Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

September 22, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statement to make.

[Questions and Answers]

Q.

On September 20, the U.S. Treasury Department announced a plan to purchase troubled assets with public funds totaling up to 700 billion dollars, equivalent to 75 trillion yen. The plan aims to overcome the financial crisis by purchasing mortgage loans and related securitization products over a two-year period. First, I would like you to tell me how you assess this plan. Also, at a press conference, Treasury Secretary Paulson indicated a plan to ask Japan and Europe to establish a similar scheme. Has Japan received such a request, and how will the Japanese authorities respond if such a request is formally made?

A.

On September 20, the U.S. authorities announced a plan to buy troubled assets with public funds totaling 700 billion dollars, in order to stabilize the financial markets. The U.S. government has already been implementing measures necessary for resolving the global financial market turmoil triggered by the subprime mortgage problem, and I welcome its decision to take an additional step to stabilize the markets. I hope that the announced measure will be implemented quickly.

As for your second question, namely whether the United States is asking Japan and Europe to establish a similar scheme, I should refrain from making comments on the details of our communications with other authorities. However, my understanding is that we have not so far received any specific request from the United States. When considering how to deal with this problem, the most important thing is that the authorities of individual countries take appropriate action in a manner suited to the circumstances of their own markets and financial sectors. As for Japan’s financial sector, as I have been saying, Japanese financial institutions have limited exposures to subprime-related products and similar high-risk products compared with major U.S. and European financial institutions, so we do not expect that this problem will have a serious, direct impact on Japan’s financial system. Therefore, the important thing to do first is to keep a close watch on developments in Japan’s financial and capital markets and on the soundness of Japan’s financial sector. In any case, the ongoing financial crisis could very rapidly spread around the world, so we will maintain a high level of vigilance and strive to handle the crisis in an appropriate manner, while strengthening cooperation with the relevant authorities both in Japan and abroad.

Q.

A media report has mentioned Nomura Group, the largest securities group in Japan, as a potential buyer of the European and Japanese operations of the bankrupt Lehman Brothers. Could you tell me whether you have any factual information regarding this, and how you think Japanese financial institutions should be involved in the rapid cross-border realignment of the financial industry amid this financial crisis?

A.

The holding company of Lehman Brothers filed for bankruptcy procedures with a court in the southern district of New York on Monday, September 15, as you know. Then, the holding company’s subsidiaries in various countries took the actions I will mention. First, Lehman Brothers in the United States, an investment bank, announced a plan to continue the securities business, and the U.S. authorities expressed an intention to make sure to protect its customers. Then, on September 17, Barclays, a British bank, announced a plan to acquire Lehman Brothers’ investment banking and capital market operations in North America. Next, the Japanese subsidiary, Lehman Brothers Japan Inc., notified us on September 15 that it may become insolvent in the long term, so the FSA (Financial Services Agency) issued a business suspension order to the company on the same day. In addition, the company filed for civil rehabilitation procedures on September 16, and the start of the procedures was approved on September 19. I understand that the company will be managed in the future based on advice from its agents for the application of the bankruptcy procedures and its attorneys, as well as supervisors and lawyers appointed by the court to monitor its financial and business operations. I also understand that Lehman Brothers’ subsidiaries in Europe and other regions and relevant authorities will take necessary actions in light of the laws of the countries concerned.

As for your question, I am aware of the various media reports about plans by financial institutions of various nationalities to acquire the Japanese subsidiary and Asian and European operations. However, I would like to refrain from commenting on such plans, since they are matters that concern individual financial institutions and are still nothing more than news stories. Generally speaking, management restructuring and integration are matters that should be considered by individual financial institutions, based on their own management decisions in accordance with their forward-looking management strategies. The FSA hopes that individual financial institutions will conduct high-quality risk management and properly exercise their financial intermediary function under proper corporate governance. In any case, the FSA will take appropriate actions in order to stabilize the global financial markets in cooperation with other financial authorities both in Japan and abroad.

Q.

I will ask you this question to make sure. You said that there is no serious problem with Japan’s financial system. Even if the U.S. government asks the Japanese government to establish a similar scheme to its plan to purchase troubled assets, or to consider the possibility of establishing such a scheme, do you think that it is unnecessary for Japan to do so?

A.

Rather than directly answering a hypothetical question like that, I would like to reiterate our basic stance that I mentioned earlier. Namely, our basic stance is that relevant authorities should take appropriate actions, in a manner suited to the circumstances of their countries’ own financial sectors and markets.

Q.

The United States and Australia, among other countries, have recently introduced restrictions on short sales of stocks. Could you please tell me whether there is a possibility that the Japanese government will introduce such restrictions?

A.

As part of the recent series of actions, Germany, France and Canada, in addition to the United States and Britain, moved last week to strengthen restrictions on short sales of financial stocks. Actually, Japan has various restrictions on short sales of not only financial stocks but all listed stocks. Firstly, traders are obligated to clarify and confirm whether their sales are short sales or not. Secondly, short sales at prices below the most recent specified prices published by financial instruments exchanges are banned in principle. These restrictions are already in place.

If we look at the situation of Japan’s stock market, we do not see any obvious attempt to push down financial stocks through short sales. In light of the existing regulatory system and the current market situation, I think that there is not much need for Japan to reform the current system immediately. However, we intend to strictly enforce restrictions on short sales and do all we can to prevent improper practices, such as market manipulation, in light of the current condition of the global markets.

Q.

Regarding the purchase (of troubled assets) in the United States, the huge amount of necessary funds is expected to be raised through the issuance of U.S. government bonds. Do you think that purchases of U.S. government bonds by Japan will be part of the two countries’ cooperation to ease concern about the financial crisis?

A.

The announced measure is still a plan. A relevant bill needs to be submitted by the U.S. Treasury Department to the Congress, and action starts only after the bill has been approved by the Congress. How to put the plan into practice after the bill’s enactment is a matter to be decided in the future, so I would like to refrain from making comments at this time.

Q.

I understand that earlier today, it was decided that two major U.S. securities companies, Goldman Sachs and Morgan Stanley, would become bank holding companies and be regulated by the FRB (Federal Reserve Board). I think that this move is aimed at enabling the companies to obtain funds more easily. First, I would like to ask you how you view this move. My impression is that investment banking does not account for a large portion of the financial businesses in Japan. Nomura is virtually the only Japanese company that is engaging in investment banking as a securities company. Other banking affiliates can be easily subjected to banking regulation, namely Basel II regulations. Could you tell me how the FSA is dealing with Nomura now, how it intends to deal with it in the future, and how you view investment banking businesses in general?

A.

As for your first question, I understand that today - late night yesterday U.S. time- the FRB announced that it will approve the application of Goldman Sachs and Morgan Stanley to become bank holding companies. As a result, the two groups will be subject to regulation by the FRB as bank holding companies, while the securities subsidiaries of the two groups will have access to all liquidity enhancement schemes provided by the FRB. This means that they will have access to the same loan facility as commercial banks, making it easier for them to secure liquidity. I should refrain from commenting directly on measures taken by U.S. authorities with regard to private U.S. financial institutions. In any case, I believe it is important for the financial authorities of individual countries to strive to take the best possible measures to stabilize the global financial markets, from their respective standpoints.

As for Japan’s situation, the Bank of Japan has a very broad facility for the provision of liquidity for securities companies too, although I do not know the details. Also, I do not think that major Japanese securities companies face a situation that requires urgent action, so I believe that the circumstances of Japan and the United States are slightly different.

Q.

I would like to ask you several questions regarding inspection of securities companies in Japan. Last week, the SESC (Securities and Exchange Surveillance Commission) announced - I am asking this although I know that the SESC and the FSA are independent of each other - that it will implement a project for reviewing the securities inspection process. I know that the authority over inspection of securities companies was transferred from the FSA to the SESC about three years ago. However, there has been criticism that inspection by the SESC tends to focus on the investigation of violation of laws and the examination of compliance, and that the SESC’s examination of the soundness of securities companies’ financial conditions and risk management systems are insufficient and ineffective. Could you tell me whether the project for reviewing the securities inspection process announced by the SESC address such criticism, and how you view the appropriateness of the transfer of the authority over the inspection of securities companies to the SESC?

A.

The project for reviewing the securities inspection process that was announced by the SESC is intended to verify the effectiveness of securities inspection, including the present way of examining the soundness of securities companies’ financial positions and risk management systems, and to check whether any improvement is necessary in light of new developments, such as regulatory changes, including an expansion of the scope of companies subject to inspection following the entry into force of the Financial Instruments and Exchange Act and the launch of the “Better Regulation” (improvement in the quality of financial regulation) initiative.

As you pointed out, the authority over inspection of the soundness of securities companies’ financial positions and risk management systems, which had previously been conducted by the FSA’s Inspection Bureau, has been delegated to the SESC since July 2005. I understand that this is intended to improve the effectiveness and efficiency of the inspection of securities companies. Meanwhile, I understand that following the delegation of the authority, the SESC has been striving to maintain the trust of investors in the markets through its inspection. For example, the SESC fully revised the securities inspection manual, in order to enhance its examination of securities companies’ internal control environment in line with the entry into force of the Financial Instruments and Exchange Act in September last year. The SESC has focused on the internal control environment when conducting inspection, with the protection of public interests and investors in mind. For details, I would like you to consult the SESC. In any case, I hope that the SESC will strive to conduct securities inspection in a more effective and efficient manner based on the results of the announced review project. I also hope that the SESC will make further efforts to maintain the trust of investors in the markets, by properly examining securities companies’ internal control environments, including the soundness of their financial positions and risk management systems.

Q.

I have another question regarding the same issue. In relation to efforts to properly examine the soundness of securities companies’ financial positions and risk management systems, there is the issue of whether a prior notice of inspection, which the FSA’s Inspection Bureau used to make but eventually discontinued, should be made. As the SESC focuses on violation of laws and compliance issues, I understand that it is difficult for the SESC to make prior notices given the possibility that evidence of legal violations may be concealed. This issue is a point of debate in the announced review project. I believe that in order to properly examine risk management systems, it is necessary to give prior notice so as to enable securities companies to make necessary preparations, rather than inspecting them without giving prior notice. What is your view on this issue?

A.

It is true that the desirability of giving prior notice varies case-by-case, depending on whether emphasis is placed on the examination of risk management systems or on compliance issues and violation of laws and regulations.

I am aware of the argument that if emphasis is placed on the examination of the financial soundness and risk management systems, inspection following prior notice is more effective because it gives the inspected company time to make necessary preparations.

I expect that the SESC will make an appropriate decision on how to proceed with the review project and reflect the review results in its on-site inspection.

Q.

Three of the five major U.S. investment banks have been acquired or have gone bankrupt, and the remaining two, Goldman Sachs and Morgan Stanley, are now to be regulated by the FRB. Thus, the U.S. business model of investment banking that has generated profits for several decades is changing dramatically, and some people think that this is the end of the business model, while others view it as a correction of excesses. How do you view this situation?

A.

I think that authorities should not make any definitive comment on what the global investment banking business should be like or how it is changing. However, a report presented by the FSF (Financial Stability Forum) at a G-7 meeting (a meeting of the Group of Seven finance ministers and central bank governors) in April contained a number of recommendations - this report was compiled with the theme of how to prevent the recurrence of the market turmoil triggered by the subprime mortgage problem, and how to maintain the resilience of financial institutions and markets. Those recommendations and other findings seem to indicate that securitization as a financial technology is in itself not necessarily inappropriate, and that the problem was the attempt to achieve short-term gains through excessive leveraging based on the so-called “originate to distribute” model, which took advantage of securitization.

Investment banking includes a broad range of businesses, including traditional operations such as the underwriting of stocks and bonds, and M&A consulting, but not all of these businesses have hit the wall. Probably, what clearly needs to be redressed is the “originate-to-distribute” business model that uses high leverage, which I mentioned. How investment banking business will be conducted in the future will be determined by the various efforts of the private-sector parties concerned, and by market developments. I expect that financial regulatory and supervisory authorities will take action, with a resolve to prevent the recurrence of major market turmoil and instability of the financial system.

Q.

Earlier today, Mr. Taro Aso was elected new president of the Liberal Democratic Party. What do you think of his election? In particular, how do you expect it will affect matters in which the FSA is involved, such as securities-related tax measures?

A.

As I always say, financial regulation has three objectives, namely, maintaining prudence - or stabilizing the financial system - protecting users and investors, and maintaining the transparency, fairness and vitality of the markets. We should concentrate on performing our duties with these objectives in mind.

Q.

Regarding the U.S. government’s plan to purchase troubled assets, (Treasury) Secretary Paulson told news media that foreign banks, namely non-U.S. banks, will be eligible to use the asset purchase scheme if they meet certain conditions. Do you think that Japanese banks should actively use this scheme, and does the FSA plan to provide support?

A.

I understand that financial institutions must have a substantial size of business operations in the United States if they are to become eligible to use this scheme. As for your question, the answer would depend on how much need there is for Japanese banks to use this scheme, and that is a matter to be decided by individual financial institutions themselves, so it would not be appropriate for the FSA to make comments at this time.

Q.

If the U.S. government asks the Japanese government to provide assistance to this comprehensive scheme, is there anything that Japan can do?

A.

For example, in the case of the bankruptcy of Lehman Brothers, which sent shock waves around the world instantly, the authorities of individual countries cooperated closely to prevent their respective markets from being destabilized and to protect investors. The important thing to do is to take necessary measures steadily and gradually.

(End)