Outline Of Financial System Stability

Money plays an essential role and is indispensable for economic activities. The overall structure of receipt and payment as well as lending and borrowing of money is called the financial system. The financial system is composed of various financial markets and numerous financial institutions.

Money plays an essential role and is indispensable for economic activities. The overall structure of receipt and payment as well as lending and borrowing of money is called the financial system. The financial system is composed of various financial markets and numerous financial institutions.

"Financial system stability" refers to a state in which the financial system functions properly, and participants, such as firms and individuals, have confidence in the system.

To contribute to the maintenance of financial system stability, the Bank conducts on-site examinations and off-site monitoring, and acts as the lender of last resort to provide liquidity as necessary.

On-Site Examinations and Off-Site Monitoring

Maintaining the sound management of financial institutions is an important prerequisite to ensure financial system stability, as they play the following important roles. They serve as part of payment and settlement systems for the transfer of funds and securities. In addition, they serve as financial intermediaries to allocate funds and risks among individuals and firms by extending loans or buying securities with funds that they receive as deposits.

The Bank assesses the condition of business operations, risk management, capital adequacy, and profitability of financial institutions that hold current accounts at the Bank (BOJ account holders), such as banks and securities companies, and encourages them to maintain and improve sound management. To understand their condition, the Bank conducts on-site examinations and off-site monitoring. In on-site examinations, examiners of the Bank visit financial institutions, whereas off-site monitoring is conducted through meetings and telephone interviews, and through analysis of various documents submitted by BOJ account holders. 

Provision of Liquidity to Maintain Financial System Stability

In the event that the stability of the financial system may be jeopardized, the Bank, as and when necessary, acts as the lender of last resort to maintain an orderly financial system.

The lender of last resort function refers to the provision of liquidity by the central bank through loans and other means to prevent the materialization of systemic risk, the risk that an event such as a financial institution’s settlement failure may cause disruptions to the payment and settlement systems and to the financial system as a whole (see Payment and Settlement Systems, and Market Infrastructure for details). As part of the liquidity provision function, the Bank extends uncollateralized loans, pursuant to Article 38 of the Law, and such loans are referred to as "special loans." 

Supporting Private-Sector Initiatives for a More Advanced Financial System

Sustainable economic growth requires intermediary channels for efficient allocation of funds. Through intermediary channels such as financial institutions and financial markets, funds should be efficiently channeled from depositors and investors to borrowers in need of funding to, for example, expand their business or buy a house. The role played by financial institutions and financial markets in this process is referred to as the function of financial intermediation.

To perform this function stably, financial institutions as important financial intermediary channels need to maintain sound business operations. Financial institutions need to better satisfy various financial demands of customers and enhance profitability by continually improving the ways in which they manage risks and their business operations. In addition, relevant parties need to review obsolete financial practices and regulations, as these can hinder financial institutions from fully performing the intermediation function, even if each institution maintains sound business management.

In this context, the Bank encourages financial institutions’ efforts to improve their management of risks and business operations, not only by conducting on-site examinations and off-site monitoring, but also by hosting open seminars and releasing research papers (see the Center for Advanced Financial Technology for details). 

International Involvement

The Bank works closely with foreign central banks and international organizations to prevent the outbreak or possible spread of international financial crises. It monitors various risks and participates in the formulation of international standards and guidelines.

Specifically, the Bank takes part in discussions held by the Basel Committee on Banking Supervision (Basel Committee) to work on the revision of the 1988 Basel Capital Accord and to set various guidelines for enhancing the effectiveness of banking supervision and the soundness of banks’ management. 

 

. "Bank Of Japan." . . Bank Of Japan. 1.31.08 <http://www.boj.or.jp/en/index.htm>.