Appendix I

Comments From the Board of Governors of the Federal Reserve System

The Board would also note that there are significant
legal restrictions on the acquisition of an existing bank,
including any of the 13 city banks, in Japan.
This would appear

to be a major inhibition on the ability of foreign banks to
compete fully in the Japanese market, since the city banks, which
account for slightly more than half of all banking assets in
Japan, are the principal competitors for foreign banks operating
in Japan. The acquisition of Japanese banks by foreign banks
would permit further expansion of the small share of the market
that they currently have.

Arguably, the restrictions on the acquisition of a Japanese bank could be considered consistent with national treatment, since generally no financial institution in Japan may hold more than five percent of the shares of another firm, including another financial institution. (In order to allow nine foreign banks, including six U.S. banks, to establish trust banking subsidiaries in Japan in 1986, a waiver of this provision had to be given by Japanese regulatory authorities.) However, the Japanese regulatory authorities have permitted merger acquisitions of some Japanese banks by other Japanese banks.

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In your August 6, 1987, letter and in subsequent discussions with your
staff, you requested that we assess the competitive environment of the
financial markets in Japan, the United Kingdom, and the United States
and examine barriers affecting the operations of foreign firms in these
markets. Because of the high level of congressional interest in Japanese
market developments, this report focuses on the primary concerns of
major U.S. financial institutions operating in the Japanese financial mar-
kets. Our work assessing the competitive environment of the United
Kingdom and U.S. financial markets is continuing, and a report with
that information will be issued at a later date.

Japan has gradually liberalized its financial system in recent years, and U.S. and other foreign financial institutions believe that in some areas they generally receive national treatment, that is, equal opportunities to compete in the Japanese financial markets. However, in our interviews conducted in October 1987, officials from U.S. financial institutions told us that in some market areas, they still find barriers to competition and have been frustrated by their lack of access to certain Japanese market sectors. In particular, these institutions have been frustrated by (1) the lack of access to the Tokyo Stock Exchange, (2) the small role that U.S. firms maintain in the Japanese government bond market, (3) the difficulties associated with introducing some types of new financial products in Japan, such as futures and options, and (4) the fact that higher capital requirements are imposed on U.S. banks by U.S. regulators than are imposed on Japanese banks by Japan's regulators, which gives Japanese banks a competitive advantage in loan pricing.

The Japanese have recently taken steps to address these concerns by, among other actions, expanding the membership of the Tokyo Stock