Japanese banks’ financial results for the fiscal year ending March 2009 marked their worst performance in recent years, with the six major banks reporting a collective loss of nearly JPY1.2 trillion (USD12 billion). Although soaring loan loss charges contributed to the banks’ weak performances, losses on equity securities were also a key driver. These losses have drawn renewed attention to the practice of Japanese banks owning stock in the companies to which they lend through so-called “cross-shareholdings,” and the market risk resulting from these holdings. Despite reducing cross-shareholdings since the early 1990s, banks still retain significant equity portfolios. This Asia Focus provides a brief background on the development of cross-shareholding and the elements of Japan’s regulatory system that permit banks to hold equity securities. The report also examines some of the problems associated with shareholdings that Japanese banks have begun to face since the mid-1990s and considers measures that banks and the government have taken to unwind these shareholdings.