Game changer for Japanese Bank: Regulation Shakeup

Asian Stock Markets

Japan’s financial supervisor is laying the groundwork for a regulatory overhaul that could lead to a shakeup in the nation’s $10 trillion banking industry.

The Financial Services Agency is examining how to change the legal framework so that all providers of financial services are subject to the same rules -- a move that would allow emerging companies such as technology startups to compete directly with traditional financial institutions. For banks, the revamp could end their monopoly on deposit-taking and lending as well as free them up to enter new businesses.

Emerging technologies have blurred the boundaries between providers of financial services and made it harder to maintain separate regulations for different types of companies in the industry, according to Financial Services Minister Taro Aso. Shifting from rules that are focused on entities -- banks, insurers and other institutions -- to one based on functions would make the industry more competitive and adaptable, he told reporters last week.

Financial institutions worldwide are being disrupted by companies that provide services ranging from digital payments to remittances using smartphones. The Bank for International Settlements said in a report this month that regulators may need to reassess their supervisory approach to adapt to changing business models brought on by technology. Japan trailed all but one of 20 markets on fintech adoption last year, according to a report by consulting firm EY.

Japanese banks are trying to diversify into areas such as asset management as near record-low interest rates and tepid loan demand undermine their traditional lending model. There is scope for technology to play an increasing role as the nation’s households look for ways to invest more of their $17 trillion of financial assets.

Like overseas, Japan has seen a plethora of fintech startups pop up in recent years, ranging from robot investing adviser WealthNavi Inc. to personal finance manager Moneytree KK. Foreign companies such as Chinese mobile payments giant Ant Financial Services Co. and U.K. remittance venture TransferWise Ltd. have also entered the nation.

The FSA is considering new rules around four key functions: settlements, credit, investing and risk transfer. It’s seeking to ensure customers are amply protected while allowing the flexibility for a range of enterprises to develop new financial services.

A panel consisting mainly of academics began meeting late last year to discuss the overhaul, which Aso said will take “a considerable amount of time.” The group concluded submissions of expert opinions on the four functions at its most recent meeting on Feb. 9, public records of the gathering show.

One issue that’s emerged as a key area of debate is how to handle deposits. Under the current law, banks are licensed to take deposits that are guaranteed if they fail. Some panel members have warned that if deposit business is opened up to competition from non-banks, this could lead to a breakdown of credit creation, according to the documents.

The FSA has already made moves to free up what banks are allowed to do under the current law. In 2016, it amended legislation to allow lenders to take larger stakes in fintech firms. Last year, the regulator introduced a registration system for cryptocurrency exchanges.

An index of Japanese bank shares has fallen 4 percent this year, more than the benchmark Topix’s 1.5 percent decline. Shares of the three so-called megabanks -- Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. -- closed higher in Tokyo trading on Tuesday.