Japan: Separation of Banking and Securities Business and Conflicts of Interest

Date01 January 1996
Publication Date01 January 1996
AuthorChizu Nakajima
SubjectAccounting & finance
Journal of Financial Crime Vol. 3 No. 3 International
Separation of Banking and Securities Business and
Conflicts of Interest
Chizu Nakajima
Japan introduced a new piece of legislation in
designed to reform the financial system, the
main feature of which was to ease the strict separa-
tion imposed on banks and securities companies
under Article 65 of the Securities and Exchange
Law of 1948 (SEL). The Japanese Government
identified as specific problems that would have to
be faced in allowing banks to enter into securities
business and securities companies in turn to enter
into banking, sound management, conflicts of
interest and fair competition. However, the fierce
opposition from the securities industry to the
banks being permitted to enter their lucrative busi-
ness had more to do with loss of business than
issues of investor protection.
The main reason for introducing the separation
of banking and securities business in Japan in 1948
was not to eschew conflicts of interest or as a
result of banking collapses, but for economic and
political expedience. The Government needed to
ensure a smooth flow of capital to industry and in
order to maximise this any unncessary competition
among the financial institutions was to be avoided
almost at all costs.
Japanese banks are prohibited from conducting
securities business except in certain limited cir-
cumstances under Article 65 of the SEL. This pro-
vision was modelled on the US Glass-Steagall Act,
a collective name for ss 16, 20, 21 and 32 of the
US Banking Act 1933. However, the reason for its
introduction in Japan and the circumstances in
which it was introduced differ considerably from
those of
American counterpart.
In the USA, the Glass-Steagall Act was enacted
because Congress sought to control abuses in the
financial sector by separating commercial and
investment banking after a series of bank failures
between 1929 and 1933, apparently caused by the
operation of the banks' securities affiliates. Before
the Second World War, there were no restrictions
on securities operations by banks in Japan. In the
1920s, there were widespread bank failures also in
Japan, but they were due to over-lending to closely
related clients including companies owned by the
same families as the banks rather than the
involvement in securities operations. After
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