Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

September 11, 2008

[Opening Remarks by Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

A few days ago, the U.S. (financial) authorities announced economic measures - I understand that this is the first step - regarding government-affiliated housing finance corporations. How do you assess these measures?

A.

As you know, turmoil has spread in the financial markets due to concern about the management of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Mortgage Corporation), which are so-called GSEs (government-sponsored enterprises), established to facilitate the provision of mortgage finance. In order to cope with this situation, the United States has taken such measures as the enactment in July of housing-related legislation, which included bailout measures for the GSEs. In addition, the U.S. government on September 7 announced a plan to place the two GSEs under government control based on this legislation in order to achieve three objectives, "stabilizing the financial markets," "facilitating mortgage finance" and "protecting taxpayers." Also, the U.S. government decided to implement bailout measures, such as the conclusion of an agreement regarding the purchase by the Treasury Department of senior preferred shares of the two GSEs, the provision of credit to them, and the purchase of GSE mortgage securities by the Treasury Department, as I understand it.

I believe that these measures are aimed at subduing the market turmoil caused by concern over the deterioration of the GSE's financial conditions. They represent the U.S. authorities' firm resolve to prevent the materialization of systemic risk in the financial markets. In this sense, we welcome this move.

Q.

Regarding this, experts point out that unless U.S. housing prices stop declining, the global financial crisis will not be over. Could you tell me about your outlook on the future of the financial markets?

A.

Regarding the recent situation of the U.S. housing market, housing prices in the April-June period announced by the Office of the Federal Housing Enterprise Oversight showed a decline of 5.4% from the previous quarter. The downturn may be becoming somewhat moderate, given that the margin of decline was smaller than the 6.9% drop of the January-March period. Meanwhile, sales of existing and new homes in July increased 3.1% and 2.4%, respectively, compared with the previous month. On the other hand, the delinquency rate for overall housing loans is still rising, as I understand it.

In the United States, 11 regional banks have failed so far this year. On September 5, a regional bank called Silver State Bank was closed by the state banking regulatory authorities. The main cause of this bank's failure was its large amount of real estate-related loans, which I think is evidence that the condition of the U.S. housing market has had a serious impact on the financial conditions of U.S. financial institutions.

There are positive factors regarding global financial market developments, such as the announcement of the bailout measures for the GSEs. However, there are also negative factors that are increasing the uncertainty over the future course of the U.S. economy, such as the series of failures of U.S. regional banks that I mentioned. Other negative factors include the continued lack of liquidity in the market for complex financial products, such as securitization products, and the continued stress in the short-term money market. Meanwhile, the fact that there is a working cycle of the recognition of huge losses by major financial institutions followed by the raising of capital necessary to cover a recognized capital shortfall is a positive factor. However, as there are still major financial institutions that book huge losses, there is no end in sight to the current severe situation. Probably, the problem of the U.S. housing market is at the heart of this situation. In this sense, it may be argued that the global financial crisis will not be over until U.S. housing prices stop declining.

From the standpoint of the FSA, I would like to refrain from offering any definitive opinion regarding the future course of the financial markets. As I have been saying, while we have seen some positive developments, there are also many negative factors, so I expect that it will take much more time before the global financial market turmoil will subside.

As for the situation of Japan, as I have said over and over again, Japanese financial institutions' exposures to subprime-related products are limited, compared with the exposures of their U.S. and European equivalents. Therefore, I do not believe that the situation of the global financial markets is likely to directly have a serious impact on Japan's financial system. In any case, the FSA will remain vigilant and keep a close watch over various market developments while maintaining cooperation with other authorities in Japan and abroad.

Q.

Earlier today, Shinkin Central Bank announced a plan to raise 220 billion yen in capital from shinkin banks, in order to strengthen its capital base. Regarding the enhancement of the central organizations of shinkin banks and credit cooperatives, debate is under way at the Financial System Council. What do you think of the fact that Shinkin Central Bank has decided to strengthen its capital base before the conclusion of the council's debate?

A.

I understand that the Shinkin Central Bank today announced a plan to raise around 220 billion yen's worth of capital in the form of subordinated loans, in order to strengthen its capital base. As this is a matter that concerns an individual financial institution's management decision regarding its capital policy, I would like to refrain from commenting on details from the standpoint of the authorities. Generally speaking, I believe that it is desirable for individual financial institutions to strengthen their capital base by raising fresh capital through self improvement efforts and consolidate the foundation for exercising their financial intermediary functions.

Regarding cooperative-type financial institutions, we recognize the extremely significant role played by the central organizations for such institutions. Therefore, we hope that Shinkin Central Bank will continue active efforts to bolster the foundation of the management of individual shinkin banks, through management consulting and a scheme for supporting the strengthening of their capital bases.

Q.

Regarding the U.S. market, you said earlier that there is a cycle of the recognition of capital shortfalls by major banks followed by moves to strengthen their capital bases. However, when Lehman Brothers revealed a business turnaround plan together with huge losses yesterday, it did not announce a plan for strengthening its capital base, and there was some disappointment in the market. Could you tell me how you assess Lehman Brothers' turnaround plan and what you think of calls from the market for the injection of public funds into private U.S. financial institutions?

A.

I mentioned the early recognition of losses and efforts to raise capital by LCFIs (Large and Complex Financial Institutions) when necessary, because since last autumn, we have seen such moves made in a cycle - or I should say there was such a trend. As for your question about Lehman Brothers, I would like to refrain from making a direct comment, as this is a matter that concerns the management of an individual financial institution. It is important, first and foremost, that appropriate steps are taken, basically under the initiative of the private sector, regarding individual financial institutions in a manner suited to their respective circumstances.

The injection of capital using public funds is a matter to be considered by the U.S. authorities themselves, so the Japanese government should refrain from making intrusive comments. Meanwhile, the U.S. authorities have decided to inject public funds into two GSEs, Fannie Mae and Freddie Mac, as I said earlier. I believe that this represents the U.S. authorities' firm resolve to prevent the markets as a whole from being destabilized violently, and to avoid systemic risk. I expect the U.S. authorities to continue efforts to tackle various problems with this stance.

Q.

I hear that as the amount of financial damage caused by the "furikome" billing fraud is increasing at the fastest pace ever, a bureau director-general of the FSA will hold a meeting with representatives from the National Police Agency and Zenginkyo (Japanese Bankers' Association) next week. Are there any new countermeasures, and what will be your future policy in this regard?

A.

It is regrettable that the number of victims of the "furikome fraud" and the amount of financial damage done by the fraud are increasing. The "furikome fraud is a very wicked crime, in that it deceives people by exploiting their love for their families.

Regarding this problem, efforts by financial institutions are important, and an institutional relief framework for victims has been established. Although individual financial institutions are making various efforts at branches where ATMs are installed, it is important to remind victims and potential victims of the risk and to strive to ensure that the reminder is effective. We will continue to remind financial institutions of the risk of "furikome" fraud when we exchange views with them and do what we can in cooperation with the National Police Agency.

Q.

Stock prices have dropped sharply following the announcement of the injection of public funds into the GSEs, and a succession of U.S. financial institutions have announced the amount of their holdings of shares and the impact on their management. Will the drop of the shares have some impact on Japanese financial institutions?

A.

Are you talking about the drop of the share prices of Fannie Mae and Freddie Mac?

Q.

That is correct.

A.

An increase in capital, whether it comes in the form of the injection of public finds or a third-party share allotment, leads to the dilution of the existing shares, so it is natural that the value of each share drops. On the other hand, the strengthening of the capital base will underpin the value of mortgage securities guaranteed by the GSEs and securities issued by themselves, leading to the narrowing of the yield spread.

I think that Japanese financial institutions, as well as financial institutions and investors around the world, have a fairly large amount of GSE securities. However, I do not think that Japanese financial institutions have a large amount of shares of those two GSEs.

Q.

Do you mean that there will be no impact on Japan, including its financial system?

A.

Since I understand that they do not have a large amount of shares of the two GSEs, the impact will be very limited.

(End)