During the 1920s, too many banks failed. One of the important reasons for the failures was the arbitrariness of the banks. The Ministry of Finance's (MOF) bureaucrats were aware of it, and strongly advocated the need to correct this.
In 1926, the preparatory committee on the reform of financial institutions and the main committee were established. There, the introduction of the system of the joint-stock company with the auditing book rules for banks was determined. MOF's discretionary powers were introduced for the issuing of warnings. MOF's explained that because the Japanese financial system had strong regional varieties according to a multi-strata financial structure, strict adherence to legal regulations was impossible. All the committee members accepted this without objections. Based on MOF's proposals, the draft of the 1927 bank law was drawn up.
In 1927, the 52nd Imperial Diet was convened. There, MOF gave the above reasons to explain the need to regulate banks with discretionary powers in MOF hands. The draft passed the Diet, and from January 1928, the 1927 bank law went into effect.
One of the important features of the bank regulation based on the 1927 bank law is the prevention of bankers' arbitrariness by introducing organic principles with rules and procedures in bank management. Another is MOF's discretion in the issuing of warnings, which enabled MOF to take action according to each region's financial situation. Thus the regulations reflected the multi-strata and strong regional characters of the financial system during the 1920s crises. These constitute the historical nature of the bank regulation based on the 1927 bank law.
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