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THE JAPANESE EXPERIENCE OF A SINGLE REGULATOR AND DEPOSIT INSURANCE

THE JAPANESE EXPERIENCE OF A SINGLE REGULATOR AND DEPOSIT INSURANCE. 26 October, 2004 Third Annual IAID Conference Brunnen, Switzerland Dr Mamiko Yokoi-Arai. Introduction. Background Objectives/Structure Analysis of regulatory efficiency Conclusion. Historical/Policy Background.

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THE JAPANESE EXPERIENCE OF A SINGLE REGULATOR AND DEPOSIT INSURANCE

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  1. THE JAPANESE EXPERIENCE OF A SINGLE REGULATORAND DEPOSIT INSURANCE 26 October, 2004 Third Annual IAID Conference Brunnen, Switzerland Dr Mamiko Yokoi-Arai

  2. Introduction • Background • Objectives/Structure • Analysis of regulatory efficiency • Conclusion

  3. Historical/Policy Background • 1971 Deposit Insurance Corporation of Japan founded with capital contributions from the Ministry of Finance, the Bank of Japan and private financial institutions • Limited role until 1991 due to ‘non-failure rule’ • 1995 protection of all deposits • 1998 regulatory reform: unification of financial regulation and changes in DICJ role

  4. Three major changes were brought about to the functions of DICJ: • Purchase of non-performing loans from financial institutions; • Injection of capital to financial institutions that have merged a troubled financial institution; and • Administration of banks taken over

  5. Uniqueness of Japan’s unified regulatory system: • Deposit insurance scheme is not subsumed under the FSA-J • Bank of Japan (BOJ) retains supervisory power although not regulatory power over the banks • inspection of securities companies is carried out by the Securities and Exchange Surveillance Commission (SESC)

  6. Structure and Objectives of DICJ • Objectives • a safety net to depositor; • providing financial assistance to and purchasing non-performing loans of viable institutions; • administrator of failed financial institutions; and • To delegate the write off of non-performing loans to the RCC and to prosecute managers of failed institutions civilly and criminally. • Independence

  7. Changes in insurance premiums in Japan:

  8. Crisis Management: Co-ordination with Other Financial Safety Nets • At times of threat of systemic risk, financial crisis management meeting is convened • Comprises the Prime Minister, Secretary of State, Finance Minister, FSA-J Minister and Governor of Bank of Japan

  9. Crisis management of DICJ

  10. Assessment of Post-Unification Regulatory Efficiency of DICJ • Changes in Moral Hazard • No pay off ever taken place • Discretion to remove license to unsound banks limits moral hazard? • Co-ordination with the Safety Nets • Critical decisions of DICJ are subject to the approval by the prime minister • Primary executioner in times of emergency • Cooperative relation with other safety nets

  11. Effective Mandate and Enforcement Power • Wide ranging and comprehensive enforcement powers • Increasing number of criminal prosecutions

  12. Independence and Adequacy of Resources • Independence inadequate compared to other deposit insurers • However, criteria for the various measures are clearly stipulated • Strong operational nature • Possible strengthening of independence if differential premiums adopted • Exponential increase of staff • Uncertainty as to needs in the near future

  13. Procedural Adequacy • Compensation • Speed of Claims and Recoveries

  14. Conclusion • DICJ remains external to FSA-J • Wide range of operations gives it practical independence, resources and external credibility • Inclusion of a compensation scheme into a unified regulator is not necessarily compelling • The well working of the structure may be due to the clear division of labour between the regulator and the deposit insurance • Greater specialisation of agencies and subsequent effective operation.

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