10.6092/issn.2531-6133/6075
How should banks be regulated to avoid their failure? Banks must control the risks they take with depositors' money. If depositors lose their trust in their banks, and demand their money, the banks will fail. This article describes three legal bank regulatory systems: Contract with depositors (U.S.); a mix of contract and trust law, but going towards trust (Japan) and a full trust-fiduciary law regulating banks (Israel). The article concludes that bank regulation, which limits the banks' risks and conflicts of interest, helps create trustworthy banks that serve their country best.
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Tamar Frankel
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A Story of Three Bank-Regulatory Legal Systems: Contract, Financial Management Regulation and Fiduciary Law
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Articles & Essays
2016-08-05
2016-04-17
2016-07-19
2018-12-14
91-105
UBLR
Tamar Frankel
2016/08/05
10.6092/issn.2531-6133/6075
91
Boston University
2531-6133
1
Japan
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A Story of Three Bank-Regulatory Legal Systems: Contract, Financial Management Regulation and Fiduciary Law
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1
ARTICLES & ESSAYS                                                                    DOI 10.6092/issn.2531-6133/6075




A Story of Three Bank-Regulatory Legal Systems: Contract, Financial
Management Regulation, and Fiduciary Law


                                             TAMAR FRANKEL†




TABLE OF CONTENTS: 1. Introduction; 2. Why is the Depositors’ Trust Crucial to the
Survival of any Bank?; 3. The U.S. Banks, Their View, and the View of Their Regulators
in Maintaining the Trust of Their Depositors and Their investors; 3.1. A bit of History;
4. The Design of Banks and Their Regulation in Japan; 5. Trust-based Banking Law in
Israel; 6. Conclusion: Food for Thought.



ABSTRACT: How should banks be regulated to avoid their failure? Banks must control
the risks they take with depositors’ money. If depositors lose their trust in their
banks, and demand their money, the banks will fail. This article describes three legal
bank regulatory systems: Contract with depositors (U.S.); a mix of contract and trust
law, but going towards trust (Japan), and a full trust-fiduciary law regulating banks
(Israel). The article concludes that bank regulation, which limits the banks’ risks and
conflicts of interest, helps create trustworthy banks that serve their country best.



KEYWORDS: Banking; Trust; Regulation; United States; Japan.




                                           UNIVERSITY OF BOLOGNA LAW REVIEW

                                                   ISSN 2531-6133

                                                   [VOL.1:1 2016]

          This article is released under the terms of Creative Commons Attribution 4.0 International License


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      1. INTRODUCTION

Banks offer crucial services to society. First, they offer depositors a reliable
and safe place to deposit their money, as well as a money transfer service.
Second, they intermediate between depositors and borrowers, lending deposit
money to reliable borrowers. Banks hold, and have power over, other people’s
money. Banks intermediate between short-term lenders (depositors) and
long-term borrowers.

         Yet, by definition, these two services create a risky structure for banks.
Deposits are short-term and expect instant liquidity; loans are long-term and
undertake payment on specific dates. Depositors expect truly low risk; the
risk posed by the borrowers is likely to be higher. In addition to an inherently
risky structure, the income from depositors and borrowers may be
insufficient to cover banks’ cost of services, which may raise another source
of risks for banks. Banks attract additional capital by selling their underlying
loans in the markets, and to the extent permitted, by offering other financial
services. Banks use their profits as backups to protect themselves against
“runs,” and to reward their employees and managers.

         Most importantly, banks cannot survive without their depositors’
trust. By definition banks do not hold all their depositors’ money in cash. A
“bank run” in which more than the usual deposits is demanded by the
depositors will cause a bank to fail. To gain the depositors’ trust, banks are
subject to constraints in using their lending power. Not only the laws, but
also the public’s view and trust, are crucial to banks’ survival anywhere in the
world.

         The risks to banks cannot be evaluated without considering other
financial services that are offered by bank holding companies, under the
same roof. These are the bank conglomerates, to which the banks belong. The
conglomerates offer underwriting and brokerage, financial advisory services
and    financial   management     (e.g.   mutual   funds),    trust     services         and
securitization services, insurance and alike: a one-stop financial service.

         The financial services in Bank Conglomerates (BCs) are differently
regulated, have different cultures and face different market competition and




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need for customers’ trust to a different extent. The purpose of a conglomerate
bank is to provide its customers with all financial services. The issue, which
these conglomerates face, is how to structure an overall unified culture,
regardless of the particular laws that may govern each of their services and
regardless of the market competition by singular services.

         Because banks are crucial to both the economy and the financial
system, as well as vulnerable to failures, various countries have regulated
their banks. These regulations are designed (1) to prevent banks from making
risky loans or engaging in other risky financial activities, and (2) to protect
banks from depositors’ demands, which the banks cannot meet and could
not, perhaps, anticipate: that is, to protect banks from unexpected “bank
runs;”1 and (3) to support bank-stability in many other ways such as
providing banks with monopolies over certain services to increase their
returns.

         Like many other fiduciaries, banks hold, and have power over, other
people’s money. Banks intermediate between short-term lenders (depositors)
and long-term borrowers. To gain the depositors’ trust, banks are subject to
constraints in using their lending power. Not only the laws, but also the
public’s view and trust, are crucial to banks’ survival anywhere in the world.

         Banks are regulated differently in different countries. The regulation
is affected by the history of the countries’ financial systems, the past bank
failures which they suffered, the size of the banks, as well as their national
and internal culture. Because today most banks around the world are open to
serve most people around the world, these differences may have greater

†
 A long-time member of the Boston University School of Law faculty, she was a visiting scholar
at the Securities and Exchange Commission (1995–1997) and at the Brookings Institution (1987).
She has taught and lectured at Oxford University, Tokyo University, Harvard Law School, and
Harvard Business School. She consulted with the People’s Bank of China and lectured in Canada,
India, Malaysia, and Switzerland. A native of Israel, she served as an attorney in the legal
department of the Israeli Air Force, an assistant attorney general for Israel’s Ministry of Justice
and the legal advisor of the State of Israel Bonds Organization in Europe. She has been in private
practice in Israel, Boston, and Washington, DC and is a member of the Massachusetts Bar, the
American Law Institute, and The American Bar Foundation.
1
 See, e.g., John Morley, The Regulation of Mutual Fund Debt, 30 YALE J. ON REG. 343, at 361 (2013)
(citing RICHARD SCOTT CARNELL ET AL., THE LAW OF BANKING AND FINANCIAL INSTITUTIONS 296-307
(4th ed. 2009)) (noting that bank regulation restricts amount of debt banks may carry and
regulates riskiness of banks’ loans and other asserts); Gregory M. Gilchrist, The Special Problem of
Banks and Crime, 85 U. COLO. L. REV. 1, at 30-32 (2014) (noting role of reserve requirements and
deposit insurance in mitigating risk of runs).




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impact on many more people than the impact they had in the past. The
purpose of this article is to learn from these differences.

         All banks aim at gaining and maintaining their depositors’ and their
investors’ trust and commitment. In the last analysis, the banks will
maintain their trust by limiting their exposure to two main risks: the risk of
losing assets, and the risk of losing the depositors’ and investors’ trust. The
following three examples describe in general terms the legal systems in three
countries, designed to gain and maintain the banks’ depositors and investors’
trust.

         Like other institutions that hold other people’s money, banks hold,
and have power over, other people’s money. Their services involve risks, and
invite regulatory focus. To gain the depositors’ trust, banks are subject to
constraints in using their power. Not only the laws, but also the public’s view
and trust, are crucial to banks anywhere in the world.

         This Article offers a short review of three different legal systems that
regulate banks, and affect their culture. The three banking regulatory
versions are the laws in the United States, in Japan, and in Israel. The
descriptions focus on the principles forming the foundation of the banks’
regulation, their regulators’ attitude, and the banks’ culture. Considering the
importance of banks’ trustworthiness, this Article highlights the means by
which     banks’   culture   is   created,    and   the    means      by     which         their
trustworthiness is achieved. These means reflect the culture of the countries
in which the banks operate.

         Part one of this Article describes bank regulation in the United States.
The second part describes the design of banks and their regulation in Japan.
The third part discusses bank regulation in the Israel. In conclusion, the
comparisons offer food for thought.




    2. WHY IS THE DEPOSITORS’ TRUST CRUCIAL TO THE SURVIVAL OF ANY BANK?

Banks offer crucial services to society, but these services involve risks, and
regulatory focus. The first and foremost public service of banks is to offer
depositors a reliable and safe deposit and money transfer service. The second




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service is to lend deposit money to reliable borrowers. By definition, these
two objectives create a risky structure for banks. Deposits are short-term,
while loans are long-term. Depositors rely on the bank’s credit strength,
which might be higher than that of the banks’ borrowers. The income from
depositors and borrowers may not be adequate to fund and compensate bank
services. A bank’s failure, however, severely injures the financial system.

        Hence, in one way or another, countries have regulated banks (1) to
prevent them from making risky loans and engaging in other risky financial
activities, and (2) to protect banks from depositors’ demands, which the
banks cannot meet and could not, perhaps, anticipate: that is, to protect
banks from unexpected “runs.”2 The United States had its share of bank
failures; and in the 1930s Congress designed laws to avoid such failures in the
future.3 Other countries have been engaged in similar preventive activities
and regulations. Countries have used different legal systems and techniques
to strengthen the depositors’ trust in their banks.

        Thus, all banks are supported by laws and regulations. Some laws are
enabling bank activities (perhaps to increase their profitability), and some are
restricting bank activities (to avoid bank risk-taking and losses that might
undermine the banking system). Banks attract additional capital by selling
their underlying loans in the markets, or by offering various services and by
organizing bank holding companies, that issue securities to the public. Banks
use their profits as backups to protect themselves against “runs,” and to
reward their employees and managers.

        All banks aim at gaining and maintaining their depositors’ and their
investors’ trust and commitment. In the last analysis, the banks will
maintain the trust in them when they limit their exposure to two main risks:
the risk of losing assets, and the risk of losing the depositors’ and investors’
trust. The following three examples describe in general terms the legal
systems in three countries, designed to gain and maintain the banks’
depositors and investors’ trust.



2
  Id.
3
  See Banking Act of 1933, ch. 89, Pub. L. No. 73-66, 48 Stat. 162 (codified as amended in
scattered sections of 12 U.S.C.).




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          3. THE U.S. BANKS, THEIR VIEW, AND THE VIEW OF THEIR REGULATORS IN
            MAINTAINING THE TRUST OF THEIR DEPOSITORS AND THEIR INVESTORS

Banking law in the United States is based on the model of contractual
relationships between the banks and their depositors on the one hand and
their borrowers on the other hand. Banks borrow from depositors by contract
and lend to borrowers by contract. Contract law applies to both types of
transactions. Bank holding companies are issuing securities, like any other
business. The purpose of the distribution is to raise funds from investors
based on the profitability of the banking enterprise. Revenues are designed to
satisfy their holding companies’ shareholders, as well as their management
and employees. The bank holding company is therefore viewed like any other
holding company that owns one or more enterprises. Currently bank holding
companies hold a variety of financial services. These may include trust
services, money management services, brokerage, and underwriting.


            3.1. A BIT OF HISTORY

The United States has had its share of bank failures; and in the 1930s
Congress designed laws to avoid such failures in the future.4 These laws have
seen fundamental changes. Other countries have been engaged in similar
preventive activities and regulations. Countries have used different legal
systems and techniques to strengthen the depositors’ trust in their banks.

            Thus, with the demise of banks in the 1930s, Senator Glass and
Representative Steagall led Congress and the bank regulators to enact the
Glass-Steagall Act of 1933.5 This statute prohibited banks from engaging in
intermediation among borrowers and lenders in the markets. The statute
limited bank intermediation to linking depositors and borrowers, whom the
banks could examine and evaluate.

            In order to reduce the risk of bank intermediation and to assure
depositors, the Act provided banks not only with financial backup (Federal
Deposit Insurance Corporation) (FDIC) that offers government guarantees to



4
    Id.
5
    Id.




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deposits up to $250,000.6 In addition, the Glass-Steagall Act allowed banks to
offer trustee-services for small trusts and fill the gap that opened when trust
companies that offered these services failed. 7 Further, the Glass-Steagall Act
limited the banks issuance of securities to the markets. 8 Thus, the method of
ensuring the banks’ stability and reliability was to restrict the ability of the
banks to take risks with the depositors’ money, as they did during the heyday
of the 1920s, and to back bank deposits with government guarantees. In
addition, the Act imposed limitations on banks’ financial services. Brokerage,
underwriting, mutual funds management and investment advisory services
were outside the banks’ authorized activities. Bank holding companies’
activities and financial structure were limited as well.

         However,       underlying       the     Glass-Steagall        Act      was       the       legal
characterization of bank acceptance of deposits as contract obligations of
borrowers. Depositors obtained an IOU from their bank and banks were
treated and are treated today as borrowers. Similarly, the bank lending was
under a contract, with some additional bank rights.

         Not surprisingly, the banks’ culture in the years that followed the
1930s disaster was conservative. Many bankers served often as reliable and
independent advisers to their depositors and others. They were the ultimate
conservative borrowers.

         Bank regulators’ activities and approach reflected another aspect to
the “reliable borrower” model. Presumably, in some respects, bank
regulators, such as the Office of the Comptroller of the Currency, continued to
believe that the more profitable business banks will engage in, the less risky
banks’ business will be.            Therefore, the OCC, for example, continued to
question the Glass-Steagall Act’s limitations.




6
  See Banking Act of 1933, ch. 89, Pub. L. No. 73-66, see 8, § 12B, 48 Stat. 162, at 168-80 (current
version at 12 U.S.C. §§ 1811-1835a (2012)).
7
  See Investment Co. Inst. v. Camp, 401 U.S. 617 (1971) (holding that Glass-Steagall Act does not
prohibit bank from pooling trust assets).
8
  See Banking Act of 1933, ch. 89, Pub. L. No. 73-66, §§ 16, 20, 21, 32, 48 Stat. 162, at 184-85,
188-89, 194 (codified as amended at 12 U.S.C. § 24 (Seventh), § 78 (repealed 1999), § 377
(repealed 1999), § 378 (2012)).




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Regulators pursued their approach prior to the demise of the markets in the
1930s, and continued to press for expanding the banks’ financial services.9
Moreover, throughout the years starting with the passage of the Glass-
Steagall Act, and especially when the stock markets began to gain some of
their former halo and trust, bank regulators pressed hard to reduce and
eliminate the constraints of the Glass-Steagall Act. That pressure was finally
successful in 1999. The Act was essentially eliminated.10

        Even before the revocation of the Glass-Steagall Act, America’s banks
faced an internal conflict between lending officers, who were concerned with
the reliability of the borrowers, and the salespersons, who were concerned
with selling the banks’ loans to other banks. These sales were achieved, first,
by selling participations in large loans to other banks (“loan participations”).
The main lender remained the lender of the large borrower, but could, as
trustee to other banks, sell participations in the loans. 11

        After the demise of the Glass Steagall Act, the door was opened to
bank business in brokerage, mutual funds, and various other financial
services. That is when banks developed swaps in fixed interest rates with
variable interest rates. Then they joined the horde of lenders who pooled the
loans they held into a legal unit and caused the unit to distribute its securities
representing interests in the loans and create a market in its securities. That
process was entitled “securitization” and bears the name today.

        However, when the banks were allowed to package the loans they
made and sell them to the investors in the markets, the concern about the
reliability of the borrowers was reduced. After all, the system allowed the
banks to reduce their risks by both transferring the loans and by shortening
the loan periods, depending on how fast they could package and sell the loans



9
   For example, a bank regulator in 1916 demanded that banks be allowed to engage in insurance
business. 53 Cong. Rec. 11,001, Letter from John Skelton Williams, Comptroller, Currency, to
Robert L. Owen, Chairman & Currency Comm., Senate Bank (Jul., 1916), quoted in Barnett Bank of
Marion County, N.A. v. Nelson, 517 U.S. 25, at 35-36 (1996). In 1916 Congress allowed national
banks in places not exceeding 5,000 inhabitants to act as insurance agents or brokers. Act of
Sept. 7, 1916, ch. 461, 39 Stat. 752, at 753-54 (codified as amended at 12 U.S.C. § 92 (2012)).
10
    See Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, § 101, 113 Stat. 1338, at 134
(repealing 12 U.S.C. §§ 78, 377).
11
   See TAMAR FRANKEL, SECURITIZATION 311-521 (Ann Taylor Schwing ed., 2nd ed. 2005).




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by pooling and selling the securities of the pools in the markets. From the
point of view of the law, this process helped the banks’ financial reliability.

       In addition to securitization, banks became engaged in collecting the
payments from small borrowers (whether the borrowers were bank borrowers
or the borrowers of other lenders) and paying the collected amounts to others
(including banks) that acted as trustees to the securitization units.

       Throughout this period and later, the view of the banks of the United
States was that of lending and borrowing under contract. Banks borrowed by
contract and lent by contract. Legally, a borrower is entitled to use the
borrowed funds as it wishes, subject to constraints in the lending contract.
Banks borrowed from depositors unconditionally. They were regulated to
some extent with respect to their lending, in order to ensure that the
borrowers will repay their loans. These rules could be viewed as substitutes
for the lenders’ conditions.

       During the period of a few years before 2008, when large banks
crashed, these banks were actively engaged in the securities markets and
were under the bank holding companies’ investors’ pressure and probably
insiders as well to “perform.” That brought more risk. That caused at least to
some extent their failure. That brought to a great extent the government’s
financial “bailout”. That also brought the establishment of a high level
committee to oversee the risk level of the banks and other large financial
institutions. Thus, much has changed in the law regulating banks. What did
not change was the fundamental view of bank depositors’ rights. It remained
a contract. What did not change was the banks legal relationship with their
borrowers. This legal relationship remained contractual. The regulation of
U.S. banks did not change in the sense that they were regulated in the way
they could accept money, lend the money, or engage in other financial
services. The change focused on the level of risk which the banks may take in
any of these activities. Thus, the legal scheme relating to banks in the United
States remained the same while the changes were made in the various parts
of the scheme and the restrictions aimed at fixing the same problems that
appeared in this scheme many years ago.




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When banks’ services expand to other financial areas a legal-cultural
problem arises. For example, the advisory service to mutual funds subjects a
bank to a fiduciary relationship. This relationship conflicts with the view of
the bank as providing services under a contract. Section 15 of the Investment
Company of 1940 describes the relationship of the adviser to a mutual fund
with the fund as contractual, but the contract is subject to unusual
conditions: it cannot be transferred except under very stringent conditions,
and otherwise is eliminated. Other sections of the law impose on the adviser a
tremendous list of constraints subject to criminal liabilities. This contract is
as far from a contract under contract law as one could imagine.

       How do the bank regulators deal with these duties? It seems that they
see these duties as designed to assure the bank’s reputation (and presumably
avoid a run by the bank’s depositors or a rise in the bank’s risks-which is the
same). However, this approach views the law as increasing the banks’ risks,
which conflicts with the main purpose of bank regulation—to reduce the
banks’ risks.

       Similarly, a bank that packages its loans and sells them in the market
reduces the bank’s risks and increases its returns. From this point of view
the securitization of loans is a good thing. In addition, if the bank makes
risky loans and packages them for public consumptions, it may still do well
for the bank. Disclosure of the high risk, which the loans represent, is not
necessarily beneficial to the banks. It is not surprising that the bank
regulators allowed banks to transfer the loans destined for marketing into
subsidiaries and the value of these subsidiaries was not calculated in the level
of risk that the banks had to maintain. It was only after the 2008 crash that
banks suddenly found these loans on their balance sheets, which changed the
picture of their assets. Yet, the fact that the regulators allowed banks to make
such loans and avoid them from joining the banks balance sheets signals the
regulators’ approach. They were concerned as always with the banks’ safety
and soundness. Presumably, safety and soundness did not involve making
these loans for sale.

       In sum, bank regulation in the United States is based on the
assumption that the banks’ contract with depositors and borrowers and that




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the risk in the banks’ structure should be covered by: restrictions on risky
lending and as many and as profitable financial services as they can handle,
without, however, the full regulators burdens of those services. An overview
of the bank regulation in the United States demonstrates that nothing has
changed in this view, except the search for added sources of income and
restrictions of bank risk.




     4. THE DESIGN OF BANKS AND THEIR REGULATION IN JAPAN

Like United States banks, Japan’s banks aim at gaining and maintaining their
depositors, as well as their investors, trust and commitment. Mitsubishi UFJ
Trust and Banking Corporation offers banking as well as trust services.                          12



         A trust under Japanese law differs from a common law trust in that
under Japanese law there is no equitable ownership. A Japanese trust is
defined by statute as “an arrangement in which the owner of property rights
transfers such rights to a third party on the understanding that the transferee
will administer, manage and/or dispose of the property in accordance with
specific guidelines established by the transferor.”13

         A trust generally must be created by an agreement, rarely by a will,
and should meet statutory requirements. 14                       As there is no equitable
ownership, the trustee is the sole owner of the trust assets, subject to
restrictions under the agreement and by statute, e.g., “the trustee should not
benefit from the trust assets,”15 or “the trust assets do not belong to the
trustee's personal estate,”16 and “the trustee should not acquire any
proprietary interest in the trust assets.”17



12
      Mitsubishi     UFJ   Financial    Group,    Inc., Annual      Report    (2015), available at
http://www.mufg.jp/english/ir2015/v_c/trust_assets/ (last visited July 25, 2016).
13
   See Jeremy Pitts, Shinji Toyohara, & Gavin Raftery, Expanding the Use of Trusts and Trust Banking
in Japan, INT’L FIN. L. REV. GUIDE TO JAPAN, Jan. 2004 at 75; see also Shinji Toyohara, Jeremy Pitts,
& Gavin Raftery, Trusts and Trust Banking, INT’L FIN. L. REV                       (Jan. 5, 2004),
http://www.iflr.com/Article/2026736/Trusts-and-trust-banking.html (last visited Dec. 30, 2015)
(citing Trust Law [Shintaku-hou], Law No.62 of 1922, as amended).
14
    Id. (citing Trust Law; Trust Business Law [Shintakugyou-hou], Law No.65 of 1922, as
amended).
15
   Id. (citing Trust Law art. 9).
16
   Id. (citing Trust Law art. 15).
17
   Id. (citing Trust Law art. 22).




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The beneficiary may be viewed to have “quasi-ownership rights” by statute,
e.g., “the beneficiary can object to the attachment of the trust assets by a
court in proceedings against the trustee,”18 “the beneficiary has a right to
request the return of the trust assets upon the bankruptcy of the trustee,” 19
and “the beneficiary can apply to the court to nullify a disposal of the trust
assets made by the trustee in violation of the tenor and purport of the trust
agreement.”20 These rights are “statutory and contractual rights against the
trustee and the trust assets” rather than ownership rights. 21

         For a beneficiary to enforce these rights, the trust must be perfected.
For some assets, perfection is achieved by registration; for securities,
perfection is achieved by “booking in a separate account” and physical
separation if possible.22 In addition to perfection, there is an additional
requirement of separation from other assets, to facilitate identification of the
trust assets.23 When third parties enter into a contract with the trustee the
trustee acts as a principal, not as an agent.24

         Only Japan-licensed trust banks may conduct trust business. 25 The
permissible trust assets are “money, securities, monetary claims, moveable
property, real estate and fixtures thereon and surface and land lease rights.” 26

         Under a specified money (tokkin) trust, the trustor appoints a
registered investment adviser to instruct the trustee regarding trust asset
investments. Under a designated money (shiteitan) trust, the trustee makes
investment decisions subject to the trust’s investment guidelines. 27

        “[A] trustee must act in accordance with the tenor and purport of the
trust agreement and with the due care of a good manager”, under statute.28




18
   Id. (citing Trust Law art. 16(2)).
19
   Id. (interpreting Trust Law art. 16(2)).
20
   Id. (citing Trust Law art. 31).
21
   Id.
22
   Id.
23
   Id. (citing Trust Law).
24
   Id.
25
   Id. (citing Trust Law; Trust Business Law).
26
   Id. (citing Trust Law; Trust Business Law).
27
   Id.
28
   Id. (citing Trust Law).




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The trustee may be liable to the trustor or beneficiaries for losses caused by
the mismanagement of the assets or the disposal in violation of the
agreement. The trustor or beneficiaries may have a claim for indemnification
or restitution. The beneficiaries may also avoid disposal to third parties in
violation of the agreement if the registration or recording requirements were
met, or, if not applicable, the third party knew or should have known of the
violation.29

           The trustee is personally liable for trust obligations. To protect
trustees, trust agreements generally include a clause limiting recourse to
trust assets (or those of the trustee’s other trusts) and an indemnity
provision. To protect third parties, where there is limited recourse, there is
generally a negative pledge clause to prevent the trustee from impairing the
assets. In addition, the agreement often provides that limited recourse does
not apply in case of certain misconducts by the trustee. 30

           With a specified money trust, the issue arises of whether the adviser
may bind the trustee. This authority is determined by the trust agreement.
Third parties should confirm that the adviser has binding authority. The
agreement may also determine to whom the third party has recourse on
default.31

           In   1999,     Japan authorized         master trusts,   which are used                 in
securitization.32 In 2000, Japan authorized JReits (real estate investment
trusts).33 Trusts have also been used to offer beneficial interests in
reorganization claims.34

           As of 2004, Japan was considering reforms including (1) expanding the
classes of permissible trust assets35 and (2) establishing three categories of
trust business license with different requirements, for (1) passive trusts




29
     Id.
30
    Id.
31
   Id.
32
   Id.
33
    Id. (citing amendments to Law Concerning Investment Trusts and Investment Companies
(Investment Trust Law)).
34
   Id.
35
     Id. (proposing amendment to Trust Business Law).




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(where the trustee has no discretion), (2) securitization trusts, and (3) active
trusts (where the trustee has discretion).36

        The law in Japan does not impose on Japanese banks fiduciary law but
this Japanese Bank has decided to self-impose fiduciary law on its activities
not only in Japan but also on its subsidiaries abroad, including the New York
subsidiary

        The important aspect of this Bank is its initiative. It expands its legal
duties and its president and management have committed to instill in its
employees the culture and principles of fiduciary principles and law, where
its employees view themselves as trustees with respect to their services and
their control over other people’s money. This is a process which started about
in 2011 and is taking shape and power currently, in 2015.37




     5. TRUST-BASED BANKING LAW IN ISRAEL

Banking law in the State of Israel imposes fiduciary law on banks. There are
no “ifs” and “buts” about it. The law is clear and the rules are similar to trust
law. In any banking system, depositors hand their money to the bank.
However, in Israel banks hold their depositors’ money not as obligors but as
fiduciaries, similar to trustees.38 The banks’ obligations to their depositors are
not contractual obligations. They are trustees’ obligations. Terms of the
trusts are spelled out in the law and regulated and enforced by the
government. They are not left to negotiations with the depositors nor are
they left to disclosure about the use of the depositors’ money. The banks may
lend money to borrowers. But, again, they do that as trustees. They are
subject to prohibitions of conflicts of interest, and to the duty of care, which
is detailed by legislation and rules. The culture in Israel’s banks reflects its



36
   Id. (proposing amendment to Law Concerning the Concurrent Undertaking of Trust Business
by Financial Institutions (Kin'yuukikan no shintakugyoumu no ken'ei-tou ni kan-suru
houritsu), Law 43 of 1943, as amended).
37
   See generally Trust Assets Business, MUFG Report 2015,
http://www.mufg.jp/english/ir2015/v_c/trust_assets (last visited May 23, 2016).
Mitsubishi      UFG     Financial   Group,    Inc.,    Trust  Assets  Business,   available    at
http://www.mufg.jp/english/ir2015/v_c/trust_assets/ (last visited May 2, 2016).
38
   Ruth Plato-Shinar, An Angel Named ‘The Bank’: The Bank's Fiduciary Duty as the Basic Theory in
Israeli Banking Law, 36 COMM. L. WORLD REV. 27, at 33 (2007).




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governing laws. When one is, for generations, called and expect to behave as
a trustee one become a trustee and act as one.




    6. CONCLUSION: FOOD FOR THOUGHT

A business regulated under contract law usually deals with people, who can
fend for themselves. In fact, in the United States the sale of many goods
(exchanging the goods for money) is accompanied by the buyer’s option of
rescinding the sale under certain conditions. This is a form of guarantee by
the seller assuring the buyer that the seller’s promises (and even the seller’s
sales persons who might have induced a sale) are truthful and trustworthy.
Thus, control in those transactions is balanced between the parties.

       In the case of financial services, however, control is not balanced, but
shifts to the “seller” of the services (accompanied by control over the
“buyer’s” money).    The government’s backing of banks’ obligations may
reduce the depositors’ anxiety but it increases the bank management and
personnel’s drive to gain more and inevitably, risk more. Hence, fiduciary law
and its accompanying duties are more appropriate for banks, and would be
far more effective by providing banks with more safety and becoming more
trustworthy. In all cases, the law introduces bank cultures. While contract
culture tends to justify self interest fiduciary culture tends to balance the
parties interests. Thus, regulation that tends to impose on banks self-
limitations as trustees might reduce the banks’ risks and benefit the financial
system.




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