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Overview: The Bank's Initiatives for Financial Stability

日本語

I. The Bank and "Financial Stability"

What Is "Financial Stability"?

Money plays an indispensable role in economic activities. The overall structure of receipt and payment as well as lending and borrowing of money is called the financial system. The financial system is composed of various financial markets and numerous financial institutions. "Financial stability" refers to a state in which the financial system functions properly, and participants, such as firms and individuals, have confidence in the system.

The Bank's Purpose and Functions concerning Financial Stability

Maintaining financial stability is one of the purposes of the Bank, along with achieving price stability (Article 1, paragraph 2 of the Bank of Japan Act stipulates that the Bank's purpose is "to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of stability of the financial system").

This is because (1) the Bank, as the "bank of banks," provides fund settlement services among financial institutions, playing a central role in the settlement of funds in Japan, and (2) the Bank, as an issuer of a currency that is a satisfactory payment instrument for any monetary debt in Japan, has functions essential for maintaining financial stability, such as providing banknotes and BOJ current accounts, which are payment instruments with settlement finality, and temporary loans as the lender of last resort.

Moreover, financial stability, which plays the role of the artery of economic activity, is a prerequisite as the Bank contributes to the sound development of Japan's economy through price stability. Both price stability and financial stability are essential for ensuring the value of money.

Against this background, the Bank has taken various initiatives for financial stability (see Sections II through VII below for notable initiatives).

Microprudence and Macroprudence

In order to achieve financial stability, a microprudential perspective, which evaluates risks specific to each financial institution to further improve their business operations, is important. At the same time, a macroprudential perspective, which analyzes and assesses the risk profile of the financial system as a whole, is also essential.

The Financial System Report assesses the vulnerabilities of the financial system from a macroprudential perspective. Moreover, the Bank focuses on not only the microprudential perspective but also the macroprudential perspective when conducting on-site examinations and off-site monitoring as well as other measures.

Releases concerning the Bank's macroprudential perspective and initiatives
Date Title
Oct. 18, 2011 The Bank of Japan's Initiatives on the Macroprudential Front [PDF 59KB]

II. On-Site Examinations and Off-Site Monitoring of Financial Institutions

Maintaining the sound management of financial institutions is an important prerequisite to ensure financial stability, as they play a number of important roles. They serve, for example, as part of payment and settlement systems for the transfer of funds and securities. They also serve as financial intermediaries to allocate funds and risks among individuals and firms by receiving funds from depositors and extending loans or buying securities with the received funds.

The Bank conducts on-site examinations and off-site monitoring to assess the conditions of business operations, risk management, capital adequacy, and profitability of financial institutions that hold current accounts at the Bank, such as banks and securities companies. This also encourages financial institutions to maintain and improve sound management.

On-Site Examinations

The Bank carries out on-site examinations by visiting the premises of financial institutions based on the contracts with them, in order to grasp their business operations and the state of the property. Through on-site examinations, the Bank contributes to financial stability by understanding financial institutions' business activities and financial conditions and examining their risk management processes, and, when necessary, urging improvement. On-site examinations are positioned as a means of appropriately conducting or preparing to conduct the Bank's business as the "lender of last resort" (Article 44 of the Bank of Japan Act).

The Bank releases an on-site examination policy every fiscal year based on the decision of the Policy Board. The document outlines the basic approach and key issues in the conduct of on-site examinations.

Latest On-Site Examination Policy
Date Title
Mar. 12, 2024 On-Site Examination Policy for Fiscal 2024 [PDF 570KB]

Off-Site Monitoring

In off-site monitoring, the Bank strives to broadly and swiftly gauge financial institutions' business conditions -- in terms of funding conditions, business operations, and profitability -- by conducting meetings and telephone interviews with their executives and staff members and by analyzing various documents they submit, both on a daily basis. Off-site monitoring differs from on-site examinations in that visits to financial institutions do not take place.

Integration of On-Site Examinations and Off-Site Monitoring

In recent years, it has become increasingly important to integrate on-site examinations and off-site monitoring. First, with regard to major financial institutions that have been designated as global systemically important banks (G-SIBs), it has become essential, in the wake of the Global Financial Crisis, for financial authorities to grasp the financial soundness and risk management of these institutions more swiftly and continuously. Second, with a view to grasping not only the financial soundness of individual financial institutions but also identifying changes in the overall financial system at an early stage from a macroprudential perspective, there is increased recognition of an effective multifaceted assessment that combines the following: analysis of the financial system as a whole in the Financial System Report; horizontal reviews across financial institutions and bank types through off-site monitoring; and in-depth on-site examinations of individual financial institutions. Third, reflecting structural changes in society, such as the spread of COVID-19 and progress in digitalization, the Bank is expected to improve the efficiency of on-site examinations and off-site monitoring and reduce the operational burden on examinee institutions while ensuring the necessary thoroughness of examinations and monitoring.

Taking these points into account, the Bank has worked on conducting integrated on-site examinations and off-site monitoring to improve their effectiveness in view of their characteristics. For example, the information obtained regularly on a daily basis through off-site monitoring is used to clarify the focus of the on-site examinations in advance. If serious issues are suspected from the information, the Bank may flexibly conduct on-site examinations with a focus on these issues. Conversely, the information obtained through on-site examinations is used in subsequent off-site monitoring. Especially when serious issues regarding financial soundness, profitability, or risk management are found at a financial institution through on-site examinations, the Bank requests the financial institution to submit follow-up reports periodically for improvement and checks on the institution's progress through off-site monitoring. The Bank thus considers that on-site examinations and off-site monitoring are interconnected operations.

Regarding major financial institutions, the Bank conducts detailed and comparative analyses of specific important issues in the joint surveys with the Financial Services Agency. By excluding these topics from the scope of on-site examinations, the Bank aims to reduce the operational burden on examinee institutions and avoid overlap with the joint surveys.

Cross-Utilization of On-Site/Off-Site Information

The wide range of information obtained from individual financial institutions through on-site examinations and off-site monitoring serves as an important input to the risk assessment of the financial system as a whole, such as the analysis of the Financial System Report. This information is also used when deliberating on and implementing various policies for financial stability. Furthermore, in discussions on international financial regulation and supervision, and in cooperation and collaboration with foreign central banks and supervisory authorities, the Bank has been working with the Financial Services Agency to communicate information and opinions that contribute to the stability of Japan's financial system, based on information obtained through examinations and monitoring, as well as dialogue with financial institutions.

In addition, the Bank also strives to encourage financial institutions to address management issues and disseminate information; for example, it has shared the knowledge gained from its examinations and monitoring not only through dialogue with individual financial institutions, but also through reports and seminars.

The Bank examines the stability of and risks in the financial system, including information on the business conditions of individual financial institutions, as one of the most relevant risk factors in conducting monetary policy. In addition, in assessing the eligibility of counterparties for market operations, the Bank confirms whether their creditworthiness is sufficient in light of the relevant information obtained from on-site examinations, etc.

III. Risk Analysis and Assessment of the Overall Financial System

Financial System Report

The Bank publishes the Financial System Report semiannually to assess the stability of Japan's financial system and communicate with all related parties on the future tasks and challenges in order to ensure the system's stability.

The main contents of the Report include (1) an assessment of developments in domestic and foreign financial markets and risks observed in these markets and (2) an examination of financial intermediation activities in Japan, including those of financial institutions (banks and shinkin banks), institutional investors' fund management, households' financial asset management, and the state of financial intermediation through financial markets, as well as whether there is an overheating in financial and economic activities. On this basis, (3) the Report assesses the stability of Japan's financial system from various positions and presents challenges faced by Japanese financial institutions from a macroprudential perspective. Specifically, the Report examines the risk profiles (e.g., size, speed, and distribution of risk accumulation) of the financial system as a whole and assesses the adequacy of financial institutions' financial bases (their capital and funding liquidity) relative to these risk profiles. It also examines the dynamics of the resilience of the financial system through macro stress testing, which estimates the decline in financial institutions' capital under specific hypothetical stress events.

The Bank uses the results of the analysis set out in the Report in planning policies to ensure the stability of the financial system and for providing guidance and advice to financial institutions through on-site examinations and off-site monitoring. It makes use of the results in international discussions on regulation, supervision, and vulnerability assessment. In relation to the conduct of monetary policy, the macro assessment of financial stability is also regarded as important input for the Bank in assessing risks in economic and price developments from a medium- to long-term perspective.

Latest Report
Date Title
Oct. 24, 2024 Financial System Report (October 2024) 

Other Research Related to Financial System

In addition to the Financial System Report, the Bank conducts research on various topics related to the financial system. In particular, Financial System Report Annex Series papers are published on an ad hoc basis to complement the Report, which include in-depth analyses of specific topics and issues as well as additional research.

IV. Policy Actions Necessary to Maintain Financial Stability

In addition to dialogue with financial institutions through on-site examinations and off-site monitoring as well as assessing and analyzing risks in the financial system in the Financial System Report and other research, the Bank has another role of taking policy actions if necessary to maintain financial stability, such as providing funds as the lender of last resort or implementing appropriate facilities.

Fund Provision to Maintain an Orderly Financial System: Lender of Last Resort (LLR)

The term "systemic risk" is used to describe the possibility that the bankruptcy of a financial institution or disruptions in a particular market or payment and settlement system will pose risks to other financial institutions, other markets, or ultimately the entire financial system, through a chain of disruptions or dysfunctions. The Bank, when necessary, acts as the lender of last resort to maintain an orderly financial system and provides funds to financial institutions experiencing a temporary shortage of funds.

The Bank normally provides financial institutions with loans against collateral in the form of Japanese government bonds or other securities in cases where it is acting as the lender of last resort (Article 33 of the Bank of Japan Act). However, the Bank may provide financial institutions with uncollateralized loans if an unexpected and temporary shortage of funds necessary for payment occurs in the relevant financial institution due to accidental causes, including computer system failures (Article 37). In addition, when there is a request from the government -- that is, the Prime Minister and the Minister of Finance -- the Bank may conduct "the business necessary to maintain the orderly financial system, including the provision of loans under special conditions" if deemed necessary by the Policy Board to maintain financial stability (Article 38). The so-called Tokuyu indicates the provision of loans to financial institutions under such special conditions.

Furthermore, as a backstop against foreign currency liquidity risk of Japanese financial institutions, the Bank has emergency liquidity provision schemes in foreign currency using its own foreign currency assets and foreign currency funds drawn based on bilateral local currency swap agreements with the relevant foreign central banks. The currencies covered by the schemes include U.S. dollar, Australian dollar, Singapore dollar, Chinese yuan, and Thai baht.

The Bank has a close relationship with the Deposit Insurance Corporation of Japan (DICJ) from the viewpoint of maintaining financial stability. Under the Deposit Insurance Act and other laws and regulations, the Bank may extend loans to the DICJ for the purpose of providing temporary bridge funds required by the DICJ for its operations.

Other

Other policy actions or facilities for financial stability that the Bank has implemented include (1) purchases of stocks held by financial institutions (between November 2002 and September 2004, and between February 2009 and April 2010), (2) provision of subordinated loans (expired on June 29, 2012) and (3) the Special Deposit Facility to Enhance the Resilience of the Regional Financial System (a three-year temporary measure for the fiscal years ending March 2021-2023 that began in March 2021).

The Bank has occasionally released statements or policy papers that present its initiatives and views about important events and relevant issues such as financial institutions' risk management, in response to developments in the financial system in Japan and abroad.

V. Participation in International Discussions on Financial Regulation and Supervision

International cooperation has become even more important in achieving financial stability as financial activities globalize further. The Bank has been working in cooperation with relevant central banks and supervisory authorities abroad on issues concerning financial systems, and also participates actively in discussions at international forums that review regulatory frameworks, aimed at strengthening the global financial system.

Basel Committee on Banking Supervision (BCBS)

The Basel Committee on Banking Supervision (BCBS) is a standard setter for the international financial regulation of banks (the first meeting was held in 1975). Currently, it is composed of bank supervisors and central banks from 28 jurisdictions, including Japan, with the Group of Central Bank Governors and Heads of Supervision as the oversight body. The representative members from Japan are the Financial Services Agency and the Bank.

The BCBS formulates and issues a set of uniform international standards on capital adequacy and liquidity ratios for internationally active banks (the Basel Accord). These have been adopted as bank regulation standards in many countries, including Japan.

The Basel Accord was first formulated in 1988 (Basel I) and revised in 2004 (Basel II). Subsequently, the Global Financial Crisis from summer 2007 triggered discussions toward the revision of the Accord, and a final agreement on the new regulatory framework (Basel III) was reached in 2017. Since then, the BCBS has shifted its focus of discussions from setting regulatory standards to monitoring implementation and impact analysis of the regulations, as well as supervisions. It has also addressed new risks and vulnerabilities that have arisen from challenges such as climate change and the digitalization of finance.

Financial Stability Board (FSB)

The Financial Stability Board (FSB) was established in April 2009 to strengthen and expand the Financial Stability Forum (FSF), which was established in 1999. The FSB works to address vulnerabilities in the financial system (encompassing a wider scope than simply the banking sector) and promote coordination among authorities responsible for financial stability.

Currently, the FSB is composed of representatives of central banks, financial supervisors, and finance ministries from 25 major jurisdictions, as well as major international standard setters and organizations. The representative members from Japan are the Financial Services Agency, the Ministry of Finance, and the Bank.

International Cooperation with Foreign Financial Authorities

The Bank participates in the meetings of supervisory colleges and Crisis Management Groups (CMGs), where relevant central banks and supervisory authorities from various jurisdictions exchange information on and discuss globally active financial institutions. The Bank also promotes bilateral cooperation with foreign financial authorities by sharing information and exchanging views on financial stability.

VI. Coordination with the Financial Services Agency

The Financial Services Agency (FSA), the financial regulator and supervisor in Japan and the Bank, the central bank of Japan, have worked closely together on financial stability, while complementing the mandate and characteristics of each other.

Against this backdrop, the FSA and the Bank have held meetings of the Council for Cooperation on Financial Stability (CCFS) biannually since June 2014, for senior officials including the Commissioner of the FSA and the Deputy Governors of the Bank to exchange views on developments in the financial system and the market, with a view to strengthening their coordination regarding macroprudential policy.

Moreover, in recent years, financial institutions' risk profiles have become more complex, and the environment surrounding the financial system has changed significantly, partly reflecting the impact of COVID-19. Under these circumstances, it is becoming increasingly important for the FSA and the Bank to conduct higher-quality monitoring and reduce the burden on financial institutions by further strengthening their coordination. The FSA and the Bank have been taking various initiatives based on "Initiatives for Further Strengthening Coordination between the Financial Services Agency and the Bank of Japan" (March 2021).

VII. Communications with Financial Institutions through Seminars

The Bank encourages financial institutions to improve their risk management and business management through various activities, such as holding seminars and releasing papers.

The Bank supports the efforts of financial institutions to respond to the sophistication of financial technology and risk management methods and to perform their financial intermediary functions more effectively, through activities of the Center for Advanced Financial Technology (CAFT). Specifically, the CAFT (1) promotes dialogue with financial institutions by holding seminars and workshops, and (2) conducts research and studies on advanced financial technology and financial institutions' efforts to improve their financial intermediary functions, and releases the results through papers, speeches, etc.

Moreover, the Bank has established the Support Unit for Regional Finance (SURF) within the Financial System and Bank Examination Department to further strengthen the dissemination of information on regional finance from the perspective of facilitating various efforts to strengthen the business foundations of regional financial institutions that support local economies. SURF collaborates with not only the CAFT, but also with on-site examinations, off-site monitoring, and research activities on the financial system. Utilizing such various expertise, SURF holds seminars and releases papers and reports on a wide range of topics related to regional financial institutions, including (1) business and risk management, (2) solutions to challenges facing the regional economy and client firms, and (3) responses to changes in the business environment.