Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

October 20, 2008

[Opening Remarks by FSA Commissioner Sato]

First, I have one matter to report to you. As we announced in a press release today, Tatsuo Yamasaki, who is Deputy Commissioner for International Affairs of the FSA (Financial Services Agency), was elected Vice Chairman of the Executive Committee of the International Association of Insurance Supervisors (IAIS) at the committee’s meeting held in Budapest, Hungary, on October 17. As the Executive Committee is the IAIS’s highest decision-making body, I believe that the election of a senior FSA official to the post of vice chairman will facilitate Japan’s cooperation with overseas authorities and enable Japan to make increased contributions to the IAIS’s efforts to deal with the current financial situation.

I do not have any further statements to make.

[Questions and Answers]

Q.

It has been decided that an emergency summit will be held in the United States in November, after the U.S. presidential election. It is expected that measures to stabilize the financial markets will be discussed, with the participation not only of the G-8 countries but also of emerging countries. Could you tell me how you view this move? In addition, how do you view the worldwide move toward tightening the supervision and regulation of financial institutions in order to prevent the recurrence of the current financial crisis, an issue which is expected to be the focus of the coming summit?

A.

A joint statement issued on October 18 by the leaders of the United States, France and the EC (European Commission) indicated that they have agreed to call on other world leaders next week to initiate a series of top-level meetings in order to tackle the problems that the global economy faces. In addition, the statement suggested the idea of holding the first such meeting in the United States, soon after the U.S. presidential election. While it is anticipated that a specific framework for the coming summit meeting will be discussed among the relevant countries, I hope that broad discussions will be held on policy measures for preventing the recurrence of the current financial crisis, strengthening the financial system and preventing a global recession, and that they will lead to concrete results.

As for the question regarding the worldwide move toward strengthening regulation, the Financial Stability Forum (FSF) in April this year drew up a report containing a variety of measures to be taken by regulatory authorities to deal with the global financial turmoil that was triggered by the subprime mortgage problem. A declaration issued by the G-8 leaders at the Hokkaido Toyako summit held in July this year called for the early implementation of all of the recommendations contained in this report. The report analyzed the causes of the current global market turmoil and proposed many measures to prevent its recurrence based on the results of the analysis. Among the typical causes cited by the report were a lack of transparency and an extremely insufficient communication of information amid the pursuit of short-term profits through excessive leveraging, as well as an excessive dependence on credit ratings. Having identified these causes, the report listed many measures to prevent the recurrence of the ongoing major turmoil in the market, and I believe that these are medium-term measures necessary for stabilizing the financial system and financial markets. In this sense, they constitute a framework under which the relevant countries will introduce necessary regulations while maintaining cooperation.

Meanwhile, we are now facing a situation in which there are strong stresses pervading the financial markets, amid significant instability in the entire financial system, so how to normalize this situation will be a huge challenge in the short term. In this respect, I think that an orderly de-leveraging - that is, the unwinding of excessive leveraging in an orderly way - will be an essential step. It is important that individual financial institutions successively implement measures such as recognizing losses, raising funds if they face a capital shortfall and separating distressed assets from their balance sheets, so as to reduce the risk of additional losses arising in the future. Indeed, such measures are actually underway at the moment. Furthermore, governments have unveiled public sector initiatives and policy measures in order to prepare for cases in which private sector entities find it difficult to do these things on their own. In any case, the current global financial turmoil needs to be resolved through international cooperation, so it is important that the authorities of individual countries take quick actions in coordination with each other, based on the G-7 action plan and the G-8 leaders’ statement.

Q.

In a television program yesterday, Minister Nakagawa revealed that he was considering the idea of easing accounting rules in order to prevent deterioration in the financial conditions of banks due to drops in share prices. What he had in mind was apparently a revision of the way in which unrealized losses on holdings of “other securities” are reflected in banks’ capital. For the moment, how does the FSA plan to deal with this matter, from the viewpoint of maintaining consistency with the Basel Accord?

A.

I am aware of the media reports about Minister Nakagawa’s comments to the effect that he would consider what to do with the treatment of valuation losses on banks’ securities holdings under the capital adequacy regulation. The impact of such valuation losses on the capital adequacy ratio varies according to the composition of a bank’s capital and the contents of its portfolio. It is true that under the capital adequacy regulations, when evaluation losses arise on holdings of “other securities,” the loss amount is deducted from the tier 1 core capital, which leads to a decrease in the upper limit on the tier 2 supplementary capital, meaning that the capital adequacy ratio may drop further accordingly. Meanwhile, the capital adequacy regulations are based on an international framework designed under the Basel Accord as a common yardstick for measuring the soundness of financial institutions, and the treatment of valuation losses on holdings of “other securities” in Japan is consistent with the Basel Accord. The FSA is considering what to do with this treatment, with due consideration of matters such as the reasonableness of such valuation losses as a benchmark for the soundness of financial institutions, amid the current environment of volatility in securities prices, and the consistency of the treatment of losses with the international framework.

Q.

I would like to ask you about the Act on Special Measures for Strengthening Financial Functions, regarding which the ruling parties will unveil the outline of a bill for revision tomorrow. Am I correct in understanding that rather than revive the act - which expired in March - in its original form, the FSA intends to review it with an open mind and make some revisions before submitting a bill? I am asking this to make sure.

A.

Your understanding is correct. The current state of local economies and the business environment for small and medium-sized enterprises (SMEs) in Japan are extremely severe, so there is a strong need for regional financial institutions to exercise their financial intermediary function. Against this background, we intend to establish a framework for capital injection as a pre-emptive measure, in case financial institutions should face a capital shortfall or lose confidence about their capital adequacy, and fail to find a solution in the private sector. Our basic stance is to improve the utility of the existing Act on Special Measures for Strengthening Financial Functions and use it for the purpose that I mentioned now, although the application period of capital injection under this act expired at the end of March this year.

Q.

Regarding the utility of the existing act, which requires the submission of earnings plans and the clarification of management responsibility, what do you think of the balance between improving the utility of the act and the need to clarify management responsibility and prevent moral hazards?

A.

I would like to refrain from giving you a specific answer at this time, as we are still considering specifically how to improve the utility.

Q.

I think that the framework for the injection of public funds always has to be considered in relation to the issue of moral hazard. Do you think - you may answer this question in general terms - that if regional financial institutions are now facing a situation in which they cannot raise funds on their own, the two matters need to be separated?

A.

The Japanese economy as a whole has fallen into the current state in large part due to the shock waves that have come from abroad. In this context, we are trying to figure out how to encourage regional financial institutions to provide financial support to local economies and the activities of SMEs in Japan, and the move to improve the utility (of the Act on Special Measures for Strengthening Financial Functions) is based on this approach.

However, of course, there is a possibility that the use of public funds could impose a burden on taxpayers, so we may say that this is a framework for risk-taking by taxpayers. In this sense, the application of the existing act was naturally conditioned on the viability of the collection of injected public funds. Generally speaking, when we design a framework for capital injection, the need to avoid creating a framework that may foster moral hazard is one of the matters we must consider.

Q.

I would like you to confirm one thing. Am I correct in understanding that Minister Nakagawa has given you instructions as to the timing of a review of the treatment of (evaluation losses on) “other securities” under the capital adequacy regulations?

A.

Minister Nakagawa and FSA staff are communicating with each other about a variety of matters, and I believe that I should not publicly comment on the specifics of such communications. Of course, Minister Nakagawa has given us instructions from a variety of viewpoints, such as how Japan should respond to the current global financial crisis, how to stabilize Japan’s financial system and how to minimize the adverse effects on the system.

Q.

You said you will consider what to do with the way of reflecting (valuation losses on securities holdings) in the capital adequacy ratio. Do you mean that you will consider this matter with possible revisions in mind?

A.

I have nothing to say other than that we are considering this matter, as I already told you.

(End)