures （in a typical case）
Source: Financial Services Agency, Japan
The DICJ keeps the record of expenses of business operations relating to orderly resolution of assets and liabilities of financial institutions in the Crisis Management Account rather than in the General Account.
Financial institutions must make specified contributions to the DICJ to cover the cost incurred by it in conducting crisis management operations (limited to measures relating to financial institutions recognized as targets of the specified measures and those relating to specified bridge financial institutions).
However, the government may provide subsidy to the DICJ to cover parts of the cost of conducting the crisis management operations only when it is recognized that the financial positions of financial institutions could substantially deteriorate and serious disruptions could be caused to the financial market and other parts of the financial system in Japan if said cost is to be funded by specified contributions alone.
In accordance with the introduction of the above measures based on the revision of the Deposit Insurance Act, the DICJ has been given an important role in implementing measures against “market-type” financial crisis and will strengthen its ability to respond to a crisis while developing its preparedness and maintaining cooperation with relevant authorities.