Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

September 18, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

The U.S. government has announced a bailout plan for AIG (American International Group), which has several subsidiaries in Japan. I suppose that you are interested in how those subsidiaries and branches will conduct business. How do you intend to deal with the problem of AIG?

A.

AIG has been under strong market pressure as shown by a drop of its stock price and a downgrading of its credit rating. Yesterday, at 10 a.m. September 17 Japan time, the U.S. FRB (Federal Reserve Board) announced a bailout plan under which the Federal Reserve Bank of New York will lend up to 85 billion dollars to AIG, with the company's assets as collateral. According to the press release regarding the bailout, the U.S. government will hold an equity stake of 79.9% in AIG and has the right to veto the payment of dividends on common and preferred shares. As this bailout plan is expected to significantly allay concern over the liquidity of AIG, Japan welcomes it.

In Japan, there are seven AIG group insurance companies, which are operating either in the form of a subsidiary or a branch. Of course, the FSA (Financial Services Agency) has been striving to supervise these insurance companies so as to ensure the appropriateness and soundness of their business operations, and will continue to properly supervise them with due consideration of the bailout plan.

I would like to provide a supplementary explanation regarding an institutional framework. Generally speaking, insurance companies that have been granted an insurance business license under Japan's Insurance Business Act are required to set aside policy reserves in proportion to the total value of insurance they undertake in Japan, whether they be operating in the form of a subsidiary or a branch of a foreign insurance company. In this sense, the institutional framework ensures the protection of policyholders.

Q.

Banks' moves to curb loans were discussed at meetings of the Council on Economic and Fiscal Policy yesterday and at meetings of an LDP (Liberal Democratic Party) division. I think that this reflects a political need to prevent curbs on loans at the regional level amid the U.S. financial crisis. I understand that Minister (for Financial Services Motegi) has recently asked the Japanese Bankers Association to make efforts to facilitate financing for small- and medium-size enterprises (SMEs). Could you tell me how the FSA intends to deal with banks' moves to curb loans?

A.

On the agenda at yesterday's meeting of the Council on Economic and Fiscal Policy were the recent financial and economic conditions, including the situation of the global financial and capital markets. I understand that Prime Minister Fukuda told the meeting that, regarding the recent financial conditions, it is necessary to closely watch developments in the global financial and capital markets and quickly and accurately grasp their impact on the Japanese markets and financial institutions, as well as how they affect the real economy through their impact on the provision of loans by private financial institutions.

With the Japanese economy already weakening as you know, there is the risk that the turmoil in the global financial and capital markets will drag it down further. Japanese SMEs thus face a severe situation, so private financial institutions need to properly and actively exercise their financial intermediary function. In this situation, it is important that private financial institutions conduct risk-taking and risk management carefully, in a manner suited to the actual management conditions and characteristics of borrower companies, so that their smooth provision of funds for SMEs and the maintenance of the soundness of their own financial positions may work in a virtuous cycle.

With this as a basic stance, the FSA will strive to facilitate financing for SMEs based on the following three measures. The first measure is precisely understanding the actual situation and conducting surveillance to ensure the facilitation of financing for SMEs, and the second measure is encouraging financial institutions to facilitate financing. The third measure is conducting inspection and supervision properly, in light of the actual situation.

Regarding the precise understanding of the actual situation and the surveillance for the facilitation of financing for SMEs, the FSA has already dispatched senior officials to various regions, in order to grasp the actual situation through hearings with SMEs and other borrowers, and has opened a hotline for the facilitation of financing. In order to more precisely understand the actual situation, we will take three additional measures. The first measure will be periodically conducting a survey with chambers of commerce and industry, in order to collect information from SMEs and regional financial institutions. The second measure will be striving to increase the awareness of the hotline for the facilitation of financing, and the third will be strengthening exchanges of information and cooperation with relevant ministries, agencies and organizations.

I would like to stress this again: The FSA recognizes that facilitating financing for SMEs is one of the most important roles of financial institutions. We will continue to implement various measures, including the precise understanding of the actual state of financing for SMEs, in order to facilitate the provision of funds by private financial institutions to SMEs. Earlier today, Minister Motegi, together with Minister of Economy, Trade and Industry Yosano, visited the office of Zenginkyo (Japanese Bankers Association), and I suppose that this visit is in accordance with the basic stance I explained to you.

Q.

Earlier today, the Bank of Japan (BOJ) signed an agreement on a dollar swap of up to 60 billion dollars with the U.S. FRB, which is an extraordinary measure taken in light of the slack provision of dollar funds. What do you think of this measure?

A.

The BOJ has decided at this time to take coordinated action with the central banks of the United States and Europe in order to facilitate monetary adjustments amid the growing pressure on fund-raising, in the dollar market in particular, and contribute to maintaining the financial markets' functions and ensuring their stability. We believe that the decision was timely. We welcome the central banks' efforts, such as contributing to stabilizing the global financial markets and thereby also stabilizing Japan's financial markets.

Q.

I understand that a document distributed yesterday at meetings of an LDP division, a DPJ (Democratic Party of Japan) division and the Council of Economic and Fiscal Policy showed that loan claims held by Japanese financial institutions, mainly banks, on Lehman (Brothers) totaled 320 billion yen, of which 140 billion was secured. These figures were calculated by individual financial institutions themselves, and I think that views are divided on their credibility. Does the FSA plan to investigate whether their claims are properly secured?

A.

As for the exposures to Lehman Brothers, individual financial institutions have disclosed data based on their own judgment. The document you mentioned was compiled on the basis of data disclosed by individual banks on a voluntary basis. Separately from this, the FSA is also conducting its own investigation in order to ensure the stability of Japan's financial system. However, we believe that the exposure of individual financial institutions is not a matter to be disclosed by authorities, so we do not plan to disclose our findings. Nevertheless, based on information obtained through our investigation, I can assure you that although Japanese financial institutions are exposed to Lehman Brothers to a certain extent, we have not so far recognized any problem that could have a serious impact on the management of individual financial institutions, in light of the depth of their capital cushion.

Q.

I would like to ask you about the central banks' coordinated action regarding the provision of dollar funds. I understand that the provision of dollar funds by the FRB and other central banks is part of international cooperation regarding monetary policy. Given that the importance of international cooperation regarding financial supervision has also been pointed out, could you tell me about your view on future international cooperation in this respect?

A.

International cooperation has been maintained both among central banks and among financial authorities. In particular, they have strengthened international cooperation and exchanges of information, in response to growing stress in the market. In a situation like this, it is very important to maintain cooperation among supervisory authorities, so we will continue efforts to cooperate in a manner suited to the circumstances.

Q.

In relation to the bankruptcy of Lehman Brothers and the government bailout of AIG, attention is focusing on where the risks involved in the credit default swap (CDS) reside. Are you planning to investigate the status of Japanese financial institutions' CDS transactions?

A.

I understand that the U.S. authorities have taken appropriate action with regard to AIG in order to avoid systemic risks, because the company has provided financial guarantee and has been involved in CDS transactions on a massive scale in the global markets. With regard to the status of Japanese financial institutions' business operations, including derivatives transactions, the FSA has been checking, through its off-site and on-site inspections, whether they are properly managing overall risks, including market risk, and our basic policy will be to examine the status of their CDS transactions as part of such inspections.

Q.

Today is September 18, and the end of the April-September fiscal first half is near. Regarding the increasing price volatility of the financial markets, including the stock market, due to the recent market turmoil, what impact do you expect the situation of the markets to have on the financial results of banks and insurance companies for the fiscal first half?

A.

One negative factor - its signs were already evident in the financial results for the business year ended in March and for the April-June quarter - is the increase in reserves set aside for nonperforming loans, which reflects the growing downside risk for the Japanese economy as a whole and the severe business conditions of borrower companies, mainly SMEs. Therefore, we need to keep a close watch on this trend. Regarding recent incidents, the global market turmoil, particularly the bankruptcy of Lehman Brothers, may cause financial institutions to recognize part of their exposures to Lehman Brothers as losses. Regardless of whether there are such exposures, they may recognize losses depending on the market situation. As we need to conduct proper analysis after the financial results for the fiscal first half are announced, it would be premature to say anything definitive at this time.

Regarding expected losses related to the exposures to Lehman Brothers following the company's bankruptcy, as I already told you, we have not recognized anything to suggest that there could be an immediately serious impact on the management of individual financial institutions.

Q.

I would like to ask you about CDS. As outstanding CDS contracts on a notional value basis has increased worldwide, those involving Japanese banks have also expanded substantially, according to BOJ data. Are you concerned about this increase? Also, do you think that the portion of the CDS-related counterparty risks that is supposed to be covered as a hedge by the claims on Lehman Brothers is really covered?

A.

It is true that the market for CDS, a credit derivative product used as a hedging device, has expanded rapidly over the past several years. I understand that CDS is usually used as a credit risk management technique by financial institutions. However, depending on how it is used, it could cause the party that has sold protection to have a lopsidedly large exposure, thereby leading to risk management problems. Given the expansion of the derivative market on a global scale, the basic stance of Japanese financial institutions will be to conduct appropriate risk management according to global market developments.

As for your question as to whether the exposures to Lehman Brothers are properly hedged, I believe that it is up to individual financial institutions to make appropriate decisions on what positions to hold and how to hedge them as part of their overall risk management. Therefore, I believe that whether their overall risk management is properly conducted is more important.

Q.

In Japan, the FSA has issued business improvement and business suspension orders. Could you tell me what measures the authorities of other countries have taken?

A.

For precise factual information, I would like you to consult the Supervisory Bureau. As you know, the FSA issued orders for keeping the assets (of Lehman Brothers' Japanese subsidiary) in Japan and for protecting investors' assets on September 15. In addition, the FSA issued a business suspension order after it was notified by Lehman Brothers' Japanese subsidiary that the company could become insolvent in the long term. If I am to answer your question in the most general way, I would say that the foreign authorities have naturally taken similar actions based on a common recognition of problems. Since the relevant legal framework may vary from country to country and local subsidiaries may have acted in different ways, I would like you to consult the Supervisory Bureau for precise information. In any case, the general answer to your question would be that the authorities are acting based on a common recognition of problems.

Q.

Regarding financing for small- and medium-size enterprises, credit guarantee associations' approval of loan guarantees has decreased significantly, apparently resulting in the deterioration of SME's fund-raising status. Some people argue that the approval has decreased because of financial institutions' reluctance to mediate for guarantee, which has led to curbs on loans, and that this situation has been aggravated by the responsibility-sharing system that was introduced last October. What does the FSA, which I think has jurisdiction over credit guarantee associations, think of this argument?

A.

As I already told you, exercising the financial intermediary function properly is one of the most important roles of financial institutions, so the FSA strongly expects financial institutions to do so. If the use of guarantee provided by credit guarantee is obstructed by problems like the one you mentioned - if, for example, a financial institution refuses to extend a loan unless a 100% guarantee is provided, they would be merely providing liquidity, rather than exercising the financial intermediary function that I mentioned. The responsibility-sharing system regarding credit guarantee requires financial institutions to share part of the risk involved in guarantee. With the risk-sharing as a premise, financial institutions should carefully examine the business conditions of borrower companies and the purpose of the use of funds, and take appropriate risks by providing loans to eligible companies and conduct appropriate risk management, thereby exercising their financial intermediary function. This is the function that they are expected to exercise, so I strongly expect them to operate in that way.

Q.

I would like to ask you about the measure taken by the BOJ that was mentioned earlier. I understand that the implementation of this measure reflects the fact that individual financial institutions are keeping dollar funds for themselves amid fears about the counterparty risk. Could you tell me about how you assess the current status of dollar transactions between financial institutions in Japan's short-term money market?

A.

I believe that the BOJ, which has decided to take that measure, has precisely grasped in detail the trend of short-term financing in the interbank market and the status of the dollar fund transactions there, so I would like to refrain from directly commenting on this matter.

(End)