Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

October 6, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statement to make.

[Questions and Answers]

Q.

Could you tell me how you view the financial bailout bill that was enacted in the United States at the end of last week? In order to implement the provisions of this act, the issuance of U.S. government bonds is expected to increase. What do you think of expectations that Japan and other countries around the world will purchase newly issued U.S. government bonds? It is said that the purchase of U.S. government bonds will be discussed at a G-7 meeting (meeting of the Group of Seven Finance Ministers and central bank governors) scheduled for this week, so I would appreciate it if you tell me about this issue in relation to the G-7 meeting.

A.

Shortly past 1 p.m. Friday, October 3, U.S. time, or shortly past 2 a.m. Saturday, October 4, Japan time, the U.S. House of Representatives passed the Emergency Economic Stabilization Bill, which had been passed by the Senate after a partial amendment, and the President signed it into law. I welcome the bill's enactment as the implementation of a necessary action by the U.S. government and Congress to resolve the current problem in light of the present state of financial affairs. I hope that measures included in this bill will be steadily implemented, leading to the stabilization of the global financial markets.

Before answering your question about my view on this act, I would like to point out that in dealing with the ongoing turmoil in the global financial markets, it is important that authorities with relevant powers and responsibilities take appropriate actions in manners suited to the circumstances of their own financial markets and financial sectors, while maintaining close cooperation with each other. If this act's scheme for purchasing troubled assets functions properly, trading will resume for securitization products for which liquidity has dried up, making it easier to calculate market prices. In addition, this scheme would enable banks to separate troubled assets from their balance sheets and shield them from the risk of incurring additional losses if it functions properly. In this sense, I hope that this scheme will be put into practice as soon as possible in an appropriate manner.

Regarding media reports saying that Japan and other countries have been asked to buy U.S. government bonds that will be issued in order to implement the provisions of this act, the FSA (Financial Services Agency) is not aware that such a request has been made.

Lastly, regarding the G-7 meeting's agenda items, although how to deal with the ongoing financial market turmoil is naturally expected to be the focus of discussion, details of the agenda have not been announced by the United States, which will chair the meeting. Therefore, I would like to refrain from making specific comments at this time. Generally speaking, as Prime Minister Aso said in his speech at the United Nations, Japan has experiences and knowledge accumulated through its efforts to achieve financial stabilization after the bursting of the economic bubble, so I think that one way for us to contribute to the stabilization of the global financial and capital markets will be to actively share our experiences and knowledge at international conferences and on other occasions.

In any case, as strong stress remains in the global financial markets, the FSA will keep a close watch on financial market developments with a high level of vigilance, and strive to take appropriate actions while strengthening cooperation with relevant authorities both in Japan and abroad.

Q.

In the insurance sector, AIG (American International Group), a major U.S. insurance company, has announced plans to sell ALICO (American Life Insurance Company), which is operating in Japan, as well as AIG Edison Life Insurance and AIG Star Life Insurance. How does the FSA view the plans? In relation to these plans, there were media reports regarding whether or not the FSA will approve the split-up and transfer of insurance contracts. Could you tell me about your thinking regarding the transfer of insurance contracts?

A.

AIG announced a business restructuring plan on October 3, Friday, which included the sale of three AIG-affiliated life insurance companies in Japan, namely ALICO, AIG Star Life Insurance and AIG Edison Life Insurance.

As for your question about the realignment of Japan's insurance industry, I would like to refrain from making comments, as it concerns the management decisions of private companies. Generally speaking, individual insurance companies should provide high-quality services that meet customers' needs while maintaining the soundness of their financial conditions. I hope that by conducting business in that way, they will strengthen their management foundation and improve the quality of services.

I would like to remind you about the impact of the sale or change in share ownership of the three life insurance companies on Japanese insurance policy holders, although this is not what you asked me about. Generally speaking, I understand that a change in the share ownership of an insurance company does not have a direct impact on existing insurance policy holders. An insurance company, whether it be a local subsidiary or a branch (of a foreign insurance company), is required to set aside policy reserves in amounts corresponding to a certain proportion of the value of insurance undertaken in Japan, an arrangement that guarantees the payments of insurance benefits.

In any case, we will keep a close watch on future developments related to AIG-affiliated insurance companies in Japan and continue to supervise them properly.

Regarding the review of the minimum transfer unit of insurance contracts, the Second Subcommittee of the Financial System Council's Sectional Committee on Financial System held a debate last autumn and recommended in its report issued in December that this matter should continue to be studied carefully. In September this year, the Second Subcommittee commissioned a study on this matter to a working group on basic insurance-related issues, so I expect that this will be one of the matters to be debated by the working group. However, I understand that it has not yet been decided when the debate will start or by when a conclusion must be reached. In any case, the FSA will also continue to pay attention to that debate.

Q.

Regarding AIG's insurance contracts that you spoke of, I suppose that policy holders are very worried. Could you say something to people worried about this?

A.

Regarding the financial and accounting affairs of insurance companies under Japan's Insurance Business Act, as I said earlier, policy reserves must be set aside in amounts corresponding to a certain proportion of the value of insurance undertaken in Japan. I understand that since before the problem of the AIG Group came to light, the three companies in question had been conducting business in Japan while maintaining the soundness of their financial conditions in accordance with this rule. In addition, I understand that the three AIG-affiliated life insurance companies have issued a statement saying that even if a change in their share ownership occurs in connection with AIG's business restructuring plan, there will not be any change in their insurance contracts with customers or in their provision of services.

Q.

In response to the financial market turmoil, Tokyo stocks (as measured by the Nikkei Average) temporarily lost as much as 500 points today, dropping to the lowest level since February 2004. Although I will not ask you to comment on the stock price level, I understand that the FSA has been conducting stress testing to examine the impact (of stock price drops) on banks' financial conditions. With the Nikkei Average slumping at the current price level, a drop below 10,000 has become conceivable. How do you think the soundness of financial institutions' financial conditions would be affected if the Nikkei Average drops below 10,000?

A.

We cannot generalize the impact of the sharp stock drop on the management of individual Japanese financial institutions, as the size of stockholdings and stocks held differ from institution to institution. However, we can say that Japanese financial institutions as a whole have been reducing their stock holdings in recent years, so I understand that their financial conditions are much less likely than before to be affected by stock price movements. According to data compiled by the BOJ (Bank of Japan), for example, the total amount of their stockholdings declined from 45.8 trillion yen at the end of August 1998 to slightly over 20.5 trillion yen by the end of August 2008.

Regarding stress testing, stock prices as measured by the Nikkei Average at the end of September was down more than 16% compared with the end of June this year. At major banks, for example, a stock price drop of more than 16% would reduce their capital adequacy ratio, which stood at an average of 11.9% at the end of June, by around 0.3 percentage points, according to an estimate based on some assumptions. In light of this, among other factors, I do not believe that the recent stock price drop will significantly undermine the soundness of Japanese deposit-taking financial institutions' financial conditions.

In any case, as the global financial market turmoil and its impact on stock prices are continuing, we will keep a close watch on future developments with a high level of vigilance.

Q.

Could you tell me how you view megabanks' and regional banks' stances on lending to small- and medium-size enterprises (SMEs) and how you intend to reflect in financial regulation the results of a joint survey conducted by the FSA and the Small and Medium Enterprise Agency on the actual state of financing?

A.

As I have been saying, I believe that acting as a financial intermediary for SMEs is one of the most basic and important roles of banks and other financial institutions. Of course, in doing so, they need to take risks based on appropriate screening while managing risks properly. Taking risks based on appropriate screening under a framework that ensures returns corresponding to the risks taken will contribute to the earnings of financial institutions, which may in turn help to maintain the soundness of financial conditions. In this sense, I hope that ensuring the soundness of financial conditions and taking necessary risks in order to act as a financial intermediary will work in a positive cycle to produce complementary effects.

The FSA has already been actively promoting the "relationship banking" initiative, involving mainly regional financial institutions, regarding financing for SMEs, and it is starting to bring about concrete results in some cases. I hope that with this in mind, financial institutions will strive to exercise their financial intermediary functions.

As for the survey on the actual state of SMEs, we hope to use its results to lead financial institutions to provide support to SMEs, by conducting it in ways to find clues for improvement measures through cooperation with the Small and Medium Enterprise Agency.

Q.

I have a related question. When will you start the joint survey with the Small and Medium Enterprise Agency and what will you mainly investigate?

A.

As for details, I would like you to consult the Supervisory Bureau. The FSA has already conducted a variety of surveys on the actual state of financing for SMEs through existing channels, such as local Finance Bureaus and local Finance Offices as well as financial institutions. Recently, we have not only held hearings with financial institutions on the lenders' side, but we have also directly contacted people on the side of borrower SMEs, including officials at chambers of commerce and industry who are in charge of providing management guidance. Meanwhile, the Small and Medium Enterprise Agency is communicating with chambers of commerce and industry and also with a network of local assistance forums for SME business rehabilitation, mainly through regional Bureaus of Economy, Trade and Industry (of the Ministry of Economy, Trade and Industry), so we hope to conduct a substantial survey by cooperating with these organizations in an organic manner and by tapping their know-how regarding business rehabilitation efforts. As for details such as the timing of the start of the survey and its method, please consult the Supervisory Bureau.

Q.

Over the weekend, the leaders of Britain, Germany, France and Italy held a meeting to discuss the financial crisis. Some people have attributed today's stock price drop in Tokyo to the European leaders' failure to bring about results as concrete as expected through their cooperation. How do you assess Europe's response to the financial crisis and how do you view the condition of the European financial markets?

A.

On October 4, European time, the leaders of Britain, Germany, France and Italy held an emergency meeting in Paris and issued a joint statement. Roughly speaking, I understand that the leaders have expressed the intention of the European Union member nations to act in a coordinated manner in light of the current global financial situation, particularly developments in the European financial markets. I do not have anything to go by to comment on today's stock price movements in Japan in relation to that.

Q.

I have another question in relation to this matter. Last week, a succession of major banks like Fortis and Dexia, which is a French-Belgian bank, were placed under government control, and some countries, including Germany, have taken steps to fully protect deposits at the end of the week. In light of these proactive movements in Europe, how do you view the state of the European financial system, which has become a new source of concern after the U.S. financial system?

A.

From a broad viewpoint, market prices of securitization products have become unclear due to the subprime mortgage problem and the drying-up of liquidity for the market for such products, which increases counterparty risks among financial institutions. I think that this situation has started to affect some financial institutions, particularly those involved in real estate financing. In the meantime, European countries have taken a variety of measures, including government support, and I understand that these measures represent their strong resolve to deal with the situation in ways that prevent systemic risks from materializing.

Q.

At the end of last week, Minister Nakagawa expressed an intention not to appeal the Daiwa Toshi Kanzai case to a higher court. Could you tell me about your view on this case and explain its background?

A.

On the night of Friday, October 3, Minister Nakagawa said he intends not to follow any further procedures regarding this case.

The FSA is holding final consultations with relevant ministries and agencies based on his judgment, so I would like to refrain from making any further comments at this time.

(End)