Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

October 27, 2008

[Opening Remarks by Commissioner Sato]

I do not have any particular statement to make.

[Questions and Answers]

Q.

Today, Prime Minister Aso gave instructions to Minister Nakagawa and the ruling parties with regard to measures to stabilize the market, strengthen the financial functions and expand the base of securities investors, among other measures. Could you tell me what you think of those instructions and how the FSA (Financial Services Agency) will respond.

A.

I will explain the instructions Minister Nakagawa has received from Prime Minister Aso. We will start with what we can do immediately, as Minister Nakagawa stated in his press conference.

The first instruction concerns the tightening of the restriction on the short selling of stocks and the flexible application of the restriction on banks’ stockholdings as ways to stabilize the stock market. The second pillar comprises the partial introduction of flexibility into the capital adequacy ratio regulation and support for efforts to ensure appropriate accounting of financial instruments as ways to strengthen the financial functions. Also under consideration will be an expansion of the scope of the government’s capital participation under the Act on Special Measures for Strengthening Financial Functions. Thirdly, Minister Nakagawa was instructed to work to facilitate stock purchases by employees’ stock ownership associations.

The FSA will quickly proceed with deliberations in line with the instructions given by the Prime Minister to Minister Nakagawa today and quickly implement those measures, starting with what we can do immediately.

Q.

In response to worldwide market jitters and stock price drops, moves to strengthen the capital base are growing, mainly among megabanks. How do you view such moves and evaluate Japanese financial institutions’ current financial conditions?

A.

I am aware of media reports that megabanks are considering raising additional capital. However, I understand that they have released a statement to the effect that no decision has been made. In any case, I would like to refrain from making comments on specific cases of capital increase, as they concern the management decisions of individual financial institutions.

Regarding the situation of Japanese financial institutions, generally speaking, they continue to face uncertain external factors, such as the rapid appreciation of the yen and volatile stock price movements in the global financial markets. In addition, Japanese financial institutions are gradually starting to suffer from adverse effects, such as an increase in the cost of disposing of nonperforming assets and other credit-related expenses, a slump in revenues from their core businesses, including the deposit and loan business and fee-based businesses, and drops in securities prices due to the financial market turmoil. I appreciate the fact that they are making voluntary efforts to strengthen their financial foundation in a situation like this.

Japan’s financial system is stable compared with the systems of the United States and Europe. However, as the various risk factors that I mentioned have significantly grown, they are starting to affect Japan’s financial sector. So, I will keep a close watch on future developments while maintaining a high level of vigilance.

Q.

Regarding the flexible application of the restriction on banks’ stockholdings, does the restriction refer to the limitation of stockholdings to within the amount of the tier 1 capital or to the 5% rule? Could you clarify that point?

A.

The restriction refers to the former.

Q.

As stock prices dropped again today, the effects of the stock downturn are expected to spread wide among financial institutions, particularly insurance companies. Could you tell me how you view this situation?

A.

Compared with the situation in the 1990s, after the bursting of the economic bubble, and the early 2000s, major risk factors for Japan’s financial sector, such as nonperforming loans, have declined, and financial institutions’ capital base has been enhanced.

However, a rapid stock price drop like this causes valuation losses on stocks held by banks, for example, thus producing some effects on their financial conditions. So, it is true that the stock price drop has a negative impact. At the moment, I believe that Japan’s financial system as a whole is sound compared with the systems of the United States and Europe in particular. In any case, we need to keep a close watch on the negative impact of the global market turmoil.

Q.

Although the partial introduction of flexibility into the capital adequacy ratio regulation is intended to limit this impact, I think that continuity and reviewability must be maintained for regulation. What kind of flexibility do you have in mind?

A.

The partial introduction of flexibility into the capital adequacy ratio regulation, regarding which the Prime Minister gave an instruction to us today, reflects concern that because valuation losses on securities holdings must be deducted from banks’ capital in the calculation of their capital adequacy ratio, as you know, an expansion of valuation losses due to the current market condition would be a significant variable factor for their capital adequacy ratio, thereby prompting them to curb loans excessively. In light of this concern, the FSA will consider the partial introduction of flexibility into the treatment of valuation losses under the capital adequacy ratio regulation, in order to ensure a smooth exercise of the financial functions while paying consideration to the reasonableness of such losses as a benchmark for the soundness - this benchmark is important for protecting depositors by ensuring the sustainable and continuous soundness of banks’ financial conditions - and to an internationally agreed framework.

Q.

Regarding this matter, at a press conference held around noon, Minister Nakagawa indicated that the flexibility will be applied to banks subject to domestic standards. Is that correct?

A.

At this time, I would like to refrain from commenting on specifics. In any case, paying consideration to an internationally agreed framework, which I mentioned just now, will be a necessary factor.

Q.

Regarding the internationally agreed framework, does the FSA plan to propose debate on possible revisions?

A.

I would like to refrain from commenting on the specifics of how we will act or what we are considering.

Q.

I understand that the Prime Minister instructed the ruling parties to consider using the Banks’ Shareholdings Purchase Corporation, with a view to resuming the purchase of stocks held by banks. What is your view on this?

A.

The Prime Minister instructed the ruling parties to consider using the Banks’ Shareholdings Purchase Corporation. As I expect that the ruling parties will hold deliberations and that the deliberation process will take some time, I should refrain from commenting on this matter at this time.

Q.

Is there any particular reason for the ruling parties, rather than a government ministry or agency, receiving this instruction?

A.

The ruling parties also received an instruction regarding the taxation related to securities investment, a typical matter for debate at the ruling parties’ tax panel (Tax System Research Council), and I suppose the instruction regarding the Banks’ Shareholdings Purchase Corporation was given to the ruling parties because it was regarded as a matter of a similar nature.

Q.

Will a revision be made based on a bill drafted by lawmakers?

A.

As this matter has yet to be considered, it would be premature to comment on specifics.

Q.

It is difficult to imagine what the introduction of flexibility into the capital adequacy ratio regulation means. Am I correct in understanding that it means, for example, that an early corrective action will not necessarily be taken against a bank subject to domestic standards even if its capital adequacy ratio slips below 4%?

A.

That is exactly an issue we will consider from now on. As I said earlier, we will consider what to do with the deduction of valuation losses on securities holdings from the capital.

The capital adequacy ratio represents the ultimate result of the calculation based on various numerator factors and denominator factors such as risk assets. Meanwhile, an early corrective action is taken under a framework of administrative actions intended to protect depositors, based on the capital adequacy ratio, which is a universal objective benchmark, so I think that this is a different matter.

Q.

I think that the calculation method of the capital adequacy ratio and the restriction on stockholdings are intended for that purpose, and I understand that you are considering plans to revise the regulation and partially introduce flexibility as a way to ease the credit condition amid this severe market environment. Will this be a permanent measure or a provisional one to be in place until the market restores some degree of stability? What is your thinking and how do you intend to act in this respect?

A.

This is included among measures to stabilize the stock market under the Prime Minister’s instructions. In short, we will consider introducing flexibility into the rule that requires the value of stockholdings held by a bank to be below the amount of its Tier 1 core capital so as to allow a temporary rise above the Tier 1 amount. We aim to flexibly apply the rule, which could otherwise force banks to continue unloading their stockholdings in the market. We will consider whether to make it a permanent or provisional measure in light of this purpose.

Q.

You said that Japan’s financial system as a whole is stable in terms of soundness compared with the systems of the United States and Europe. However, as the United States and Europe are in a state of emergency, I would like you to tell me how you evaluate the Japanese system in absolute terms, rather than in relative terms, namely whether you think that the Japanese system is on the brink of a crisis or it is about to be shaken.

A.

As I said earlier, Japanese financial institutions have begun to be confronted with the current global financial market turmoil and the resultant stock price plunge at a time when their bad loans and bad assets have decreased compared with the 1990s, after the bursting of the bubble, and the early 2000s, while their capital has increased. In light of our experiences of the 1990s, I believe that their resilience against market turmoil like this has considerably improved. Of course, we need to keep a close watch on the impact of stock prices, as the recent stock price movements have been very volatile.

Q.

What do you think is the significance of expanding the amount of public funds available for capital injection under the Act on Special Measures for Strengthening Financial Functions, and what is your view on a proposal by Mr. Yosano (Minister of Economy, Trade and Industry) to increase that amount to 10 trillion yen? Do you think that it is necessary to increase the amount so much?

A.

The Act on Special Measures for Strengthening Financial Functions has a strong preemptive nature, in that it is intended to secure the financial foundation of financial institutions so as to enable them to properly exercise their financial intermediary function, mainly through the provision of loans to small- and medium-size enterprises. Today, the Prime Minister instructed us to consider expanding the scope of the government’s capital participation under this act. As this act is intended to secure the stability of the financial foundation of financial institutions, even as volatile market movements occur, and to enable financial institutions to actively take risks and act as financial intermediaries so that they can smoothly exercise their financial functions for regional economies. Therefore, I believe that we should consider this matter with a view to ensuring a sufficient amount of funds.

Q.

Since you became FSA Commissioner, the FSA has been stressing its forward-looking approach of taking every possible action in anticipation of future circumstances. Am I correct in understanding that despite this stance, the FSA failed to foresee the rapid market movements that occurred in September and October, such as the Nikkei average’s plunge to 7,000 and the U.S. Dow’s tumble to 8,000?

A.

The forward-looking approach means quickly identifying major risk factors and destabilizing factors hidden in various business models and in the management methods of financial institutions, including structural elements, while paying attention to global market developments. In short, it means identifying risk factors that could affect the management of financial institutions, as precisely and quickly as possible and taking preemptive actions. In this sense, regarding the subprime mortgage problem, we have since last autumn taken various actions, such as analyzing its basic features, examining Japanese financial institutions’ total exposure to subprime-related securitization products through hearings with them and expanding the scope of our examination to include a broader range of securitization products, in addition to subprime-related ones. In this context, we have been monitoring the exposure to securitization products, mainly subprime-related ones, and CDS (credit default swaps), which have been the source of the turmoil of the U.S. and European markets.

In the meantime, regarding global market developments, a flight to quality has occurred in the United States and Europe, as well as in other regions, in the form of the flow of funds to sovereign bonds and the commodities market as a result of the reduced risk tolerance of various investment funds. Furthermore, recently, even the flight to cash has occurred. Amid these violent upheavals sweeping through the global markets, the stock market has also shown a very sharp volatility. It is difficult to foresee everything in the first place, and market movements, particularly global market movements, depend on moves made by various classes of investors, so I suppose all we can do is to try to collect as much information as possible regarding such moves.

(End)