Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

November 6, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

The bill for revising the Act on Special Measures for Strengthening Financial Functions was passed by the House of Representatives today. The bill has undergone amendments regarding the pursuit of management responsibility and information disclosure concerning individual cooperative-type financial institutions. How do you feel about these amendments from your standpoint as the person who proposed the bill?

A.

The bill for revising the Act on Special Measures for Strengthening Financial Functions was passed by today’s plenary session of the House of Representatives after undergoing amendments at the Financial Affairs Committee.

As for the amendments, first, the “matters regarding the establishment of a responsible management system” in the original bill - which are matters to be included in a management enhancement plan to be submitted at the time of the application - was revised to read as the “matters regarding reform of the previous management system and the establishment of a responsible management system,” in order to require the clarification of management responsibility as necessary. Secondly, the bill was amended to also require the clarification of management responsibility with regard to plans for strengthening the financial functions of cooperative-type financial institutions to be submitted by their central organizations. Thirdly, the bill was amended so as to require that under a framework for capital injection by the government into the central organizations of cooperative-type financial institutions, a central organization that has received public funds should disclose the names of financial institutions to which it provides support. These amendments have been agreed upon as a result of active negotiations between the ruling and opposition parties in the House of Representatives. I hope that deliberations at the House of Councillors will proceed smoothly.

Q.

Regarding the coming financial summit, Prime Minister Aso said at a press conference on October 30 that Japan plans to present a proposal regarding international cooperation in financial supervision. As Japan’s financial supervisor, specifically what kind of cooperation do you have in mind?

A.

I understand that at the March 30 press conference, which was held after a new economic package was adopted, the Prime Minister pointed to the need for a framework for international cooperation in the supervision and regulation of financial institutions as an issue of concern, as he prepares to attend the Summit Meeting on Financial Markets and the World Economy, which will be held on November 15. In pointing out this issue, the Prime Minister cited problems such as distorted incentives related to the securitization process as the causes of the current global financial market turmoil, as I understand it. In addition, I think that his reference to the need for international cooperation reflects the fact that exchanges of information and coordination of activities between the authorities of various countries are becoming increasingly important, because the financial market turmoil has spread worldwide as a result of investment by investors around the world in troubled securitization products. I expect that details of a proposal to be made at the November 15 summit will be deliberated mainly by the Prime Minister’s advisory staff. In any case, I understand that the Prime Minister has outlined his broad perspective on problems to be tackled at the summit.

Q.

At the same press conference, the Prime Minister raised the issue of how thoroughly “jika-kaikei” (fair-value accounting or market-value accounting) should be maintained. At the moment, although the Accounting Standards Board of Japan (ASBJ) is discussing possible revisions, it has not decided to relax the standards of jika-kaikei itself. What are the FSA’s (Financial Services Agency’s) views on this issue?

A.

Regarding the question concerning the ASBJ, I would like to first ascertain one thing as a basis of the discussion. I believe that “jika-kaikei” as used by accounting professionals means fair-value accounting in the internationally accepted sense of the term. This uses a market value as the basis of evaluation when the trading volume of a specific financial product is sufficient to make the market price reliable - which represents a mark-to-market approach - while using a price calculated on the basis of rational estimation, or a theoretical value, when a reliable market price is not available for reasons such as market turmoil- which represents a mark-to-model approach. The set of these two approaches constitutes fair-value accounting, and “jika-kaikei” as used by accounting professionals usually means fair-value accounting in this sense. Meanwhile, I suppose that there are general misunderstandings that “jika-kaikei” refers only to the mark-to-market part of these two elements and universally applies market prices. I will reply to you on the premise that your question concerns fair-value accounting, or “jika-kaikei,” in the proper sense of the term. I understand that the ASBJ is responsible for indicating guidelines for how to ensure an appropriate functioning of fair-value accounting. Interpretations of matters regarding fair-value accounting were published by the ASBJ on October 28 in the form of an FAQ.

The FAQ specifies that when transactions concerning a specific financial product are very rare or when there is a significant difference between sellers’ offer price and buyers’ bid price, the use of a theoretical value, rather than an extreme market price, may be appropriate, as I already explained to you.

Separately, the ASBJ is also conducting deliberations regarding the reclassification of securities by the holding purpose. Specifically, I understand that the ASBJ is deliberating whether a change in the holding category, from the “securities held for the trading purpose” or “securities held for other purposes” to “securities held for ownership until maturity,” for example, should be allowed as an exceptional measure, while paying attention to international developments related to accounting standards.

Regarding accounting standards, including those for financial products, I expect that the ASBJ, which is a private-sector, independent entity, will continue appropriate deliberations and take appropriate actions with due consideration of international developments, so the FSA will support its efforts to ensure an appropriate accounting of financial products.

Q.

I would like to ask you about the financial ADR (alternative dispute resolution) system. This week, a joint committee of the Financial System Council started debate on legislation related to the financial ADR system. I suppose that the debate has been started because of the perception that ADR organizations established by individual business sectors have failed to sufficiently meet the needs of consumers. How do you assess individual sectors’ approaches to this matter and how do you think the legislation should be pursued?

A.

Individual sectors have made some efforts to achieve appropriate resolution of specific disputes under the leadership of their umbrella organizations. Meanwhile, the ultimate purpose of the financial ADR system is to ensure that disputes that would take time, cost money and impose a heavy mental burden if contested in court are settled out of court quickly through fair and neutral procedures and with high reliability. So it is important to always bear in mind how best to gain the trust of financial service users and ensure an appropriate operation of the ADR system. I understand that debate is underway on issues such as what legal framework should be established or how to ensure an effective and reliable operation of the ADR system without a new legal framework.

Q.

Stock prices (as measured by the Nikkei Average) plunged below 9,000 today. Although stock prices appeared to recover after hitting a new post-bubble low last week, they resumed a downturn and dropped below 9,000. How do you view the stock market condition? Also, could you tell me about the impact of the stock price drop below 9,000 on banks’ capital adequacy, as assessed through stress testing, for example?

A.

Daily stock price movements and price levels are determined by moves made by a variety of investors, so I would like to refrain from commenting on specific stock price movements or levels.

As for your question regarding the impact of the slumping stock prices on Japan’s financial sector, although we are conducting stress testing in order to study the effects of stock price drops, I would like to refrain from saying what levels of prices would have what effects.

Q.

How do you assess the impact of the drop below 9,000 on banks’ capital adequacy? You may reply without referring to any specific figure.

A.

Changes in the prices of various securities held by banks will affect their balance sheets to a certain degree, bringing unrealized profits in some cases and causing unrealized losses in other cases. The most important thing is that individual financial institutions value their securities holdings based on actual transaction prices as part of their risk management and implement various forward-looking risk management measures regarding their entire portfolios of securities.

Q.

During the Diet deliberations on the bill for revising the Act on Special Measures for Strengthening Financial Functions, Minister Nakagawa mentioned a rule change that makes the escape clause regarding restructured loans to small- and medium-size enterprises (SMEs) applicable when the borrowers submit plans to achieve a business turnaround within five years, compared with the present cut-off line of three years. How do you expect this to affect actual lending practices?

A.

I can reply to your question only from a qualitative viewpoint. If there is a framework for enabling financial institutions to flexibly relax lending terms, such as extending the repayment period and reducing the interest rate, in order to facilitate the borrowers’ fund-raising and help their management improvement amid this severe environment for SMEs, it will provide support to SMEs’ improvement efforts by promoting the relaxation of the lending terms. I believe that it is important to encourage individual financial institutions to make efforts in this respect, so the FSA has revised the guideline for supervision and the financial inspection manual so as to expand the scope of cases in which restructured loans to SMEs are not regarded as nonperforming loans. In addition, because it is important to ensure that financial inspections and supervisory activities are conducted properly, in order to better secure the effectiveness of the revisions of the guideline for supervision and the financial inspection manual, I am thinking of asking Minister Nakagawa to issue a relevant written directive so that we can make sure that all inspectors and supervisory officials, including those at local Finance Bureaus are familiar with the purpose of the revisions. Furthermore, we plan to issue a written request to financial institutions through relevant financial-sector associations to ask them to show a flexible stance in dealing with SME borrowers, including relaxing the lending terms, in light of the actual state of SMEs.

Q.

Regarding fair-value accounting, many banks will announce their financial results starting next week. This week, some banks announced results based on the use of theoretical values in their accounting, while others used market prices. Such divergence may cause a problem in terms of consistency. Is the FSA planning to take action in this respect, such as requiring them to use only one or the other of market prices and theoretical values?

A.

When theoretical values are used because reliable market prices are not available for reasons such as market turmoil, it is necessary to first specify the cases in which reliable market prices are not available. In the process of specifying such cases, different banks will need to examine different securities or the same securities acquired at different prices. I suppose that the contents of portfolios vary widely from institution to institution. As examples of a lack of reliable market prices, the ASBJ cited cases in which transactions concerning a specific financial product are very rare and in which there is a considerable gap between the offer price and the bid price. However, I suppose the specific circumstances regarding securities held by financial institutions vary between different financial institutions. Individual financial institutions should tally their figures after properly checking the factual records, and they should discuss those figures with their auditing firms.

For its part, the FSA will keep a watch on the process through which financial institutions and auditors agree on the use of theoretical values based on an appropriate recognition of the facts. We may consider holding hearings to check the actual state after banks have announced their financial results.

Q.

Are you referring to hearings with auditing firms?

A.

I do not have specific ideas for now. What I meant to say was that we may consider doing something in order to examine how the accounting was conducted.

Q.

I understand that a supplementary resolution was adopted for the bill for revising the Act on Special Measures for Strengthening Financial Functions. What impact do you expect it will have on financial administration?

A.

At the House of Representatives’ Financial Affairs Committee, which adopted the supplementary resolution, the government has pledged to act in line with its intent, although I do not remember the precise wording of the resolution. As for specifically how we conduct administration, we will deal with each situation as it arises while bearing in mind the matters mentioned in the supplementary resolution.

Q.

Am I correct in understanding that you will bear the supplementary resolution in mind in taking legal measures, those based on the Banking Act, for example?

A.

The supplementary resolution covers a wide range of items, and the intent varies from item to item.

Q.

My question concerns the part of the resolution regarding the controlling shareholders.

A.

I think that what is important now is to act based on the supplementary resolution adopted by the House of Representatives’ Financial Affairs Committee.

Q.

I would like to ask you about a court case involving SFCG, a major lender for small businesses, although this matter is under the jurisdiction of the Tokyo Metropolitan Government. SFCG has demanded lump-sum repayments of loans from 30% of its customers, to which SME borrowers responded by jointly filing a lawsuit. How does the FSA view this case from its standpoint as the agency with jurisdiction over money lenders? Also, how do you plan to cooperate with the Tokyo Metropolitan Government or how are you acting in relation to this case?

A.

The FSA has already been properly checking the facts and then taking strict actions under the Money Lending Act against cases in which the protection of users is undermined. I would like to refrain from commenting on how to deal with a specific company.

I will reply to you on the premise that your question concerns cases involving lenders registered at the prefectural level. In such cases, the FSA is also ready to take appropriate and strict actions from the viewpoint of protecting the interests of debtors according to the circumstances, while cooperating with relevant prefectural governments.

As you know, the FSA is inviting complaints and inquiries from users of financial services, including the money lending service. Although I refrain from mentioning the names of specific companies, it is true that we have received complaints, such as that a lender demanded a lump-sum repayment or additional collateral from a borrower who has been making repayments regularly without any delay, or that a lender demanded a lump-sum repayment or resorted to a legal action because of a late repayment. I understand that the Japan Financial Services Association is also inviting complaints and trying to resolve disputes. I believe that it is also important that the FSA grasps the actual situation through the association.

(End)