Bank-Owned Security Subsidiaries in Japan: Evidence after the 1993 Financial System Reform

Abstract

Abstract One of the features of the Japanese postwar financial system is a clear division between banking and the securities business. Section 65 of the Securities and Exchange Act of 1948 explicitly prohibited banks from conducting securities business. As financial markets underwent rapid product innovations from the late 1970s, this division, along with other partitions within the banking industry (city banks, long-term credit banks, and trust banks), became a subject of discussions on deregulation. The resulting change was the Financial System Reform Act, which became effective on 1 April 1993. The law is intended ‘to promote the healthy development of financial markets through effective and proper competition and to give incentives to financial institutions to better serve their clients through the introduction of a variety of new products’ (Ministry of Finance 1994). One of the major changes under the new law is the lowering of the traditional barrier between banks and securities firms, allowing banks (securities firms) to set up their securities firm (trust bank) subsidiaries. The implementation of the law, however, was deliberately slow, and new subsidiaries were approved only gradually. Among bank subsidiary securities firms, the first three banks receiving licences were the Industrial Bank of Japan, the Long-term Credit Bank of Japan, and Norinchukin Bank. These banks established their subsidiaries on 26 July 1993. City and trust banks followed (see Table 6.1). The business activities of these bank subsidiary securities firms are still restricted in equity and equity derivative transactions.1