The 1981 Banking Law designated the Ministry of Finance (MOF) as solely responsible for authorizing and regulating the banking industry in Japan, and it maintained MOF’s legal supervisory authority over banks. The central bank of Japan, BOJ, was founded in 1882, although it was later reorganized under the Bank of Japan Law of 1942. Specifically, our objectives were to describe how (1) Japanese bank regulation and supervision is organized; (2) Japan’s banking oversight structure functions, particularly with respect to bank licensing, regulation, and supervision; (3) banks are monitored by their supervisors; and (4) participants handle other financial system responsibilities. This report does not include an evaluation of the efficiency or effectiveness of the Japanese bank regulatory structure. BOJ as the Bankers’ Bank

In its role as Japan’s bankers’ bank, BOJ maintains current accounts for its client institutions. In conducting its supervisory responsibilities, MOF is required to ensure that each bank subject to MOF’s supervision operates within limits set by both Japanese banking legislation and the bank’s own internal policies, and monitor any developments in bank operations that may have an adverse effect on the integrity of the bank involved or the banking system as a whole. BOJ also requires banks to undergo periodic on-site examinations and to submit necessary information upon request, which allow BOJ to obtain an understanding of the bank’s operations to fulfill its responsibility to maintain and foster the safety and soundness of the financial system. MOF and BOJ Share Monitoring Information When Necessary

Although MOF and BOJ at times share information informally on a case-by-case basis, there is no legal or formal requirement for MOF or BOJ to share supervisory information with each other. BOJ is responsible for maintaining liquidity, serving as the lender of last resort, and providing funds transfer service. Both BOJ and MOF share responsibility for managing financial crises and for participating in international forums. According to BOJ officials, BOJ’s function as lender of last resort basically involves its providing liquidity to troubled financial institutions or to the financial system, to prevent a systemic crisis. BOJ also provided needed liquidity to the two institutions.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Japanese bank regulatory structure and its key participants, focusing on how: (1) the Japanese bank regulation and supervision is organized; (2) Japan's banking oversight structure functions, particularly with respect to bank licensing, regulation, and supervision; (3) Japanese banks are monitored by their supervisors; and (4) participants handle other financial system responsibilities.

What GAO Found

GAO found that: (1) in Japan, two entities, the Ministry of Finance (MOF) and the Bank of Japan (BOJ), are responsible for ensuring the safety and soundness of the nation's banking system; (2) MOF, as a governmental agency, has the sole responsibility for licensing banking institutions and for developing and enforcing banking regulations; (3) in addition to its power to order business suspensions and to rescind a bank's license, MOF can seek the imposition of fines, and, in some cases, imprisonment as enforcement measures; (4) to fulfill its responsibility stipulated in the Bank of Japan Law, BOJ has contractual arrangements with 700 financial institutions, including all commercial banks, that allow it to examine these financial institutions and provide advice; (5) over the period 1990 to 1994, MOF and BOJ have examined approximately 500 banks annually, and, although MOF and BOJ do not regularly share information obtained during their separate on-site monitoring visits to the same banks, they do work together on a case-by-case basis to resolve crisis situations; (6) in connection with its responsibility to maintain the financial system's stability, BOJ is the lender of last resort and, as the central bank, BOJ can provide funds to banks in trouble or to the system as a whole if there is no alternative financial provider of liquidity to prevent a systemic crisis, and such liquidity is needed; (7) under the Bank of Japan Law, BOJ sets monetary policy and the interest rate at which it loans or discounts bills for its client banks; and (8) MOF and BOJ share responsibilities for such functions as failure resolution and representing Japan's interests in international forums.