1. “20 YEARS OF ASIAN FINANCIAL CRISIS:
STRENGTHENING INFRASTRUCTURES FOR CRISIS RESOLUTION”
Jakarta, 28 February 2018
Cross Border Resolution: Enhancement of International Norm and Key Accomplishments in Japan
Nobuhiro Koyama
Deputy Head, Research Department
Deposit Insurance Corporation of Japan

2. Contents Introduction: “Orderly Resolution” and DICJ Japanese G-SIBs
International Discussions on Cross Border Resolution
Key Accomplishments in Japan
Conclusion

3. Introduction DICJ’s Profile Establishment 1971 Number of Staff
416 (authorized number of staff）
Category
Loss Minimizer
Functions
Deposit Insurer, Financial Administrator
Insured Banks
572
Insurance Coverage
\10 million (US$ 90 thousand)
Insurance Premium
Flat rate system (currently 0.037%)
Fund Reserves
\3.2 trillion （US$ 29 billion: General Account）
(As of March 2017)
“Loss minimizer” means the DIA which engages in the selection from appropriate least-cost resolution strategies.

4. Functions added to DICJ
Introduction
Functions added to DICJ
Established in 1971
as a Pay-Box type
organization
1986 : Financial Assistance (P&A)
1998 : Financial Administrator, Bridge Bank, Measures against Financial Crisis
DICJ
1999 : Housing Loan Administration Corporation (founded in 1996) and Resolution and Collection Bank (founded in 1995) merged to RCC* (100% subsidiary of DICJ)
2013 : Orderly Resolution Measures
*RCC: Resolution and Collection Corporation

5. Financial Safety Net in Japan
Introduction
Financial Safety Net in Japan
Financial Services Agency (JFSA) Supervisory and Resolution Authority
pursues financial stability in general, using its micro-supervisory powers in cooperation with the BoJ and DICJ.
develops resolution plans for G-SIBs, in cooperation with the BoJ and Ministry of Finance (MOF), reviews recovery plans, and oversees the implementation of recovery/ resolution measures.
Bank of Japan (BOJ) Central Bank
one of main objectives; to ensure the stability of the financial system through the smooth settlement of funds
conducts onsite examinations and offsite monitoring of a wide range of financial institutions
Deposit Insurance Corporation of Japan (DICJ) Resolution Executive Body
acts as financial administrator and receiver for the resolution of failed financial institutions, and establishes “bridge institutions”.
carries out capital injection, provides financial assistance and temporary funding to facilitate resolution

6. Model Flow of “Orderly Resolution”
Introduction
Model Flow of “Orderly Resolution”
* In the case of resolution of G-SIBs, utilizing the functions of “TLAC”, the structure should look like the next slide.
(Source: Financial Services Agency, Japan)

7. Introduction
(Source: Financial Services Agency, Japan)

8. The outline of Japanese G-SIBs
Three Japanese banking groups are designated as G-SIBs by JFSA.
・Mitsubishi-UFJ Financial Group (MUFG)
・Mizuho Financial Group (MHFG)
・Sumitomo Mitsui Financial Group (SMFG)

9. The basic financial data of the Japanese G-SIBs (“Mega Banks”)
Total Assets (Billion \)
303,297
200,508
197,791
Net Assets (Billion \)
16,658
9,273
11,234
Ordinary Profits (Billion \)
1,360
737
1,005
Net Income (Billion \)
961
646
808
Capital Adequacy Ratio
15.85%
16.28%
16.93%
Tier I Ratio
13.36%
13.30%
14.07%
(As of 31 March 2017)

10. The domestic shares of the Japanese G-SIBs (“Mega Banks”) in assets
FSB “Peer Review of Japan Review Report” (2017)

11. Comparison between Japanese G-SIBs (“Mega Banks”)
and the other G-SIBs
(End of the latest FY)
<million dollars>

12. 2. Japanese G-SIBs Global Networks of Japanese G-SIBs MUFG SMFG (Asia)
(Source: the websites of MUFG, SMFG and MHFG)
MHFG

13. 3. International Discussions on Cross Border Resolution
In cross border resolution, communication and information sharing among related jurisdictions, and the implementation of legal bases for effectiveness in resolution are indispensable in order to solve various problems.

14. 3. International Discussions on Cross Border Resolution
The problems to be solved should be,
✓Procedures to be carried out by the authorities in the other jurisdictions (e.g. approval of transfer of control rights)
✓Prevention of “ring fencing”
✓Harmonization of cross-border financial contracts treatment (e.g. “Temporary Stay on Early Termination Rights”)
✓Differences in resolution regimes of home and host authorities
✓How to give effect to foreign resolution action

15. 3. International Discussions on Cross Border Resolution
Cross Border Cooperation
Mr. Paul Tucker of Bank of England said,
“…For a SPE strategy, successful implementation will depend on the home authority providing assurances to the key host authorities so that they refrain from taking independent action.”
“For a MPE strategy, the successful implementation will require effective coordination of the different resolution actions undertaken by home and host authorities. Each key host authority needs to be open about its plans.“
@ the INSOL International World Congress, 20 May 2013

16. 3. International Discussions on Cross Border Resolution
Challenges
Mr. Michael Gibson of Federal Reserve testified,
“…The key remaining obstacles include …adopting effective statutory resolution regimes in other countries;…completing firm-specific cooperation agreements with foreign regulators that provide credible assurances to those host-country regulators to forestall disruptive ring-fencing; and… coordinating consistent treatment of cross-border financial contracts.”
@ US Senate, May 15, 2013

17. 2. International Discussions on Cross Border Resolution
Frameworks set by international organizations
International Association of Deposit Insurers (IADI)
“Core Principles for Effective Deposit Insurance Systems”
Financial Stability Board (FSB)
“Key Attributes of Effective Resolution Regimes for Financial Institutions” (KA) and the guidelines under KA

18. 2. International Discussions on Cross Border Resolution
Challenges
And,
“…Foreign subsidiaries and bank branches of a U.S.-based systemic financial firm could be ring-fenced or wound down separately under the insolvency laws of their host countries if foreign authorities did not have full confidence that local interests would be protected. Further progress on cross-border resolution ultimately will require significant bilateral and multilateral agreements among U.S. regulators and the key foreign central banks and supervisors for the largest global financial firms. It also may require that home-country authorities provide credible assurances to host-country supervisors to prevent disruptive forms of ring-fencing of the host-country operations of a failed firm. The ultimate strength of these agreements will depend on whether they have adequately addressed the shared objectives, as well as the self-interests, of the respective home and host authorities…”
@ US Senate, May 15, 2013

19. 3. International Discussions on Cross Border Resolution
International Association of
Deposit Insurers (IADI)
“Core Principles for Effective Deposit Insurance Systems”
Principle 5 – CROSS-BORDER ISSUES
Where there is a material presence of foreign banks in a jurisdiction, formal information sharing and coordination arrangements should be in place among deposit insurers in relevant jurisdictions.

20. 3. International Discussions on Cross Border Resolution
Financial Stability Board (FSB)
“Key Attributes of Effective Resolution Regimes for Financial Institutions” 4. Set-off, netting, collateralisation, segregation of client assets
4.3 Should contractual acceleration or early termination rights nevertheless be exercisable, the resolution authority should have the power to stay temporarily such rights where they arise by reason only of entry into resolution or in connection with the exercise of any resolution powers.

21. 3. International Discussions on Cross Border Resolution
Financial Stability Board (FSB)
“Key Attributes of Effective Resolution Regimes for Financial Institutions” 7. Legal framework conditions for cross-border cooperation
7.1 The statutory mandate of a resolution authority should empower and strongly encourage the authority wherever possible to act to achieve a cooperative solution with foreign resolution authorities.

22. 3. International Discussions on Cross Border Resolution
Financial Stability Board (FSB)
“Key Attributes of Effective Resolution Regimes for Financial Institutions” 7. Legal framework conditions for cross-border cooperation (contd.)
7.5 Jurisdictions should provide for transparent and expedited processes to give effect to foreign resolution measures, either by way of a mutual recognition process or by taking measures under the domestic resolution regime that support and are consistent with the resolution measures taken by the foreign home resolution authority.

23. 3. International Discussions on Cross Border Resolution
Financial Stability Board (FSB)
“Key Attributes of Effective Resolution Regimes for Financial Institutions” 7. Legal framework conditions for cross-border cooperation (contd.)
7.6 The resolution authority should have the capacity in law, subject to adequate confidentiality requirements and protections for sensitive data, to share information, including recovery and resolution plans (RRPs), pertaining to the group as a whole or to individual subsidiaries or branches, with relevant foreign authorities (for example, members of a CMG), where sharing is necessary for recovery and resolution planning or for implementing a coordinated resolution.

24. 3. International Discussions on Cross Border Resolution
Financial Stability Board (FSB)
“Key Attributes of Effective Resolution Regimes for Financial Institutions” 7. Legal framework conditions for cross-border cooperation (contd.)
7.7 Jurisdictions should provide for confidentiality requirements and statutory safeguards for the protection of information received from foreign authorities.

25. 3. International Discussions on Cross Border Resolution
Financial Stability Board (FSB)
“Key Attributes of Effective Resolution Regimes for Financial Institutions” 8. Crisis Management Group (CMG)
8.1 Home and key host authorities of all G-SIFIs should maintain CMGs with the objective of enhancing preparedness for, and facilitating the management and resolution of, a cross-border financial crisis affecting the firm.

26. 3. International Discussions on Cross Border Resolution
Financial Stability Board (FSB)
“Key Attributes of Effective Resolution Regimes for Financial Institutions” 8. Crisis Management Group (CMG) (contd.)
8.2 CMGs should keep under active review, and report as appropriate to the FSB and the FSB Peer Review Council on:
(i) progress in coordination and information sharing within the CMGs and with host authorities that are not represented in the CMGs;
(ii) the recovery and resolution planning process for G-SIFIs under institution-specific cooperation agreements; and
(iii) the resolvability of G-SIFIs.

27. 3. International Discussions on Cross Border Resolution
Financial Stability Board (FSB)
“Key Attributes of Effective Resolution Regimes for Financial Institutions” 9. Institution-specific cross-border cooperation agreements (CoAg)
9.1 For all G-SIFIs, at a minimum, institution-specific cooperation agreements, containing the essential elements set out in Annex I, should be in place between the home and relevant host authorities that need to be involved in the planning and crisis resolution stages.

28. 3. International Discussions on Cross Border Resolution
Financial Stability Board (FSB)
“Principles for Cross-border Effectiveness of Resolution Actions”
1. Authorities should pursue a close alignment of resolution powers and tools with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions to facilitate the process of giving cross-border effect to resolution actions.
…Recognition of foreign resolution actions may be difficult or impossible, as a matter of law or policy, if resolution regimes in home and host jurisdictions differ substantially and do not provide for the same or similar actions. A close alignment of resolution powers and tools with the Key Attributes will help achieve cross-border effectiveness of resolution actions…

29. 4. Key Accomplishments in Japan
The resolution authorities of Japan have implemented the measures to carry out cross-border resolution smoothly, along with the international standards such as KAs.
✓ Introduction of the legal basis for cross-border cooperation
✓ Establishment of CMGs for Japanese G-SIBs
✓ Conclusion of CoAgs and MOUs, etc.
✓ Publication of the related Supervisory Guideline

30. 4. Key Accomplishments in Japan
Legal Ground of Cross Border Cooperation
Deposit Insurance Act
(amended in 2013, along with
the introduction of orderly resolution)
(International Cooperation)
Article The Corporation shall, when there is a need to carry out the operations thereof under international cooperation, carry out exchange of information with foreign governments, foreign local public entities, foreign central banks, international organizations, and other bodies equivalent thereto and other necessary operations.

31. 4. Key Accomplishments in Japan
Legal Ground of Cross Border Cooperation Deposit Insurance Act (contd.)
(Confidentiality Obligations of Members, etc.)
Article 22 Members, etc. (of The Policy Board of DICJ) shall not divulge any secret which may have come to their knowledge in the course of their duties. The same shall apply after they have left their position.
(Confidentiality Obligations of Officers, etc.)
Article 33 The provisions of Article 22…apply mutatis mutandis to officers and staff members.

32. 4. Key Accomplishments in Japan
Recognition of Foreign Resolution Action in Japan
The framework to recognise or give effect under Japanese law to a foreign resolution action is a judiciary procedure set out in “the Act on Recognition of and Assistance for Foreign Insolvency Proceedings”, based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross- Border Insolvency.

33. 4. Key Accomplishments in Japan
CMG Meetings
Japanese authorities have held CMG meetings once a year for three of Japanese G-SIBs in line with KA 8.2.

34. 4. Key Accomplishments in Japan
Cross-border Cooperation Agreements (CoAg)
The Japanese authorities have signed a number of cooperation agreements (as home authority for the three Japanese G-SIBs and as host authority for several other G-SIBs) .

35. 4. Key Accomplishments in Japan
Memorandum Of Understandings
The Japanese authorities are signing memorandums of understanding (MOU) with foreign deposit insurance organizations in order to strengthen mutual cooperation through exchange of information, etc.

36. 4. Key Accomplishments in Japan
“Comprehensive Guidelines for Supervision”
Established by JFSA (“Guidelines”) provide the following concrete frameworks, based on the related laws (“Banking Act” and “Financial Instruments and Exchange Act”)
✓ The framework for enforceability of temporary stays on early termination rights on contracts governed by foreign laws
✓ The framework for recovery plans (RCPs) for G-SIBs

37. 4. Key Accomplishments in Japan
Temporary Stays on Early Termination Rights
<Elements of the “Guidelines”>
Covered
Entities
Entities in the scope of the Specified Confirmation prescribed in the Deposit Insurance Act: Banks, cooperative financial institutions, securities, insurance companies, etc.
Covered Transactions
OTC derivatives, securities financing transactions, etc. that are governed by foreign laws and include the clause on early termination rights
Covered Counterparties
All except CCPs
Requirements
Covered Entities shall take measures to extend the effect of stay decision stipulated in Deposit Insurance Act by
- Adherence to the internationally common protocol (e.g. ISDA resolution stay protocol) or amendments to bilateral contracts
- Confirmation that the Covered Counterparties have also adhered to the protocol

38. 4. Key Accomplishments in Japan
Recovery Plans (RCPs) for G-SIBs
The “Guidelines” set the minimum and common items that must be included into each RCP.

39. 4. Key Accomplishments in Japan
✓ Profile of subsidiary corporations, etc., and overseas offices
- Criticality for business summary, financial information and financial system (analysis of importance of certain business and subsidiary corporations, etc., for the group in view of their market shares, etc., and analysis of their criticality for the financial system)
Relative importance of overseas subsidiary corporations, etc., and overseas offices in the business strategy
✓ Interrelationships among main subsidiary corporations, etc., overseas offices, and business divisions
- Capital relations in the group, fund transaction relations in the group, guarantee relations in the group, interdependency among IT systems, identification of subsidiary corporations, etc., and overseas offices which provide services to divisions, etc., having critical functions, and personnel relationships

40. 4. Key Accomplishments in Japan
2016 Peer Review of Japan
The accomplishments by the Japanese resolution authorities have got a certain understanding from the other authorities and other international bodies.
For example, Japan accepted Peer Review mission of FSB in 2016 to receive the comments as follows.

41. 4. Key Accomplishments in Japan
<Review Report December 2016>
…The authorities have the ability to share information with foreign authorities for resolution related purposes, though one consideration prior to the sharing of information is whether the foreign authority in question has safeguards in place to protect the confidentiality of that information. At a practical level, the authorities have signed a number of cooperation agreements (as home authority for the three Japanese G-SIBs and as host authority for several other G-SIBs) that allow for the sharing of information between members of G-SIB Crisis Management Groups (CMGs), and memoranda of understanding have been agreed with some other authorities. CMG meetings have been held once a year for the three Japanese G-SIBs and one other systemically important financial institution…

42. 5. Conclusion
✓ The bases and toolkits for the information sharing and close cooperation to deal with the cross border resolution issues have been established and developing in Japan.
✓ The resolution authorities need to utilize them effectively, and to solve individual issues steadily together, for the improvement of resolvability regarding cross border resolution.

43. Terima kasih Nobuhiro Koyama Deputy Head, Research Department
Voyage to Indonesia- IDIC Bank Resolution College
International Seminar on Bank Restructuring and Resolution
“20 YEARS OF ASIAN FINANCIAL CRISIS:
STRENGTHENING INFRASTRUCTURES FOR CRISIS RESOLUTION”
Jakarta, 28 February 2018
Terima kasih
Nobuhiro Koyama
Deputy Head, Research Department
Deposit Insurance Corporation of Japan