Roles & Functions of Co

Co--operative Banks in Japan

- The case of Shinkin Banks -

May 27, 2008

EIICHI MATSUZAKI
Shinkin Central Bank Research Institute
 1. About Cooperative Bank
- Cooperative Bank is the not-for-profit corporation established for the people who are
hard to raise funds from banks, such as small-and-medium-sized-enterprises and
individuals, mainly because of lack of their credit.
- Cooperative bank is managed democratically based on the mind of mutual help by its
members.
Cooperative Principles - ICA (International Co-operative Alliance)
l 1: Voluntary and Open Membership
- without gender, social, racial, political or religious discrimination
l 2: Democratic Member Control
- controlled by members democratically, one-member one-vote
l 3: Member Economic Participation
- member equitably contribute and has right to the capital
l 4: Autonomy and Independence
- basically self-help organization
l 5: Education, Training and Information
- provide education or training to their members
l 6: Co-operation among Co-operatives
- Co-operatives co-operate to work effectively
l 7: Concern for Community
- work for the sustainable development of their communities
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 2. Cooperative Banks in developed countries

n Europe: Germany - Volksbank and Raiffeisenbank

France - Credit Agricole, Credit Mutuel, Banques Populaires

Netherlands - Rabobank
Italy - Banche Popolari, Federcasse
Austria - Raiffeisenbank, Genossenschaftsbank
Spain - Cooperativas de Credito
U.K. - The Cooperativebank
(Stock based subsidiary of Cooperative Wholesale Society)

n North America: U.S.A. - Credit Unions, Mutual Banks

Canada - Caisse Populaires (Desjardins), Credit Unions

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 3. Cooperative Banks in developed countries 2
No. of No. of
Country Groups Asset Deposit Loan Membership Customer
Banks Branches
(Bil. Yen)
Japan Shinkin Banks 118,004 109,221 62,670 292 7,777 9,191,407 n/a
(Mil. EUR)
Germany Volksbank/Raiffeisenbank 909,179 531,860 486,158 1,290 14,122 15,724,909 30,000,000
Union National de
Spain 80,548 80,548 63,838 83 4,715 1,799,474 9,715,710
Cooperativas de Credito
Credit Agricole 1,170,000 398,000 455,000 41 9,100 5,700,000 21,000,000
France Credit Mutuel 436,400 149,000 188,200 18 5,020 6,700,000 14,200,000
Banques Populaires 250,404 94,800 121,000 22 2,692 2,800,000 6,600,000
Banche Popolari 365,200 254,100 243,000 90 7,593 1,070,000 8,050,000
Italy
Federcasse 126,400 102,700 84,800 439 3,617 776,224 1,463,584
Netherlands Rabobank 506,234 278,095 186,459 248 1,575 1,551,000 9,000,000
Oesterreichische
176,008 97,694 101,254 574 1,611 1,655,153 3,600,000
Raiffeisenbanken
Austria
Oesterreichischer
33,773 22,054 17,617 68 611 650,000 700,000
Genossenschaftsverband
Krajowy Zwiazek Banków
Poland 8,786 6,551 4,631 588 3,597 2,500,000 10,500,000
Spóldzielczych
Finand OKOBANK 52,845 24,200 34,800 238 680 1,133,000 3,100,000
UK The Co-operative Bank 16,452 12,240 10,998 n/a 119 n/a 2,200,000

as of the end of fiscal year 2005 (Dec.2005 (Europe), Mar. 2006 (Japan))
(Source) European Association of Co-operative Banks, Shinkin Central Bank

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 4. Overview of Japanese Banking Institutions

Category Group Institutions offices

Banks - City Banks, Regional Banks, Regional Banks 2, Trust Banks, other 126 13,617
Cooperative Banks - Shinkin Banks (Credit Associations) 292 7,777
- Shnikin Central Bank 1 13
- Shinkumi Banks (Credit Cooperatives) 174 1,901
- National Association of Credit Cooperatives 1 9
- Labor Banks 13 683
- The Rokinren Bank 1 1
- Agricultural Cooperatives 872 10,696
- Norinchukin Bank 1 35
Total 1,355 21,115
Specialized Institutions - The Shoko Chukin Bank 1 99
(Governmental) - Development Bank of Japan 1 10
- Japan Bank for International Cooperation 1 2
- National Life Finance Corporation 1 152
- Housing Loan Corporation 1 12
- Agriculture Forestry and Fisheries Finance Corporation 1 22
- Finance Corporation for Small Business 1 61
- Finance Corporation for Municipal Enterprises 1 1
- Okinawa Development Finance Corporation 1 6
Total 9 365
Postal Savings Japan Post 1 24,631

as of the end of March, 2006

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 5. Overview of Japanese Banking Institutions 2

lDeposit and Loan Book (Billion Yen)

Category Group Deposit Loans
Share Share

Banks - City Banks 250,762 26.3% 189,688 29.5%

- Regional Banks 188,891 19.8% 140,355 21.8%
- Regional Banks 2 54,126 5.6% 41,256 6.4%
- Other 40,369 4.2% 39,458 6.1%
Subtotal 534,149 56.0% 401,758 62.5%
Cooperative Banks - Shinkin Banks (Credit Associations) 109,221 11.4% 62,670 9.7%
- Shinkumi Banks (Credit Cooperatives) 15,943 1.6% 9,307 1.4%
- Labor Banks 14,477 1.5% 9,709 1.5%
- Agricultural Cooperatives 78,865 8.2% 21,318 3.3%
Subtotal 218,506 22.9% 103,004 16.0%
Specialized Institutions (Governmental) - - 137,171 21.3%
Postal Savings Japan Post 199,922 20.9% - -
Total 952,577 100.0% 641,933 100.0%

as of the end of March, 2006

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 6. Strategic map of banking segments

Large
Strategy （Cost effective mass products）
Nationwide n Low cost banking channel
Mega-bank （Telephone・PC・ATM・Instore）
n High profitable transaction（Private Banking）

Scale Strategy（Regional concentration）

Regional Bank nMaintain leading position in each region
nProfitability from high share and fame in the region

Strategy（Local concentration）
n Close relationship with customers
Shinkin Bank
n Value added service
n Commitment to the community
Small

Low Local Concentration High

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 7. Importance of Cooperative Banks
n The importance of cooperative banks is increasing in the recent economic condition,
as competition in large commercial banks have been severe and improving
management efficiency is being more important for commercial banks.
l For SMEs or individuals, loan is small and disperse, then lender diversity is important.
l Regardless of economic conditions, steady supply of funds for SMEs and individuals, who
are essential for national economic growth.
l Cooperative banks have to be sensitive about its members' needs because of their nature.
As not for profit entity, member benefits should be primarily preceded. It is said that
cooperative banks are more suitable for community finance.

Value of cooperative

n Detailed response for user/member （based on close relationship with community）

n Providing financial service based on the long-term mutual prosperity Shinkin Banks

Value of SME specialized bank

n Granularity of lending for SMEs.

n Steady supply of funds for SMEs, regardless of economic conditions

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 8. Brief History of Shinkin Banks

○1867: The Meiji Restoration ended feudalism → Start modern industrialization

↓
Core economic policy = Capital concentration to the military heavy industries
↓
Financial starvation in farmers and merchants → Necessity to dissolve financial disclusion

○1900: Establishment of the Industrial Union Act, and birth of Credit Cooperative as legal entity.
(Shinkumi Bank)

○1917: The Urban Credit Cooperative Act → Approval of taking non-member deposit

○1951: The Shinkin Bank Act → Separate Shinkin Bank from Shinkumi Bank legally.
↓
- The difference between Shinkin and Shinkumi is determined mainly by the range of non
member transaction.

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 9. Shinkin Banks all across Japan

292 Shinkin Banks

Hokkaido (25)
7,777 Branch/Office
Total Deposit \109Trillion

Hokuriku (18)

Kinki (33)

Chugoku (27)

Kyushu (29) Tohoku (33)

Kanto (51)

Shikoku (11) Tokai(41) Tokyo Met. (23)

Okinawa (1)
(As of the end of Mar. 2006)
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 10. Enlargement of Shinkin Banks
Total Deposit Total Lending
Bil. Yen)
(Mil. Yen Bil. Yen)
(Mil. Yen
110,000 80,000

70,000
90,000

60,000
70,000

50,000

50,000
40,000

30,000 30,000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Membership
('000)
9,500
l Total deposit: Continuously increasing, except
9,000
for the fiscal year 2002.(by partial withdrawal of
deposit protection)
8,500
l Total lending: Peaked in 1999 and reversed and
8,000 increased slightly 2006.

7,500
l Membership: Continuously increasing but growth
rate slowed.
7,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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 11. Breakdown of Customers

1. Breakdown of Borrower 2. Corporate Borrower

Other
corporate
6.3%
Individual Services
31.6% 19.6% Manufacturing
Corporate 19.2%
65.1%
Construction
14.3%
Real Estate Wholesale
Municipal 24.6% retail trade
16.0%
3.4%

3. Breakdown of Depositor
l Borrower: Lending for small and medium-sized
FI
Public
1.4%
Corporate enterprises reaches to around 65%. The great
2.0% 16.7% portion of lending for individuals is housing loan.
l Corporate classification: Industries of corporate
borrowers diversified widely. Real Estate (24.6%),
Individual Services(19.6%), Manufacturing(19.2%) are the
80.0%
largest.
l Depositor: Individual depositors accounted about
80% of total amount.

as of March 31, 2006

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 12. Reorganization of Shinkin Banks
lChanges of number of Shinkin Banks and their offices

500 No. of offices (right scale) 9,000

8,673 8,638
8,599 8,643 8,668
8,454 8,524 8,480
8,400
8,371
8,263 8,500
450
8,059
7,879
435
428
7,777 8,000
400 421 416 410
401 396
386 7,500
350 371
349 7,000
No. of institutions (left scale) 326
300
306 6,500
298 292

250 6,000
93 94 95 96 97 98 99 00 01 02 03 04 05 06

No. of merger 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
transactions
7 5 8 4 6 8 3 6 12 16 20 14 9

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 13. Differences in statute and regulation
(Between Shinkin, Shinkumi and Commercial Banks)

Shinkin Bank Shinkumi Bank Commercial Bank

Legal Basis Shinkin Bank Act Law on the Cooperative Association of Small Banking Act
and Medium Enterprises
Mission To smooth the finance to SMEs and residents To improve member's economic status with Financial business for companies and
in the community mutual assistance individuals
Organization Cooperative not for profit organization Cooperative not for profit organization Stock company for profit. Adopting one-
capitalized by member contribution. Equality of capitalized by member contribution. Equality share one-vote principle, Voting rights are
member status is secured by one-member of member status is secured by one-member distributed according to number of shares
one-vote principle. one-vote principle. amount.
Business Area Substantially restricted Substantially restricted No restriction
Member (1)Residents (1)Residents None
Qualification (2)Owners of offices (2)Owners of offices
(3)Workers (3)Workers
:within registered business area :within registered business area

【Company Scale Restriction】 【Company Scale Restriction】

Less than 300 employees or 900 million yen Less than 300 employees or 900 million
in capital yen in capital (Depend on type of business)

Business scope Deposit taking → No restriction Deposit taking → Basically only members No restriction
Lending → Basically only members are are eligible. (Non member deposit can
eligible. There is some exception of be taken less than 20% of total deposit.)
lending for non-member Lending → Basically only members are
eligible. There is some exception of
lending for non-member
Tax Preferential Preferential Ordinal

Supervisory Financial Services Agency (FSA) FSA FSA

Authority

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 14. Regulation for Shinkin Bank

n Business line is almost same as Commercial Banks

《Lending》 Basically only members are eligible for borrower.

- Non-member loan exception: 1. Loan collateralized by deposit
2. Lending to former corporate member (disqualified
by scale restriction)
3. Small amount (less than 7 million Yen) loan
4. Loan to municipalities
5. Loan to Local Housing Supply Corporations
6. Loan to Financial Institutions
《Deposit》 No restriction.
《Subsidiary》 Shinkin Banks have not been permitted to establish trust, securities or insurance
subsidiaries.
Only central organization (Shinkin Central Bank) can establish these subsidiaries.

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 15. Regulation for Shinkin Bank 2

nCapital policy restriction

- Regulations about share capital and shareholder of Shinkin Bank are far stricter than Commercial
Banks.
⇒In exchange for tax or other preferences

Shinkin Bank Commercial Bank

Shareholder's Rights Self-Profit, Profit Sharing Self-Profit, Profit Sharing
Voting Rights One Member One Vote One Share One Vote
(Democratic control) (Stockholder equality)
Shareholder qualification Member eligible None
Transfer Share Only member eligible Free
(by face value) (by market price)
Issuing Share Only by face value Free
Profit Capitalization Prohibited (Only reserve) Possible
Retirement of Shares Prohibited Possible
Treasury Stock Prohibited Possible

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 16. Tax Preference for Shinkin Bank
Type of Tax Shinkin Bank
Corporation Tax 22% to taxable income
Property Tax for 50% reduction of taxation basis
commercial real estate
Business Tax Marginal tax rate
-Taxable income less than 4 mil
Yen will be applied 5%.
-Taxable income exceeding 4 mil
Yen will be applied 6.6%.
Business Office Tax 50% reduction of taxation basis
Stamp Tax -Free
-Deposit book -Tax (200 Yen/Cert.)
-Deposit certificate (If face value of a certificate is
-Receipt less than 10,000 Yen: free)
-Share Certificate -Tax (Specific Duty)
(Issued for member: free)
-Free
Registration and License -Tax 90,000 Yen
Tax on establishment of an office.
(excl. Head Office)
Commercial Bank
30% to taxable income
Reduction is not applied.
Marginal tax rate
-Taxable income less than 4 mil
Yen will be applied 5%.
-Taxable income exceeding 4 mil
Yen and less than 8 mil Yen will
be applied 7.3%.
-Taxable income exceeding 8 mil
Yen will be applied 9.6%.
Reduction is not applied.
-Tax (200 Yen/Book)
-Tax (200 Yen/Cert.)
-Tax (Specific Duty)
-Tax (Specific Duty)
-Tax 150,000 Yen
on establishment of a branch.
-Tax 90,000 Yen
on establishment of a non-
branch office.
Legal Basis
-Art. 66 of Corporation Tax Law
-other specific law
-Art. 349 sec. 3 of Local Tax Law
-Art. 72 sec 22 of Local Tax Law
-Art. 40 of Local Tax Law
additional rule
-Art. 701 sec 41 of Local Tax Law
Stamp Tax Law
-Attached table 1 Sec.18
-Attached table 1 Sec.8
-Attached table 1 Sec.17
-Attached table 1 Sec.4
Registration and License Tax
Attached table 1 Sec.24
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 17. Governance system of Shinkin Banks
n Management Structure of Shinkin Banks
Member (Shareholder)
Election
Representative
Meeting (Optional)
Assignment
Board of Directors
n Regulation of Directors
l In Shinkin Bank Act, a duty of installation of a
general meeting is imposed as the highest
organization of control. (One Member One
Vote)
Assignment l Since Shinkin Banks have so large
Auditor membership that they may be hard to hold
general meeting, installation of a
Audit
representative meeting instead of a general
meeting is optionally permitted.

Shinkin Bank Commercial Bank

Number of directors 5 or more 3 or more
Non-member (external) Directors More than 2/3 directors must No restriction
be assigned from members.
Number of auditors 2 or more 3 or more
Non- member (external) Auditor More than 1 More than 1

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 18. The Characteristics of Cooperative Banking System 1
n The existence of Central Bank facility

- To improve investment and refinance opportunities of local cooperative banks, central

institution might be established to provides with a link to money market or central bank for their
liquidity.
- Central institution is usually capitalized by local banks' shareholdings.
- There is the case that central institution supervises local banks as the delegation of
authorities.

lExample (Japanese & German cooperative banking system)

Japan (Shinkin Banks) Germany (Volksbank/Raiffeisenbank)
○Providing liquidity
Shinkin Central Bank DZ Bank (Central Bank)
○Financial products
○Providing liquidity
○Mutual Support Program BVR (National Association)
○Shareholding ○Financial products
○Shareholding ○Lobbying
(Membership) (Membership) ○Managing Protection scheme
Nat'l Assoc. of Shinkin Banks
○Group-wide Strategic Planning

7 Regional Association
○Lobbying
○Auditing
○Consulting
292 local Shinkin Banks 1,290 local Cooperative Banks

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 19. The Characteristics of Cooperative Banking System 2
n Mutual Support Mechanism
- Regardless of differences in scale and scope, cooperative banks in countries may have mutual support
mechanisms so that any local cooperative bank that is in difficulties should be supported to avoid losing the
creditworthiness of the group.
- Some groups have legally prescribed systems. (France, the Netherlands)
- "Cross-Guarantee Mechanism" is structure to provide mutual guarantee for liabilities of entities within
the group. (central institution, local cooperative banks and subsidiaries)
- Other groups have the mutual support systems running privately. (Japan, Germany)
- In most cases, scope of guarantee (protection, support) is limited. (for the liabilities due to customers)

lExample (Dutch & German system)

Germany (Private Managed)
Netherlands (Rabobank: Legally prescribed)

Local Banks Share-

BVR
Rabobank Nederland
holding Protection Scheme
Local Bank (Central Bank)
Guarantee Fund
Mutual Guarantee Bond
Guarantee Share- Mutual
holding Guarantee
Funds
Mutual Contribution Provision of
Guarantee Guarantee
Institutions within group
Local Bank Local Bank Subsidiaries
Mutual ○Volksbank and Raiffeisenbank
(Insurance, Lease, AM )
Guarantee ○Central bank (DZ Bank, WGZ Bank)
○Subsidiaries

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 20. Shinkin Central Bank
n In 1950, Shinkin Central Bank (SCB) was established by all Shinkin Banks' contribution for
shareholding as the central institution for Shinkin Banks.
n SCB plays dual roles as a central bank for Shinkin Banks and an individual financial institution. At
the end of fiscal year 2004, SCB has ranked the 6th largest in Japan and 73th worldwide.
(reference, "The Banker" Jul. 2006)

Shinkin Banks (292: March, 2006)

Membership, Shareholding

Shinkin Central Bank Stock Market

Issuing Preferred Shares

n The SCB issues preferred shares. Preferred shares are issued to complement members' common
shares and listed on the Tokyo Stock Exchange in 2000.
n Preferred shares carry no voting rights at the general meeting, in this regard, voting rights are
equally distributed to every member Shinkin Banks. (One Member One Vote)

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 21. Functions of Shinkin Central Bank

Role as a central bank for Shinkin Banks

lEffective investment of funds deposited from Shinkin Banks

lCentralized function of clearing and settlement for funds, foreign exchange and bonds of Shinkin Banks.
lSupporting Shinkin Banks' operation: 1. Lending to member disqualified corporate
2. Introducing innovative financial products
3. Advisor for each Shinkin's operations (revitalization of towns,
turning around for customer SMEs, etc.)
lImproving credit of Shinkin Bank - Shinkin Bank Management Reinforcement System

Role as an individual financial institution

lComprehensive financial service provider - deposit taking, lending, remittance and other additional
operations
lRegional Financial Institutions - Lending to municipal and related entities, local development projects
lOne of the largest institutional investors in Japan

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 22. Support for Shinkin Banks

FY2003 FY2004 FY2005

Shinkin Bank Management Reinforcement System

Management Consulting 92 92 82

Capital reinforcement Number of institutions 31 31 32

Balance \223.9 bil. \238.6 bil. \253.0 bil.

ALM support 53 69 47

Securities investment and portfolio analysis 114 143 132

Support for regional development 3 cases 1 cases 5 cases

Support for the improvement of management at SMEs 8 cases 1 cases -

(unit without especially mentioned means number of institutions)

n ALM support: Providing comprehensive and detailed advice, including basic approaches to risk management of the
overall assets and liabilities of a Shinkin Bank and methodologies for developing ALM system.
n Securities investment and portfolio analysis: Suggestions on securities investments and risk management
n Support for regional development: SCB helps Shinkin Banks play a leading role in regional development and the
revitalization of local shopping area in their communities.
n Support for the improvement of management at SMEs: Support for better management at Shinkin Banks' customer
SMEs

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 23. Shinkin Bank Management Reinforcement System
n Securing the soundness of Shinkin Banks in order to maintain and improve the credit
worthiness of the industry, the Shinkin Bank Management Reinforcement system was founded
in 2002, based on the agreement of Shinkin banks, National Association of Shinkin Banks, and
Shinkin Central Bank,
n Shinkin Bank Management Reinforcement System consists of 3 steps as " Management Analysis", "Management Consulting" and
"Capital Reinforcement"
1. Management Analysis :
Objective analysis of the business conditions based on the management data submitted from Shinkin Banks.
2. Management Consulting:
Depend on the business condition, consultation program of management and individual issues will recommend.
3. Capital Reinforcement:
Capital injection by subordinated loan with being submitted business revitalization plan and conducting a feasibility survey

Nat'l Association of Shinkinbanks

Agreement

1. Management Analysis
Shinkin
Shinkin
Central 2. Management Consulting
Banks
Bank
3. Capital Reinforcement
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 24. Challenges of Japanese Cooperative Banks

l Pressures for change in nature of cooperatives

・Based on member mutual finance, there is a limit in scale, organizational efficiency.

・Deposit taking from non-member

→ Being similar in operation with commercial banks, cooperative philosophy only remains in
lending.

・ Change of accounting standards

1. IAS announced that members' capital in cooperative banks should be accounted to be

"debt nature". (IAS 32)

2. Merger between Shinkin banks can be accounted by "Pooling of Interest" method.

However, As of December 2005. introducing "Purchase" method to cooperative merger is
under consideration at IASB and FASB. (IFRS3)

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 25. Challenges of Japanese Cooperative Banks 2

lCooperative management
・ As cooperative banks, management concepts essentially differ from stock based
commercial banks.

－As not-for-profit organization, the primary target of cooperative banks is

improving economic welfare for members. Member objective is usage of
financial services (not for dividend).

－In real, many Shinkin Banks are issuing year-end dividend.

－Income gain for member shareholdings (No capital gain)

Ex) Cooperative Dividend (Rabobank: the Netherlands)

Instead of dividends to be paid for shareholders, cooperative dividend is paid as

investments or disbursements in order to improve the economic, social and cultural
environment, without yielding any direct returns. Rabobank uses its cooperative
dividend to invest in its clients and their local environments.

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 26. Subjects of local based banks

Stability of financial system Transform of financial system

Bad loan problem Disintermediation
Financial Inspection Manual Over-banking

Global standards Local Banks Withdrawal of deposit protection

Basel Ⅱ Finance for SMEs, individuals Liquidation of deposit
Market-value accounting Shortening of duration

Deterioration of local economy Existence of public finance

Decrease in birthrate Postal savings
Delay in industrial transformation Public finance for SMEs

Maintain credit Worthiness Strengthen management Support for local development

Expansion of customer base Enhancement of risk control

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