## EXECUTIVE SUMMARY

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---

### Introduction and scope
- Summarizes the 2024 FSAP analysis and detailed recommendations pertaining to the financial safety net and financial crisis readiness framework in Japan (based on missions in September/October 2023 and January 2024 and the regime in place and practices employed as of end-2023). (¶1–3)
- Assessment focused on arrangements that apply to banks and touched upon some NBFIs, informed by:
  - Key Attributes of Effective Resolution Regimes for Financial Institutions (KA) adopted by the Financial Stability Board (FSB).
  - Core Principles for Effective Deposit Insurance Systems adopted by the International Association of Deposit Insurers. (¶2–3)

### Financial system context and key statistics
- Total assets of Japan’s financial system: nearly seven times GDP at end-2023. (¶4)
- The four largest financial groups: about one-fourth of total financial assets or about 170 percent of GDP. (¶4)
- Banking sector: accounts for almost 60 percent of the financial system; one-third of banking assets held by the three G-SIBs. (¶4)
- Insurance sector: accounts for 12 percent of the financial system and ranks fourth in the world by total written premiums (in U.S. dollar terms). (¶4)
- One of the three domestic CCPs, the Japan Securities Clearing Corporation (JSCC), is in the top-10 CCPs worldwide. (¶4)

### Progress since the 2017 FSAP and recent reforms
- Notable reforms and advances:
  - Introduction of loss absorbing capacity (LAC) requirements.
  - Expansion of the recovery and resolution planning (RRP) perimeter to some degree.
  - Establishment of the Recovery and Resolution Planning Office (RRP Office).
  - Revision of RRP guidelines for banks and financial market infrastructures (FMIs).
  - Continued annual reviews and updates of existing RRPs and progress on firm-specific crisis management groups (CMGs).
  - Engagement in international standard-setting bodies and bilateral workshops with foreign counterparts.

### Main findings: crisis readiness and resolution framework
- Structure and features:
  - Resolution framework comprises three administrative regimes complemented by ordinary and modified insolvency proceedings.
  - Each regime allows several resolution options supported by resolution powers; discretionary powers require policies to guide decision-making, operational manuals, and firm-specific resolution plans.
- Key challenges:
  - Hands-on experience with managing bank failures and financial crises is fading in Japan.
  - Financial system complexity is increasing, creating a need to accelerate and expand crisis readiness efforts.
- Recommended emphasis for crisis readiness:
  - Codify, regularly review, and update readiness efforts.
  - Execute a multi-year interagency crisis simulations program for diverse failure scenarios, including fast-fail resolutions of systemic and midsize banks, and their concurrent failure; present this program as a strategic priority under the leadership of a high-level national committee.
  - Increase public awareness of authorities’ crisis readiness efforts and ensure agency-wide delivery of prompt and effective resolution outcomes through resolution training and crisis simulation exercises (CSEs).

### Resolution regime enhancements recommended
- Strengthen RRP regime and resolution powers:
  - Continue to strengthen the RRP regime for insurers and FMIs, prioritizing central counterparties (CCPs), and establish an orderly resolution regime for CCPs.
  - Introduce statutory bail-in powers with complementary creditor safeguards; ensure resolution strategies primarily allocate losses to shareholders and creditors.
  - Provide policies that increase transparency on the choice among resolution regimes and designate the Crisis Management Measures regime as a last-resort option.
- Expand RRP perimeter and LAC coverage:
  - Gradually expand RRP requirements to more banks, prioritizing all Major Banks for recovery planning and all systemically important banks (SIBs) for resolution planning, eventually covering all banks that could be deemed systemic at the time of failure.
  - Require more banks to maintain a minimum amount of LAC, calibrated to each bank’s resolvability needs, to reduce potential resolution costs for taxpayers and reduce the Deposit Insurance Fund’s (DIF) exposure.

### Resolution governance and staffing
- Current roles and constraints:
  - The RRP Office at the Financial Services Agency (FSA) leads recovery plan reviews, resolvability assessments, policy development, and international engagement; current workload suggests staff are stretched.
  - RRP Office staff increased by 5 since the previous FSAP to a total of 18 staff. (¶)
- Recommendations:
  - Ensure staffing resources commensurate with increasing ambitions and complexities in preparing and managing bank resolutions. (¶28–29)
  - Strengthen and operationalize FSA governance for business-as-usual resolution work and contingency planning for imminent firm failures to allow agency-wide integrated information flows and decision-making. (¶28)
  - Enhance the RRP Office’s role in preparation of critical resolution decisions.

### Emergency Liquidity Assistance (ELA)
- BOJ ELA authorities and loan types:
  - Article 33: collateralized loans for prudential policy purposes; extension period up to 3 months; collateral framework same as market operations.
  - Article 37: temporary uncollateralized loans for accidental causes; extension period 1 month (maximum); eligibility stipulated by law and Cabinet Order.
  - Article 38: loans under special conditions ("special loans", Tokuyu) at request of the government; extension period not pre-determined; no statutory collateral requirement.
- BOJ ELA principles and practices:
  - BOJ Policy Board uses four ELA Principles for Article 38: (i) strong likelihood that systemic risk will materialize; (ii) no alternative to central bank money; (iii) responsible parties must take clear responsibility to avoid moral hazard; (iv) BOJ’s financial soundness should not be impaired.
  - BOJ can extend loans in foreign currencies using part of its foreign currency-denominated assets and currency swap agreements with four central banks.
  - Collateral haircuts and levels are publicly available and subject to yearly review and adjustment.
- Recommended ELA enhancements:
  - Increase public disclosure of ELA eligibility, conditions, and procedures (including English-language disclosure of solvency requirements and eligibility criteria).
  - BOJ policies should explicitly limit Article 38 ELA to solvent institutions or to institutions expected to become solvent under a credible and timebound recapitalization plan.
  - Strengthen safeguards to reduce firms’ reliance on ELA: conditionality, interest rate guidance (ELA at a margin above policy rate), intensive monitoring, operational restrictions, and progressively tightening conditions if repayment progress is inadequate.
  - Protect the BOJ’s financial soundness by making utmost efforts to request collateral for Articles 37 and 38 and implementing additional safeguards for extreme cases (e.g., preferential creditor status, arrangements with the government to cover potential losses, adjustments to distribution of profits to the national treasury), while ensuring BOJ’s discretionary powers remain intact.
  - Consider expanding ELA eligibility to systemically important non-bank financial institutions (NBFIs), prioritizing CCPs.

### Deposit insurance and payout readiness
- Coverage and public awareness:
  - DICJ estimates: about 63 percent of deposit amounts and the balance of 98 percent of accounts is insured.
  - DICJ coverage: protects general deposits up to JPY 10 million (about USD 67,000) plus interest, per depositor, per bank.
  - 2022 survey: 60.5 percent of the population is aware of deposit insurance.
  - Recommendation: continue public awareness efforts to further increase this percentage, ensuring gender and generational balance.
- DIF target and operational readiness:
  - 2022 DICJ Policy Board change: increased the target level of the DIF from JPY 5 trillion to 0.7 percent of insured deposits capped at JPY 7 trillion.
  - Current DIF holdings: about JPY 5.3 trillion (about 0.6 percent of insured deposit).
  - Commentary: current funds and the target level are not sufficient to cover payouts if the largest DTI without a resolution plan or the largest non-systemic DTI would fail.
  - Ideal target: DIF should hold enough funds to cover prompt payouts if the largest 2–3 non-systemic DTIs would concurrently fail.
  - Interim review: DICJ plans an interim review of target level in about five years and should consider expanded RRP perimeter when determining a new target ratio or higher cap.
  - Operational commitment: DICJ should publicly commit to starting payouts within seven business days after a DTI fails to strengthen depositor confidence.
- Governance and conflicts of interest:
  - Policy Board composition: Governor, up to four Deputy Governors, and up to eight non-executive external members; currently 13 people including 5 active bankers.
  - Recommendation: active bankers should not sit on the DICJ Policy Board.
  - Tenure recommendation: terms for executives (now two years) and non-executive members (now one year) should be longer than the political cycle.
  - Removal risk: Governor or Deputy Governor can be removed if the PM “finds that it is inappropriate for the officer to remain in office.”

### Banking sector capitalization, liquidity, and profitability — key findings
- Banks are generally well capitalized but have seen some recent decline in capital ratios due to valuation losses from overseas securities holdings.
- Banks’ risk weight densities have declined notably over the past decade.
- Nonperforming loan ratios have remained low and fairly stable since the pandemic.
- Banks have maintained sizeable JPY liquidity buffers; about one-third of assets are liquid.
- Liquidity conditions among banks have been stable, with retail and insured deposits at 58 and 60 percent of total deposits as of December 2022.
- Decline in interest rates since 2016 has put downward pressure on banks’ net interest margins and profitability, posing a challenge particularly for domestic banks and regional banks.
- The FSA has initiated measures to support the consolidation of regional banks to enhance their efficiency and preserve viability.

### Recovery planning and resolution planning — scope and recommendations
- Recovery planning:
  - All seven SIBs required to prepare recovery plans with annual updates.
  - Improvements observed since first plans in 2012; no critical shortcomings recently identified.
  - Recommendation: expand recovery planning to more banks, prioritizing all Major Banks not yet undertaking recovery planning, and require larger regional banks (by risk profile) to adopt enhanced contingency funding plans emulating recovery plans.
  - Recommendation: FSA should provide comprehensive guidance on recovery planning topics (current Guidelines Section III-11-2-2 provides only an outline).
- RRP for FMIs and JSCC:
  - JSCC: annual recovery planning since 2018 (voluntary) and mandatory since 2022; FSA and BOJ engage in feedback meetings without formal feedback letters.
  - Recommendation: update FSA’s recovery planning guidelines for FMIs when the other two CCPs are subjected to recovery planning.
- Resolution planning by authorities:
  - FSA has prepared resolution plans for the three G-SIBs and one D-SIB, with single point of entry resolution as the preferred strategy.
  - TLAC requirements (external and internal) introduced in March 2019 for the three G-SIBs and March 2021 for one D-SIB.
  - JFAs report all four SIBs meet both external and internal TLAC requirements with no funding gap.
  - Recommendation: gradually expand FSA resolution planning, prioritizing remaining D-SIBs to cover all SIBs, then the remaining Major Banks, and eventually all banks that could be deemed systemic at time of failure.
- Resolution planning for insurers:
  - Current gap: no resolution plan exists for any insurer.
  - Recommendation: prepare for insurer resolution, prioritizing IAIGs, starting with the IAIG with predominantly life insurance business; include manuals, firm-specific plans, and CSEs.

### Resolution governance, government role, and interagency cooperation
- Government role:
  - PM decides whether an event is systemic and which resolution measures to use in systemic cases after FCRC deliberations; PM also suspends early termination rights and triggers contractual bail-in clauses, writing off AT1 and Tier2 instruments.
  - When legislation was adopted, these powers were delegated to the FSA Commissioner; DIA allows delegation to be reassigned to the PM by Cabinet Order (which has occurred).
  - Recommendation: limit political office involvement in firm-specific decisions to cases where taxpayer money is at risk; consider redelegating powers back to the FSA Commissioner to ensure FSA operational autonomy.
- FCRC and domestic cooperation:
  - FCRC chaired by the PM and comprises Chief Cabinet Secretary, Minister for State for Financial Services, FSA Commissioner, Minister of Finance, and BOJ Governor; advises the PM on triggering resolution regimes for systemic cases.
  - Recommendation: undertake resolution policy and crisis readiness work under FCRC auspices for high-level accountability and collective readiness; consider a subcommittee for crisis readiness that includes the DICJ and could be chaired by the FSA.
- International cooperation:
  - FSA and BOJ participate in FSB Resolution Steering Group work and CMGs for Japanese G-SIBs and one D-SIB, and in global/regional CMGs for nine foreign G-SIBs with operations in Japan.
  - Recommendation: allocate more resources to deepen cooperation and coordination arrangements with key regional and global countries.

### Resolution funding, loss-absorbing capacity (LAC), and DICJ mechanics
- TLAC/LAC:
  - TLAC requirements apply to the four SIBs for which FSA undertakes resolution planning; announced April 2018, introduced March 2019.
  - FSB’s July 2019 review: Japan’s TLAC regime complies with the FSB TLAC Standard including certain exceptions.
  - JFAs state all four SIBs meet both external and internal TLAC requirements with no funding gap.
  - Recommendation: extend minimum LAC to more banks (prioritizing banks with insured deposits exceeding readily available DIF funding); calibrate LAC to resolvability needs.
- DICJ funding mechanics and caps:
  - DICJ can borrow from banks or issue securities; for speed, can borrow from the BOJ—with a government guarantee—and channel funds through the DICJ account at the BOJ.
  - CMA contains about JPY 367 billion from resolution recoveries and is primarily an ex-post industry-funded resolution fund.
  - DICJ borrowing caps: JPY 19 trillion for the General Account (the DIF) and JPY 35 trillion for the CMA (funding measures under the CMM and ORM regimes).
  - If more funds are needed, funding would have to be obtained from the government with parliamentary approval.
  - CMA could borrow from the DICJ’s General Account (the DIF), but given DIF levels, borrowing from banks, markets, or the BOJ is more realistic; DICJ should be cautious borrowing from the DIF if this could leave the DIF financially vulnerable to honor its primary responsibility for deposit insurance.
- DICJ role:
  - Main capital provider and primary liquidity provider in resolution.
  - Capital support from DICJ would render it partial owner; full ownership follows nationalization.
  - Recommendation: DICJ should develop policies and procedures to ensure shareholdings are managed at arm’s length.

### To minimize taxpayer losses: official financial support policies
- Fundamental principle: undertake resolution without exposing taxpayers to loss (KA11.6).
- Loss allocation: losses primarily allocated to shareholders and to unsecured and uninsured creditors (KA6.4).
- Legal context and recommendation:
  - DIA does not explicitly set protecting taxpayers as an objective, but nothing prevents JFAs from adopting policies to guide future resolution funding decisions.
  - Recommended approach: emulate the BOJ’s ELA Principles and ensure resolution strategies primarily allocate losses to shareholders and creditors.
  - Designate the CMM regime as a last-resort option and increase transparency on regime choice.

### Annex I — BOJ collateral framework (key facts and principles)
- As of December 2023:
  - Total face value of collateral accepted by the BOJ: JPY 158 trillion.
  - Collateral composition:
    - Bonds, including treasury discount bills: 51.9 percent.
    - Loans on deeds: 22.4 percent.
    - Beneficial interests of a trust in housing loans: 25.7 percent.
    - Others: 0.03 percent.
- Historical shift:
  - Until April 2016 more than 60 percent of collateral typically comprised bonds; holdings of eligible collateral decreased as JGB purchases progressed under QQE.
  - BOJ began accepting beneficial interests of a trust in housing loans as eligible collateral; trust in housing loans now constitute around 25 percent of collateral.
- BOJ principles for eligible collateral:
  - (i) maintain soundness of BOJ’s assets;
  - (ii) ensure smooth BOJ business operations and efficient use of collateral;
  - (iii) utilize market information to evaluate creditworthiness and calculate haircuts (ratings by rating agencies and market prices).
- Eligibility standard: collateral should be denominated in Japanese Yen, issued in Japan and governed by Japanese law.
- Pricing and margins:
  - Pricing depends on remaining maturity and is determined by applying margins to market prices, face values, or outstanding principal balances.
  - Margin derivation:
    - I. For collateral with an obtainable market price: margins consider historical fluctuations in market price over the duration needed for BOJ to enforce rights.
    - II. For collateral without an available market price: margins determined based on estimated price fluctuations over the time required for BOJ to exercise rights.
    - III. Margins from I and II adjusted when necessary to ensure consistency in BOJ’s margin table in light of creditworthiness and marketability.

*Source: 1jpnea2024007 — Executive Summary and selected technical-note excerpts.*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Introduction and scope
- This note summarizes the 2024 FSAP analysis and detailed recommendations pertaining to the financial safety net and financial crisis readiness framework in Japan (based on missions in September/October 2023 and January 2024 and the regime in place and practices employed as of end-2023). (¶1–3)
- The assessment focused on arrangements that apply to banks and touched upon some NBFIs, informed by:
  - Key Attributes of Effective Resolution Regimes for Financial Institutions (KA) adopted by the Financial Stability Board (FSB).
  - Core Principles for Effective Deposit Insurance Systems adopted by the International Association of Deposit Insurers. (¶2–3)

### Financial system context and key statistics
- Total assets of Japan’s financial system: nearly seven times GDP at end-2023. (¶4)
- The four largest financial groups: about one-fourth of total financial assets or about 170 percent of GDP. (¶4)
- Banking sector: accounts for almost 60 percent of the financial system; one-third of banking assets held by the three G-SIBs. (¶4)
- Insurance sector: accounts for 12 percent of the financial system and ranks fourth in the world by total written premiums (in U.S. dollar terms). (¶4)
- One of the three domestic CCPs, the Japan Securities Clearing Corporation (JSCC), is in the top-10 CCPs worldwide. (¶4)

### Progress since the 2017 FSAP and recent reforms
- Notable reforms and advances:
  - Introduction of loss absorbing capacity (LAC) requirements. (Executive Summary)
  - Expansion of the recovery and resolution planning (RRP) perimeter to some degree. (Executive Summary)
  - Establishment of the Recovery and Resolution Planning Office (RRP Office). (Executive Summary)
  - Revision of RRP guidelines for banks and financial market infrastructures (FMIs). (Executive Summary)
  - Continued annual reviews and updates of existing RRPs and progress on firm-specific crisis management groups (CMGs). (Executive Summary)
  - Engagement in international standard-setting bodies and bilateral workshops with foreign counterparts. (Executive Summary)

### Main findings: crisis readiness and resolution framework
- Japan’s resolution framework:
  - Comprises three administrative regimes complemented by ordinary and modified insolvency proceedings. (Executive Summary)
  - Each regime allows several resolution options supported by resolution powers; discretionary powers require policies to guide decision-making, operational manuals, and firm-specific resolution plans. (Executive Summary)
- Key challenges:
  - Hands-on experience with managing bank failures and financial crises is fading in Japan. (Executive Summary)
  - The financial system is evolving and becoming more complex, increasing the need to accelerate and expand crisis readiness efforts. (Executive Summary)
- Recommended emphasis for crisis readiness:
  - Codify, regularly review, and update readiness efforts. (Executive Summary)
  - Execute a multi-year interagency crisis simulations program for diverse failure scenarios, including fast-fail resolutions of systemic and midsize banks, and their concurrent failure; present this program as a strategic priority under the leadership of a high-level national committee. (Executive Summary)
  - Increase public awareness of authorities’ crisis readiness efforts and ensure agency-wide delivery of prompt and effective resolution outcomes through resolution training and crisis simulation exercises (CSEs). (Executive Summary)

### Resolution regime enhancements recommended
- Strengthen RRP regime and resolution powers:
  - Continue to strengthen the RRP regime for insurers and FMIs, prioritizing central counterparties (CCPs), and establish an orderly resolution regime for CCPs. (Executive Summary)
  - Introduce statutory bail-in powers with complementary creditor safeguards; ensure resolution strategies primarily allocate losses to shareholders and creditors. (Executive Summary)
  - Provide policies that increase transparency on the choice among resolution regimes and designate the Crisis Management Measures regime as a last-resort option. (Executive Summary)
- Expand RRP perimeter and LAC coverage:
  - Gradually expand RRP requirements to more banks, prioritizing all Major Banks for recovery planning and all systemically important banks (SIBs) for resolution planning, eventually covering all banks that could be deemed systemic at the time of failure. (Executive Summary)
  - Require more banks to maintain a minimum amount of LAC, calibrated to each bank’s resolvability needs, to reduce potential resolution costs for taxpayers and reduce the Deposit Insurance Fund’s (DIF) exposure. (Executive Summary)

### Resolution governance and staffing
- The RRP Office at the Financial Services Agency (FSA) leads recovery plan reviews, resolvability assessments, policy development, and international engagement; current workload suggests staff are stretched. (Executive Summary)
- Recommendations:
  - Ensure staffing resources commensurate with increasing ambitions and complexities in preparing and managing bank resolutions. (¶28–29)
  - Strengthen and operationalize FSA governance for business-as-usual resolution work and contingency planning for imminent firm failures to allow agency-wide integrated information flows and decision-making. (¶28)
  - Enhance the RRP Office’s role in preparation of critical resolution decisions. (Executive Summary)

### Emergency Liquidity Assistance (ELA)
- BOJ ELA practices and strengths:
  - Sound guidelines for solvency requirements for ELA under Articles 33 and 37 of the BOJ Act (prudential purposes and operational disruptions). (Executive Summary)
  - Ability to extend loans in foreign currencies and currency swap agreements with several central banks. (Executive Summary)
  - Annual reviews of eligible collateral based on market conditions. (Executive Summary)
- ELA framework recommended enhancements:
  - Increase public disclosure of ELA eligibility, conditions, and procedures to improve credibility, accountability, and market guidance. (Executive Summary)
  - Collaborate between BOJ and FSA to strengthen ELA safeguards to reduce firm reliance on ELA and mitigate moral hazard. (Executive Summary)
  - Protect the BOJ’s financial soundness by making utmost efforts to request collateral as a first step when providing ELA under Articles 37 and 38, and implement additional safeguards for extreme cases. (Executive Summary)
  - Consider expanding ELA eligibility to systemically important non-bank financial institutions (NBFIs), prioritizing CCPs. (Executive Summary)

### Deposit insurance and payout readiness
- Key recommendations include:
  - Publicly commit to starting deposit pay-outs within seven business days after a bank’s failure to increase depositor confidence. (DICJ; ¶47)
  - Regularly review and update the Deposit Insurance Corporation of Japan (DICJ) target level to ensure prompt payouts in case of a concurrent failure of the largest 2–3 non-systemic DTIs. (DICJ; ¶47)
  - Strengthen DICJ governance by excluding active bankers from sitting on its Policy Board. (DICJ; ¶48)

### Consolidated key recommendations (selected items from Table 1)
- Resolution Governance (selection):
  - 1. Ensure staffing resources commensurate with ambitions and need for managing bank resolutions. (JFAs; ¶28–29) — C H
  - 2. Strengthen and operationalize FSA governance for business-as-usual resolution work and contingency planning. (FSA; ¶28) — C H
  - 4. Under the FCRC, execute a multi-year interagency crisis simulations program for diverse failure scenarios including fast-fail resolutions of systemic and midsize banks, and their concurrent failure. (JFAs; ¶26–27) — C H
  - 6. Seek to further deepen cross-border cooperation and coordination arrangements with key partner countries. (JFAs; ¶32) — C M
- Resolution Regime (selection):
  - 7. Subject more banks, prioritizing all Major Banks, to recovery planning requirements, supported by comprehensive planning guidance. (FSA; ¶20–21) — ST H
  - 8. Undertake resolution planning for more banks, prioritizing all SIBs, and continue to articulate expectations on resolvability. (FSA; ¶24) — ST H
  - 9. Require more banks, prioritizing all SIBs, to maintain a minimum amount of LAC additional to regular capital requirements, calibrated to each bank’s resolvability needs. (FSA; ¶33) — ST H
  - 11. Introduce statutory bail-in powers with a NCWO safeguard; allow departure from pari passu treatment; establish depositor preference. (government; ¶18) — MT M
- Emergency Liquidity Assistance (selection):
  - 14. Enhance ELA safeguards with additional collateral requirements, lending conditions, and other safeguards such as arrangements with the government to cover potential losses on ELA operations. (BOJ, MOF, FSA; ¶42–44) — C H
  - 15. Increase public disclosure of ELA eligibility, conditions, and procedures. (BOJ; ¶41) — C M
  - 16. Expand ELA eligibility to some NBFIs that could be systemically important, prioritizing CCPs. (BOJ; ¶45) — MT H
- Deposit Insurance (selection):
  - 17. Publicly commit to starting deposit pay-outs within seven business days after a bank’s failure. (DICJ; ¶47) — I M
  - 18. Regularly review and update the DICJ target level to ensure prompt payouts in case of concurrent failure of the largest 2–3 non-systemic DTIs. (DICJ; ¶47) — M M

*EXECUTIVE SUMMARY — JAPAN, INTERNATIONAL MONETARY FUND*

### 5.      Bank capital ratios remain well above the regulatory minimum, and liquidity buffers

### 5.      Bank capital ratios remain well above the regulatory minimum, and liquidity buffers remain high, but banking sector profitability has been weak.

### Banking sector capitalization, liquidity, and profitability — key findings
- Banks are generally well capitalized but have seen some recent decline in capital ratios due to valuation losses from overseas securities holdings.
- Banks’ risk weight densities have declined notably over the past decade.
- Nonperforming loan ratios have remained low and fairly stable since the pandemic.
- Banks have maintained sizeable JPY liquidity buffers; about one-third of assets are liquid.
- Liquidity conditions among banks have been stable, with retail and insured deposits at 58 and 60 percent of total deposits as of December 2022.
- The decline in interest rates since 2016 have put downward pressure on banks’ net interest margins and profitability, posing a challenge particularly for domestic banks and regional banks.
- The FSA has initiated measures to support the consolidation of regional banks to enhance their efficiency and preserve viability.

### Financial safety net and institutional roles
- The financial safety net of Japan comprises three key members:
  - The FSA is the lead bank resolution authority, supervises all sectors of the financial system, is responsible for bank RRP, and oversees the recovery planning by insurers and by one FMI (that is, JSCC). FSA staff is also the Secretariat for the Financial Crisis Response Council (FCRC) and supports the Minister of State for Financial Services.
  - The DICJ is responsible for deposit insurance in the banking system, the execution of resolution measures, and liquidity and capital support in most resolution cases.
  - The BOJ is the central bank and lender of last resort, including ELA to banks and to some NBFIs, including in a few resolution cases.
- The three G-SIBs are Mitsubishi UFJ Financial Group (MUFG), Mizuho Financial Group (MHFG), and Sumitomo Mitsui Financial Group (SMFG).
- Japan also has four domestic systemically important banks (D-SIBs): Sumitomo Mitsui Trust Holdings, Norinchukin Bank, Daiwa Securities Group, and Nomura Holdings.
- The Japan Post Group accounts for about 12 percent and 22 percent of the banking and insurance sectors, respectively.

### Coordination and contingency arrangements
- Several committees provide coordination and cooperation among the JFAs and other authorities:
  - The FCRC advises the Prime Minister (PM) whether the resolution regimes for systemic cases should be triggered; it is chaired by the PM and comprises the Chief Cabinet Secretary, the Minister for State for Financial Services, the FSA Commissioner, the Minister of Finance, and the BOJ Governor.
  - Other platforms include the Council for Cooperation on Financial Stability, the Financial Monitoring Council, the Working-Level Meeting on Macroprudential Policy, and the Joint Group for Coordinating FSA's Inspections and BOJ's On-Site Examinations.

### Developments since the 2017 FSAP — RRP and resolution planning
- The JFAs have introduced and advanced several measures:
  - Introduction of total loss absorbing capacity (TLAC) requirements that apply to four SIBs.
  - Expansion of resolution planning to include one DSIB along with the three G-SIBs.
  - Establishment of the Recovery and Resolution Planning Office (RRP Office) at the FSA.
  - Revision of the RRP guidelines for banks and FMIs, and introduction of mandatory recovery planning by the JSCC.
  - Continued annual reviews and updates of existing RRPs, work on firm-specific CMGs for G-SIBs, participation in international standard-setting bodies, and bilateral workshops with foreign counterparts.
- At the time of writing, a public consultation is underway to expand resolution planning guidelines for banks with sections on testing and valuation capabilities.
- Implementation of prior FSAP recommendations has been mixed due to staffing resource constraints, weighing potential benefits and legal challenges, awaiting international progress, or differences of view with the FSAP assessment.

### Challenges ahead — crisis management experience and preparedness
- Hands-on experience with managing bank failures and financial crises is fading in Japan:
  - No Japanese bank has failed in over a decade.
  - It has been more than 15 years since an insurer in Japan failed.
  - Japan has not had recent near failures, limiting opportunities for live-testing contingency planning procedures.
- Remaining crisis management experience largely dates to the 1990s; current financial systems, media landscapes, and international practices have evolved considerably, increasing the need to build “muscle memory” for crisis management.

### Resolution framework and regime structure — overview
- Japan’s resolution framework comprises three administrative regimes complemented by ordinary and modified bankruptcy proceedings, distinguishing between deposit-taking institutions (DTIs), banks, and certain NBFIs, and between systemic and non-systemic failures.
- In non-systemic events:
  - DTIs would be subject to the Resolution under Limited Coverage (RLC) regime; the DICJ can transfer or payout insured deposits, with a preference to transfer insured deposits to a private sector purchaser (PSP) or a bridge bank.
  - Failures of most other financial firms would be subject to the Act on Special Measures for the Reorganization Proceedings of Financial Institutions (the ‘Special Measures Act’), complementing the Civil Rehabilitation Act and the Corporate Reorganization Act.
- In systemic cases:
  - Two distinct regimes apply depending on the firm and conditions:
    - The Crisis Management Measures (CMM) regime would apply for certain DTIs; it includes preemptive equity support (‘item 1 measure’), financial assistance over and above a potential payout of insured deposits (‘item 2 measure’), and nationalization (‘special crisis management’ or ‘item 3 measure’).
    - The Orderly Resolution Measures (ORM) regime would apply to banks and most other financial firms (excluding FMIs); it allows preemptive equity and liquidity support (‘specified measure I’) and transfer powers for systemic assets and liabilities (‘specified measure II’).
  - The CMM applies if not taking measures “may seriously hinder maintaining an orderly credit system in Japan or in a certain region” (Article 102 DIA).
  - The ORM applies if inaction “may cause severe disruption in Japan's financial market and any other financial systems” (Article 126-2 DIA).

### Gaps and recommendations highlighted
- There is no FMI-specific resolution regime in Japan; FMIs are solely subject to ordinary corporate rehabilitation, reorganization, and insolvency proceedings.
  - The KA1.2 requires FMIs be subject to resolution regimes appropriate to their critical role; the authorities should prioritize CCPs for introducing a resolution regime consistent with international principles and guidance.
- Statutory bail-in powers are not available in Japan; the country relies on contractual bail-in and transfer powers under the ORM regime.
  - Using transfer powers to impose losses on equity holders and unsecured non-systemic creditors faces challenges (due diligence, costs of operating bridge banks, legal proceedings abroad).
  - Statutory bail-in powers could provide prompt and less costly results and should be considered alongside safeguards such as no creditor worse off (NCWO) and powers to depart from pari passu treatment (KA5.2 and KA5.1).
- The JFAs should develop policies to translate discretionary judgment under the ORM regime into actions that favor earlier triggering of resolution and use of the most flexible and comprehensive regime, consistent with KA3.1.
- The JFAs should remain mindful of the courts’ critical role in insolvency and resolution-related court approvals and plan resolution measures to ensure prompt execution.

### Recovery planning by firms
- All seven SIBs in Japan are required to prepare recovery plans with annual updates based on feedback from the JFAs.
- The authorities observed significant improvements in recovery plans across iterations since the first plans in 2012.
- For the G-SIBs, plans are discussed in the CMG for each bank; for all SIBs, feedback letters are issued and followed by FSA and BOJ meetings with firms, after which firms adjust organizations and plans for the next annual cycle.
- The review of firms’ recovery plans is led by the RRP Office at the FSA, with input from supervision teams and consultation with the BOJ and the DICJ.
- In recent years, the authorities have not found critical shortcomings or impediments in the plans.
- The four SIBs that are also subject to resolution planning are leading the operationalization of recovery governance; other SIBs are furthering testing capabilities.
- The JFAs’ focus is shifting to the integration of firms’ recovery plans and their financial contingency plans.

*Source: 1jpnea2024007 - 5.      Bank capital ratios remain well above the regulatory minimum, and liquidity buffers remain high, but banking sector profitability has been weak.*

### 20.      More banks should be subjected to recovery planning requirements. Recovery planning

### 20.      More banks should be subjected to recovery planning requirements. Recovery planning

### Recovery planning: rationale and prioritization
- Recovery planning is a key component of an effective RRP framework, providing firms with a regular mechanism to establish and maintain capabilities to restore their financial soundness when shocks materially affect their capital or liquidity position.
- The FSAP concluded that the thresholds set out in the FSA’s prompt corrective action regime remain calibrated to minimum capital thresholds and should be raised to allow earlier interventions.
- Expansion rationale:
  - Earlier interventions place a premium on recovery planning by more banks so they can develop mechanisms to restore financial conditions at an early stage.
  - The FSA should first prioritize all Major Banks that are not yet undertaking recovery planning.
  - Other banks, such as larger regional banks prioritized by their risk profile, could be required to adopt credible, enhanced contingency funding plans—emulating recovery plans—subjected to the FSA’s critical supervisory assessment to ensure proportionality.

### Recovery planning: guidance and content
- Current gap: The section on recovery planning in the FSA ‘Comprehensive Guidelines for Supervision of Major Banks, etc.’ (Section III-11-2-2) only provides an outline without elaboration on listed topics.
- Ongoing improvements: A public consultation was ongoing for testing and valuation capabilities, which the FSA intends to incorporate in the RRP section of the Guidelines.
- Recommendation: The FSA should provide comprehensive guidance on more topics; for example, the Guidelines do not require discussion of a bank’s communications with internal and external stakeholders regarding its recovery process.

### Recovery planning for FMIs and JSCC
- The JSCC:
  - Has undertaken annual recovery planning since 2018 on a voluntary basis and since 2022 on a mandatory basis.
  - With the 2022 revision of the FSA ‘Comprehensive Guideline for Supervision of FMIs’, clearing organizations can be required to submit a recovery plan; so far this requirement is applied only to the JSCC.
  - The FSA and the BOJ engage in feedback meetings with the JSCC—without submitting formal feedback letters.
- Recommendation: FSA’s recovery planning guidelines for FMIs will require updating with more guidance when the other two CCPs in Japan are subjected to recovery planning.

### Resolution planning by the authorities: current status
- The FSA has prepared resolution plans for the three G-SIBs and one D-SIB, with single point of entry resolution as the preferred strategy.
- The FSA’s 2018 additions detailed expectations on operational continuity, liquidity monitoring, and loss-absorbing capacity (LAC); a public consultation is ongoing to add sections on valuation and testing capabilities.
- The FSA conducts deep dives into impediments to resolvability, issues feedback letters to SIBs, and holds regular meetings; SIBs have been responsive.

### Resolution planning: recommended expansion
- Findings prompting expansion:
  - The resolution framework applies to all banks and includes potential public financial support.
  - The FSAP found vulnerabilities among regional banks and concluded more supervisory resources are needed for regional banks.
  - The JFAs estimate that several large DTIs, including a few large regional banks, hold substantially more insured deposits than funding available in the deposit insurance fund (DIF; JPY 5. 3 trillion).
- Sequenced recommendation:
  - Gradually and proportionally expand FSA resolution planning, prioritizing first the remaining D-SIBs so there is a resolution plan for all SIBs, then expanding to the remaining Major Banks.
  - Eventually undertake resolution planning for all banks that could be deemed systemic at the time of failure and potentially require applying the CMM and ORM regimes.
  - Meanwhile, continue articulating expectations of banks in improving resolvability and discuss firms’ expertise and infrastructure use in resolution execution.

### Resolution planning for insurers
- Current gap: No resolution plan exists for any insurer, despite the ORM regime being applicable to insurers, including access to potential official financial support.
- Recommendation: Authorities should prepare for insurer resolution, prioritizing IAIGs, starting with the IAIG with predominantly life insurance business; preparations should include manuals tailored to the insurance sector, firm-specific plans, and CSEs.

### Operational readiness and crisis simulations
- JFA actions to date:
  - The FSA, BOJ, and DICJ organized workshops with the three G-SIBs in 2022 and 2023, including the one D-SIB with a resolution plan.
- Recommendations:
  - Ensure for each resolution option there is a mutually complementary set of legal powers translated into policy options, operational manuals, and firm-specific resolution plans to support FCRC and PM/FSA Commissioner decision-making.
  - Execute a multi-year interagency crisis simulations program for diverse failure scenarios, including fast-fail resolutions of systemic and midsize banks and concurrent failures.
  - Precede joint exercises with agency-specific exercises; ensure agency-wide delivery and staff familiarity with manuals and drills.
  - Make the multi-year interagency crisis simulations program a strategic priority and use external communications to raise public awareness of crisis readiness efforts.

### Resolution governance: FSA RRP Office and staffing
- Role and current resources:
  - The RRP Office leads recovery plan reviews and resolvability assessments, develops policies, guidelines, and manuals, and engages with foreign counterparts.
  - Staff increased by 5 since the previous FSAP to a total of 18 staff.
  - The BOJ’s Financial Stability Planning Group has less than 20 staff; the DICJ had 427 staff in fiscal year 2023.
- Risks and recommendations:
  - The RRP Office’s broad portfolio leaves staff stretched; the FSA’s RRP Office role in critical resolution decisions should be further strengthened with an enhanced resolution governance structure for agency-wide integrated information flows and decision-making.
  - As the RRP perimeter expands, the FSA should continue to strengthen functional separation between RRP and supervision.
  - Staffing levels and skillsets should be commensurate with an ambitious resolution regime: the number of staff at the FSA RRP Office and at the BOJ should be significantly increased to avoid implementation and reputational risks.
  - Short-term rotation cycles at the FSA and BOJ could jeopardize retention of expertise; continuous assessment of required skills and staff numbers is needed.

### Government role and interagency cooperation
- Government role:
  - The PM decides whether an event is systemic and which resolution measures to use in systemic cases, after FCRC deliberations; the PM also suspends early termination rights and triggers contractual bail-in clauses, writing off AT1 and Tier2 instruments.
  - When the National Diet adopted legislation, these powers were delegated to the FSA Commissioner; the DIA allows delegation to be reassigned to the PM by Cabinet Order (which has occurred).
- Recommendation: To ensure FSA operational autonomy as lead resolution authority, limit political office involvement in firm-specific decisions to cases where taxpayer money is at risk; consider redelegating powers back to the FSA Commissioner.
- FCRC and domestic cooperation:
  - The FCRC has been activated only for imminent banking failures and crises; its mandate includes crisis readiness.
  - Recommendation: Undertake resolution policy and crisis readiness work under the FCRC auspices for high-level accountability and collective readiness; consider a subcommittee for crisis readiness that includes the DICJ (currently not included) and could be chaired by the FSA.
  - Continue informal and functional interagency engagements (e.g., FSA–DICJ, FSA–BOJ) alongside collective work through the FCRC.

### International cooperation
- The FSA and BOJ actively participate in FSB Resolution Steering Group work and CMGs for Japanese G-SIBs and one D-SIB, and in global/regional CMGs for nine foreign G-SIBs with operations in Japan.
- Recommendation: JFAs should allocate more resources to deepen cooperation and coordination arrangements for crisis readiness and management with key regional and global countries.

### Resolution funding and loss-absorbing capacity (LAC)
- TLAC and LAC status:
  - Japan’s TLAC requirements apply to the four SIBs for which the FSA undertakes resolution planning; requirements for external and internal TLAC were announced in April 2018 and introduced in March 2019.
  - According to the FSB’s July 2019 review, Japan’s TLAC regime complies with the FSB TLAC Standard including certain exceptions.
  - The TLAC requirements apply to the three G-SIBs since March 2019 and to one D-SIB since March 2021.
  - According to the JFAs, all four SIBs meet both external and internal TLAC requirements with no funding gap.
- Recommendation: More firms should maintain a minimum LAC in addition to regular capital requirements; LAC requirements should follow the expansion of the RRP perimeter, particularly including banks with insured deposits over and above readily available funding in the DIF. These requirements should be calibrated to each bank’s resolvability needs.
- Benefits: An expanded LAC perimeter would improve resolvability and reduce the DIF’s exposure, making potential resolution measures less costly for taxpayers.

### Official financial support arrangements and limits
- DICJ role:
  - The DICJ is the main capital provider and the primary liquidity provider in resolution.
  - Capital support (equity) from the DICJ would render it partial owner; full ownership follows nationalization.
  - The DICJ should develop policies and procedures to ensure shareholdings are managed at arm’s length.
- Liquidity support:
  - The three resolution regimes give the DICJ broad authority to provide liquidity support to firms in resolution, except in two instances under the CMM regime (item 1 and 3 measures) where the BOJ would need to provide liquidity support to a DTI in resolution at the request of the FSA Commissioner and the Minister of Finance, based on Article 38 of the BOJ Act.
  - Before and after resolution, firms can access BOJ facilities and ELA at the BOJ’s discretion if they meet conditions; if the BOJ refuses a request under Article 38, the government would need to consider alternative resolution options.
- Funding mechanics and caps:
  - If DICJ funds are insufficient, it can borrow from banks or issue securities; for speed, the DICJ can borrow from the BOJ—with a government guarantee—and channel funds through the DICJ account at the BOJ.
  - The CMA contains about JPY 367 billion from resolution recoveries and is primarily an ex-post industry-funded resolution fund.
  - DICJ borrowing caps: JPY 19 trillion for the General Account (the DIF) and JPY 35 trillion for the CMA (funding measures under the CMM and ORM regimes). If more funds are needed, funding would have to be obtained from the government with parliamentary approval.
  - The CMA could borrow from the DICJ’s General Account (the DIF), but given DIF levels, borrowing from banks, markets, or the BOJ is more realistic; DICJ should be cautious borrowing from the DIF if this could leave the DIF financially vulnerable to honor its primary responsibility for deposit insurance.

*Source: IMF staff assessment excerpt — “20. More banks should be subjected to recovery planning requirements. Recovery planning.”*

### 35.      To minimize taxpayer losses, the authorities should adopt policies for official financial

### 35.      To minimize taxpayer losses, the authorities should adopt policies for official financial support to firms in resolution.

### Official financial support and resolution principles
- Fundamental principle: undertake resolution without exposing taxpayers to loss (KA11.6).
- Loss allocation: losses are primarily allocated to shareholders and to unsecured and uninsured creditors (KA6.4).
- Legal context: the DIA does not explicitly set protecting taxpayers as an objective for resolution measures, but nothing prevents the JFAs from adopting policies to guide future resolution funding decisions.
- Recommended approach: emulate the BOJ’s ELA Principles and ensure resolution strategies primarily allocate losses to shareholders and creditors.
- Crisis Management Measures (CMM) regime: designate as a last-resort option; increase transparency on the choice between resolution regimes.

### EMERGENCY LIQUIDITY ASSISTANCE — Institutional framework
- BOJ LLR authority: provides three types of lending under the Bank of Japan Act (BOJ Act) to prevent systemic risk by guaranteeing access to liquidity.
  - Article 33: collateralized loans for prudential policy purposes (loans against collateral from the BOJ as a whole).
  - Article 37: temporary uncollateralized loans for accidental causes resulting in an unexpected and temporary shortage of funds necessary for payment.
  - Article 38: loans under special conditions ("special loans", Tokuyu) which may be provided without collateral to maintain financial system stability at the request of the government.
- Key features (Table 2 summary):
  - Type of loan:
    - Article 33: Funds for illiquid financial institutions with no other lending alternative.
    - Article 37: Loans for temporary shortage of funds due to accidental causes and necessary to secure smooth settlement of funds among financial institutions.
    - Article 38: Special loans when there is a strong likelihood that systemic risk will materialize, at the request of the government.
  - Extension period:
    - Article 33: Up to 3 months.
    - Article 37: 1 month (maximum).
    - Article 38: Not pre-determined.
  - Eligibility criteria:
    - Article 33: Financial institutions that hold an account and a loan agreement with the BOJ.
    - Article 37: Stipulated by law, encompassing deposit-taking institutions, securities companies, securities finance companies and money market brokers.
    - Article 38: No constraints.
  - Collateral requirement:
    - Article 33: Same as of market operations.
    - Article 37: None.
    - Article 38: None.
- Article 33 specifics:
  - Typically granted at the BOJ’s discretion for up to three months to solvent financial institutions that experience a funding shortage and lack alternative lending sources.
  - Eligible counterparties include banks and NBFIs that hold a current account at the BOJ and have entered into loan contracts with the BOJ.
  - Collateral framework currently same as open market operations (see Annex I).
- Article 37 specifics:
  - Temporary uncollateralized loans for up to a month when unforeseen shortages in payment funds arise due to accidental causes (e.g., earthquakes and cyberattacks).
  - Conditions and procedures are decided independently by the BOJ and are not publicly disclosed.
  - Eligibility criteria stipulated in a Cabinet Order and encompass DTIs including foreign bank branches, securities companies, securities finance companies, and money market brokers.
- Article 38 specifics:
  - Special loans at request of the FSA Commissioner and the Minister of Finance when systemic risks may arise.
  - BOJ Policy Board independently determines acceptability of requests based on four ELA Principles:
    - (i) there must be a strong likelihood that systemic risk will materialize;
    - (ii) there must be no alternative to the provision of central bank money;
    - (iii) all responsible parties are required to take clear responsibility to avoid moral hazard;
    - (iv) the financial soundness of the BOJ itself should not be impaired.
  - BOJ decides on provision, interest rates and procedures; Article 38 does not specify eligible institution types and an institution may not necessarily be solvent.
  - Recommendation: BOJ policies should explicitly limit Article 38 ELA to solvent institutions or to institutions expected to become solvent under a credible and timebound recapitalization plan.
- BOJ foreign currency ELA:
  - BOJ can extend loans in foreign currency by utilizing (i) part of its foreign currency-denominated assets (for US dollars) and (ii) currency swap agreements with four central banks (recent extensions listed).
- Collateral haircuts and levels: publicly available and subject to yearly review and adjustment.

### Increasing public disclosure
- Gap: solvency requirement and eligibility criteria for ELA could be better disclosed in English in the published principles.
- Benefit: improved disclosure would better guide market expectations and enhance credibility and accountability of the ELA framework.

### Mitigating moral hazard
- Joint action: BOJ and FSA should strengthen safeguards to reduce firms’ reliance on ELA.
- Public stipulation: ELA under Articles 33 and 37 should be clearly stated as conditional, discretionary, and granted basically at a specific margin above the policy rate.
- Interest rate guidance:
  - ELA interest rates should be sufficiently high to motivate institutions to seek alternative funding sources, yet not so high as to exacerbate financial pressures.
  - Exception: interest rates for ELA under Article 37 could differ as operational disruptions are distinct from liquidity management failures.
- Monitoring and conditionality: institutions receiving ELA should be under FSA and BOJ’s intensive monitoring; operational restrictions and progressively tightening conditions could be applied if repayment progress is inadequate.
- Transparency: general conditions and restrictions should be made public to reduce moral hazard.

### Protecting the BOJ’s financial soundness
- Collateral insistence: BOJ should make operational efforts to request as much collateral as needed when providing ELA under Articles 37 and 38, despite statutory exceptions for uncollateralized loans.
- Operational support: implement an operational approach to help firms prepare and mobilize collateral, e.g., conducting ELA simulations with eligible firms; consider accepting a wide range of collateral at BOJ discretion.
- Safeguards for un(der)collateralized ELA:
  - Potential measures to protect BOJ balance sheet include: preferential status for the BOJ in creditor hierarchy and arrangements with the government to cover potential losses on ELA operations.
  - Examples: provision and fully suspending or partially reducing the distribution of profits to the national treasury to strengthen BOJ reserves for potential ELA losses.
  - Imperative: ensure none of these measures undermine the BOJ’s discretionary powers.
- Priority: requesting collateral is essential and should be primary before additional safeguards.

### Expanding ELA eligibility
- Current gap: key systemic NBFIs are currently ineligible under the BOJ Act despite the principle that a wide range of firms could be eligible.
- Priority expansion: extend Article 33 coverage to systematically important NBFIs, prioritizing CCPs given their pivotal role in market stability.
- Rationale: direct emergency liquidity provision to a CCP could be more cost-effective and timely than supplying ELA to CCP counterparties when a CCP is the source of liquidity problems.

### DEPOSIT INSURANCE — Findings and recommendations
- Coverage and awareness:
  - DICJ estimates: about 63 percent of deposit amounts and the balance of 98 percent of accounts is insured.
  - DICJ coverage: protects general deposits up to JPY 10 million (about USD 67,000) plus interest, per depositor, per bank.
  - Exclusions: overseas branches of Japanese banks and branches in Japan of foreign banks; foreign-currency deposits, offshore market accounts, anonymous accounts, deposits from the BOJ and insured institutions.
  - 2022 survey: 60.5 percent of the population is aware of deposit insurance.
  - Recommendation: continue public awareness efforts to further increase this percentage, ensuring gender and generational balance.
- DIF target and levels:
  - 2022 DICJ Policy Board change: increased the target level of the DIF from JPY 5 trillion to 0.7 percent of insured deposits capped at JPY 7 trillion.
  - Premiums: determined by the Policy Board to ensure long-term financing needs; changes require authorization from the FSA Commissioner and the Minister of Finance.
  - Rationale for target: replaced absolute JPY 5 trillion target with 0.7 percent after Study Group advice; expected to translate to about JPY 7 trillion in fiscal year 2031.
  - Current DIF holdings: about JPY 5.3 trillion (about 0.6 percent of insured deposit).
  - Commentary: considering potential recoveries is sensible, but immediate outflows in weeks/months after a DTI failure matter; neither current funds nor the target level are sufficient to cover payouts if the largest DTI without a resolution plan or the largest non-systemic DTI would fail.
  - Ideal target: DIF should hold enough funds to cover prompt payouts if the largest 2–3 non-systemic DTIs would concurrently fail.
  - Interim review: DICJ plans an interim review of target level in about five years and should consider expanded RRP perimeter when determining a new target ratio or higher cap.
  - Operational commitment: DICJ should publicly commit to starting payouts within seven business days after a DTI fails to strengthen depositor confidence.
- DICJ governance and conflicts of interest:
  - Policy Board composition: Governor, up to four Deputy Governors, and up to eight non-executive external members; currently 13 people including 5 active bankers.
  - Powers: decide DICJ budget, funding plans, insurance premiums—subject to FSA Commissioner and Minister of Finance approval.
  - Concern: active bankers are involved in market-sensitive resolution decisions.
  - Recommendation: active bankers should not sit on the DICJ Policy Board; given one-year tenure for non-executive members, a board without active bankers could be achieved within a year.
  - Tenure recommendation: terms for executives (now two years) and non-executive members (now one year) should be longer than the political cycle to reduce political dependencies.
  - Removal risk: Governor or Deputy Governor can be removed if the PM “finds that it is inappropriate for the officer to remain in office,” a lack of specificity that could enable arbitrary dismissals.

### Annex I. BOJ Collateral Framework — Key facts and principles
- As of December 2023:
  - Total face value of collateral accepted by the BOJ: JPY 158 trillion.
  - Collateral composition:
    - Bonds, including treasury discount bills: 51.9 percent.
    - Loans on deeds: 22.4 percent.
    - Beneficial interests of a trust in housing loans: 25.7 percent.
    - Others: 0.03 percent.
- Historical shift:
  - Until April 2016 more than 60 percent of collateral typically comprised bonds; holdings of eligible collateral decreased as JGB purchases progressed under QQE.
  - BOJ began accepting beneficial interests of a trust in housing loans as eligible collateral; trust in housing loans now constitute around 25 percent of collateral.
- BOJ principles for eligible collateral:
  - (i) maintain soundness of BOJ’s assets;
  - (ii) ensure smooth BOJ business operations and efficient use of collateral;
  - (iii) utilize market information to evaluate creditworthiness and calculate haircuts (ratings by rating agencies and market prices).
- Eligibility standard: collateral should be denominated in Japanese Yen, issued in Japan and governed by Japanese law.
- Foreign collateral: BOJ publishes general guidelines for foreign bonds denominated in foreign currencies that can become eligible when necessary for market stability or money market operations.
- Pricing and margins:
  - Pricing depends on remaining maturity and is determined by applying margins to market prices, face values, or outstanding principal balances.
  - Margin derivation:
    - I. For collateral with an obtainable market price: margins consider historical fluctuations in market price over the duration needed for BOJ to enforce rights.
    - II. For collateral without an available market price: margins determined based on estimated price fluctuations over the time required for BOJ to exercise rights.
    - III. Margins from I and II adjusted when necessary to ensure consistency in BOJ’s margin table in light of creditworthiness and marketability.

*Source: IMF staff technical note (excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1jpnea2024007.pdf_