Financial authorities are considering requiring branches of foreign banks in Japan to join the deposit insurance program amid continuing turbulence in the global financial system.
The deposit insurance system is designed to protect up to ¥10 million per customer in principal and interest in the event of a bank failure. It covers deposits at domestic commercial banks, “shinkin” banks, or credit associations, “shinyo kumiai” credit cooperatives and labor credit associations.
Foreign banks are subject to the insurance scheme if they operate in Japan via subsidiaries rather than branches. Only Citibank of the United States and Shinhan Bank of South Korea have subsidiaries in Japan.
As of March 2012, the insurance system did not cover yen-based deposits totaling ¥3.1 trillion at the branches of 57 foreign banks. The amount has more than doubled in about 10 years.
The Financial Services Agency began to seriously consider forcing foreign bank branches to join the insurance system after the collapse of Franco-Belgian lender Dexia SA in October 2011.
Although Japanese depositors were not affected by the bankruptcy (Dexia had closed its Tokyo branch before the collapse), FSA officials considered it imperative to subject foreign bank branches to the deposit insurance program.
At a meeting of the Financial System Council, an advisory panel to the prime minister, in October last year, the FSA declared its intention of requiring retail banking branches of foreign banks in Japan to join the insurance system to protect their individual customers.
But foreign banks strongly oppose the FSA plan, as they would be required to pay insurance premiums in accordance with the balance of deposits accepted.
In its final report presented to the council in December, therefore, the FSA watered down the plan, saying that it would be “desirable” for foreign bank branches to be subject to the insurance scheme “in the future.”
The European Union requires foreign bank branches to join its deposit insurance program, while foreign banks in the United States are banned in principle from accepting deposits at their branches.
Japan’s weak regulations concerning foreign banks dates back to the early postwar era, when the economy was feeble and there was a need to attract overseas financial institutions to the country.
Given the growth of the Japanese economy, it is “natural” for Japan to have “matching regulations,” said a senior FSA official.