Recent Developments in Japan on Resolution Regimes for Financial Institutions

Transcription

1 Recent Developments in Japan on Resolution Regimes for Financial Institutions March 6, th DICJ Round Table Hiroyuki Obata Deputy Governor

2 Different Approach, but (California Roll) 2

3 Presentation Outline 1. Existing Resolution Schemes 2. Proposed New Framework 3. Conclusion 3

4 1. Existing Resolution Schemes 4

5 Resolution Schemes for Deposit-Taking Institutions Bank Failure Undercapitalized Banks Limited Coverage Ordinary Schemes Systemically Insignificant Blanket Guarantee Exceptional Schemes Systemically Significant Payout Purchase & Assumption (P&A) Purchase & Assumption (P&A) For the amount of principal exceeding the coverage Temporary Nationalization Capital Injection Purchase & assumption is preferred to payout as it is least costly and also preserves the functions of a failed bank. 5

6 Ordinary Schemes - P&A under Limited Coverage - Maintaining banking functions of the failed financial institution to minimize the resolution costs and avoid confusion: P&A resolution (with bridge bank, if necessary) Securing depositors prompt access to deposits Protecting insured deposits Limited coverage (JPY 10 million) for interest-bearing deposits (e.g. savings account, term deposits) Full protection of non-interest bearing deposits for payment and settlement purposes (e.g. checking/current account) Maintaining orderly functioning of payment/settlement systems Continued loan operations 6

7 Ordinary Schemes - Funding - No taxpayers money Losses absorbed by shareholders, debt holders and uninsured depositors Financial assistance from DICJ s general account (i.e. deposit insurance fund) Funded by insurance premiums collected from deposit-taking institutions (DTIs) DICJ is able to raise necessary funds temporarily from the market, with government guarantee. 7

8 Resolution of Incubator Bank of Japan (IBJ) in 2010 Before the failure Failure Bank Resolution Process FSA s onsite inspection detected regulation violations and management problems at IBJ. FSA took administrative action against IBJ to seek partial business suspension and business improvement. (May 27, 2010) Incubator Bank of Japan failed on Friday, Sep 10, Total Assets: billion yen ($ 5.3 billion), Deposits: billion yen ($ 6.5 billion) DICJ was appointed as financial administrator on the same day. Civil Rehabilitation Proceedings in the court started. Calculation of insured deposits was completed during the weekend. Bank reopened at 9am on Monday, Sep 13, 2010, and insured deposits at IBJ were withdrawable. Transfer of business to the bridge bank and financial assistance by DICJ (April 25, 2011) Transfer of business to the final assuming bank, Aeon Bank (Dec 26, 2011) 8

9 Exceptional Schemes - Crisis Prevention Measures - Requiring determination by the Prime Minister (PM) on systemic implications, following the deliberation at the Financial Crisis Response Council chaired by the PM Three options: Capital injection: only for non-insolvent DTIs Resona Bank in 2003 (Total Assets; 31.7 trillion yen, $340 billion) P&A and financial assistance beyond limited coverage Temporary nationalization (acquisition of all shares by DICJ) Funding Ashikaga Bank in 2003 (Total Assets; 5.27 trillion yen, $ 56.5 billion) Ex-post by the banking industry Financial support from the government available only for exceptional circumstances 9

10 Safety Nets for Depositors, Insurance Policyholders and Securities Investors Deposit Insurance Corporation of Japan (DICJ) Life Insurance Policyholders Protection Corporation of Japan (LIPPC) Non-life Insurance Policyholders Protection Corporation of Japan (NLIPPC) Japan Investor Protection Fund (JIPF) Establishment July 1971 December 1998 December 1998 December 1998 Coverage 10 million yen (approx. $107,181) per depositor per financial institution Full protection for deposits for payment/settlem ent purposes Fund Size Number of resolutions billion yen (approx. $4.5 billion) 90% of Policy Reserves 56.2 billion yen (approx. $602 mil) 100% for Compulsory Auto or Household Earthquake policies 80% for Auto, Fire and other policies 50.0 billion yen (approx. $536 mil) Up to 10 million yen (approx. $107,181) of liabilities to an investor Approx billion yen All data is as of the end of FY Figures in US dollars are calculated based on US$1 = 93.3 yen. 10

11 Summary of the Existing Schemes Separate limited-guarantee schemes for DTIs, life & nonlife insurance companies and securities firms Exceptional measures beyond the limited guarantee available only for DTIs Not directly covering financial holding companies Not equipped with relatively new resolution tools, such as bail-in or temporary stay 11

12 2. Proposed New Framework 12

13 Working Group Report (1) A working group (WG) was established in the Financial System Council, an advisory body to the Japanese government, in May 2012 to discuss orderly resolution frameworks envisaged in the FSB s Key Attributes. During the global financial crisis triggered by the failure of Lehman Brothers and others, it was revealed that there is a potential risk that distress and failure of systemically important financial institutions may spread across financial markets and cause a serious impact on the real economy. In response to this, a framework for new effective resolution regimes for financial institutions has been discussed internationally and the agreement was reached on this issue at the G20 Summit. (excerpt from the WG report) 13

14 Working Group Report (2) The final report of the WG was published on January 25, Reflecting the global trends, it is necessary to establish a framework for an orderly resolution regime of financial institutions, in order to address risks that may spread across financial markets. 14

15 Orderly Resolution Regime Proposed in the WG Report (1) The following slides are a summary of the working group report, summarized and translated into English by DICJ. Scope: Financial institutions, including deposit-taking Institutions, insurance companies, securities firms and financial holding companies. Procedures for initiating the mechanism: The Prime Minister determines the need to implement the orderly resolution mechanism, as it is deemed necessary to prevent severe market disruption, following the deliberations by the Financial Crisis Response Council. 15

16 Orderly Resolution Regime Proposed in the WG Report (2) Measures to be taken (on condition that it is considered necessary to prevent severe market disruption): Oversight by DICJ DICJ s functions and organization are to be enhanced. Provision of liquidity and financial assistance Capital enhancement may be undertaken as necessary, when the financial institutions are not in the state of insolvency. Reducing FI s market transactions, while ensuring the performance and continuation of its obligations that are critical for financial stability Thus, realizing the orderly resolution of FIs while preventing severe market turmoil When the above measures are implemented, contractual bail-in options are to be exercised. 16

17 Four Major Functions of DICJ ( Four Propellers ) Deposit insurance Failure resolution Capital injection Purchase of NPLs 17

18 Orderly Resolution of FIs (1) Source: Financial Services Agency, Japan

19 Orderly Resolution of FIs (2) Source: Financial Services Agency, Japan

20 Orderly Resolution Regime Proposed in the WG Report (3) Funding: DICJ is to raise temporary necessary funds with government guarantee. Should losses be incurred, the expenses shall be in principle borne ex-post by the financial industry. The government may provide financial support in exceptional cases. Resolution planning and international cooperation: Work is to be advanced on recovery and resolution planning for large and complex financial institutions. International coordination is to be promoted through FSB and other supervisors forums and dialogues between resolutionimplementing organizations. 20

21 Selected Key Attribute and the Proposed Regime (1) (KA3.2: Resolution powers) Resolution authorities should have at their disposal a broad range of resolution powers. (WG report) In crisis, the measures including the following should be necessary. Transfer of businesses by permission substituting the required special resolution of the stockholder s meeting, even when net worth is positive Purchase of assets from the resolved institution Enabling transfer of debts without approval from creditors Granting the authority a power to apply for the commencement of Japanese insolvency proceedings for foreign banks with Japanese branches Determination of triggering contractual bail-in options 21

22 Selected Key Attribute and the Proposed Regime (2) (KA4.3: Stay) Should contractual acceleration or early termination rights be exercisable, the resolution authorities should have the power to temporarily stay such rights where they arise by reason only of entry into resolution or in connection with the exercise of any resolution powers. (WG report) It should be enabled to change/suspend the legal effects of termination rights with entry into orderly resolution and any accompanying events as their termination events, to the extent necessary to avoid significant market disruption. The same treatment should be applied to the existing crisis-prevention measures in the Deposit Insurance Act. 22

23 3. Conclusion 23

24 Conclusion Very important to build up closer international cooperation, exchanges of views and information sharing among jurisdictions. Need to deepen our discussions/dialogues at various venues. 24

25 Thank you for your attention. 25