Competition and Risks in Financial Services: Lessons from Tokyo

The banking and securities businesses in Japan have been separated since 1948. In addition, banks are divided into specialized categories, including regular banks (corresponding roughly to commercial banks overseas), long-term credit banks, trust and banking companies, financial institutions for smaller businesses, and other types of institutions. The objectives of this policy of establishing specialized financial institutions were threefold: The first was to restrain long-term interest rates at a relatively low level and to provide an adequate flow of funds to those industries regarded as important for Japan’s economic development. To achieve this objective, a number of financial institutions specializing in long-term lending were established, while regular, commercial banks were not permitted to engage in long-term lending. The second was to assure the soundness of banks. In line with this objective, commercial banks were not permitted to enter the securities business. At the same time, interest rates were regulated, thus assuring a spread between deposit and lending interest rates. The third objective was to prevent conflicts of interest and prevent control of industry by banks through the separation of the securities and banking industries.