Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

November 10, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

On November 7, the FSA (Financial Services Agency) announced the introduction of flexibility into the capital adequacy ratio regulation regarding deposit-taking financial institutions. Although the relevant FSA section briefed us on this, could you tell me about its purpose and expected effects?

A.

As the details of the proposed partial introduction of flexibility into the capital adequacy ratio regulation included in the recent economic package were fixed, we announced them on November 7.

Specifically, banks subject to domestic standards are allowed to not deduct valuation losses on their holdings of securities, such as stocks and bonds, from the capital amount when calculating the capital adequacy ratio. Banks subject to international standards are allowed to not count profits and losses on their holdings of government bonds and other bonds with a zero risk weighting as part of their capital, in line with international agreements. This is a provisional measure that will be applicable from the fiscal term ending in December 2008 to the fiscal term ending in March 2012.

This is an extraordinary supervisory measure aimed at preventing financial institutions’ financial intermediary function from being reduced by rapid changes in their capital adequacy ratios due to the increased turmoil and volatility of the global financial markets.

The FSA hopes that this new measure will help financial institutions properly exercise their financial intermediary function under the current condition.

Q.

At the recent G-20 meeting, the G-20 members issued a statement calling for the promotion of efforts to tighten the regulation and supervision of financial institutions out of concern about the negative impact of the financial crisis on the real economy. At a G-8 meeting to be held in Washington this weekend, the regulation and supervision of financial institutions is expected to be taken up as an important agenda item, and Prime Minister Aso has expressed his intention to propose the establishment of a new framework for international cooperation regarding supervision and regulation. Could you tell me how you view the global trend toward tighter regulation and the strengthening of the framework for supervision? Also, could you tell me about how you regard the relationship between various countries’ moves toward tighter regulation and Japan’s stance on supervision, including the effects of such global moves on the “Better Regulation” initiative promoted by the FSA?

A.

Your question concerns such a broad theme that it would take much time for me to give you a full answer, so I would like to sum up key points.

I understand that a joint statement issued at a meeting of the G-20 Finance Ministers and central bank governors underscored the need to rebuild the framework of supervision and regulation on a global scale in order to prevent the recurrence of the current financial crisis. I expect that with due consideration of this, the Summit Meeting on Financial Markets and the World Economy scheduled for November 15 in Washington will discuss a broad range of policies and other matters, in order to prevent a recurrence of the financial crisis and strengthen the financial system.

The moves to review regulations and strengthen cooperation between supervisory authorities are intended to cope with the ongoing global financial turmoil triggered by the subprime mortgage problem. They are based on the recognition that supervision and regulation have failed to keep up with changes in the financial system and globalization as represented by the cross-border activities of financial institutions and the cross-border transactions of financial products. I understand that these moves represent global cooperative efforts to tackle this situation. These moves are part of medium-term efforts by individual countries to introduce regulations necessary for stabilizing their financial systems and markets while maintaining cooperation with each other, which were called for in a report presented to the G-7 in April by the Financial Stability Forum.

Meanwhile, the FSA has been promoting the Better Regulation (improvement in the quality of financial regulation) initiative since the summer of last year. This initiative aims to improve the effectiveness, efficiency and transparency of the necessary regulations, while revising outdated regulatory methods and taking care to avoid excessive regulations. So, I understand that this does not run counter to the broad global trend toward strengthening necessary regulations, which I mentioned earlier. For example, I believe that this initiative is in line with the global moves to review regulation and supervision with regard to the points I will now explain to you.

First, one of the four major pillars of the Better Regulation initiative is an early recognition of priority tasks and effective response (risk-focused, forward-looking approach). It means that we will strive to quickly identify areas where serious problems are hidden or where risks may materialize in the future and allocate financial resources to those areas in an effective manner.

In addition, specific measures under the Better Regulation initiative include the precise identification of market developments, the strengthening of cooperation with overseas authorities and the enhancement of dialogue with financial institutions. We may say that these measures have been taken in light of the fact that the ongoing financial crisis has originated in the market and spread worldwide.

In any case, the FSA believes that it is important to implement short-term measures to minimize the negative impact of the ongoing financial crisis and medium- to long-term measures to prevent its recurrence as well as measures to reinvigorate Japan’s markets and strengthen their competitiveness in a balanced manner.

Q.

Regarding the capital adequacy ratio, which was mentioned in the first question, the rule change means there will be two sets of capital adequacy ratios, one based on the previous rules and the other based on the new rules. Some people have expressed concern that the new rules may bring about unintended results. For example, banks confident of their financial positions may stress their soundness by revealing their capital adequacy ratio based on the previous standard when announcing their financial results. If this happens - this may be a perverse hypothesis - a bank which does not reveal a ratio based on the previous standard could raise suspicions that it may have a problem. Regarding such concerns, could you tell me what matters you have taken into consideration in reaching the decision to introduce the new rules?

A.

We will partially revise the calculation method of the capital adequacy ratio regarding banks subject to domestic standards. As you pointed out, this is a revision of the calculation method of the capital adequacy ratio related to financial supervision and regulation. Some people may say that this does not change the actual circumstances. However, the FSA has decided on this as a provisional measure - although we have yet to start the public comment process - within the framework of financial regulation that uses the capital adequacy ratio as a common yardstick, in the hope of preventing wild swings in the capital adequacy ratio due to the volatile market movements from producing negative effects on the exercise of financial functions by individual financial institutions. In managing banks and other financial institutions, managers have to maintain relationships not only with regulatory and supervisory authorities but also with a broader range of stakeholders, such as shareholders, creditors, business clients, employees and local communities. They are properly fulfilling their duties of accountability while maintaining good relations with this diverse range of stakeholders, as I understand it.

The regulatory authorities are only part of these various stakeholders. In this sense, I hope that individual financial institutions will continue efforts to properly exercise their financial intermediary functions while maintaining the soundness of their financial conditions. I also believe that it is important for them to disseminate relevant information to their diverse range of stakeholders in an appropriate manner.

Q.

I would like to ask you about Norinchukin Bank, which has become the subject of controversy in relation to deliberations on the bill for revising the Act on Special Measures for Strengthening Financial Functions. Currently, Norinchukin Bank is covered not by the Deposit Insurance Act but by the Agricultural and Fishery Cooperation Savings Insurance Act. Some people argue that in light of the current circumstances, Norinchukin Bank should be covered by the Deposit Insurance Act, and it is indeed under the joint jurisdiction of the Ministry of Agriculture, Forestry and Fisheries and the FSA. How do you view the legal framework that provides for the injection of capital into Norinchukin Bank although it is not covered by the Deposit Insurance Act?

A.

Currently, deposits are protected by a protection scheme based on the Deposit Insurance Act, while a protection scheme for savings, particularly small-lot savings, collected by agriculture-related financial institutions, is based on the Agricultural and Fishery Cooperation Savings Insurance Act. There are two separate frameworks for insurance premium payments and other fiscal arrangements.

The Act on Special Measures for Strengthening Financial Functions, even before the planned revision, provides for the injection of capital into Norinchukin Bank itself. This is intended to secure its capital base through government support in case it should face difficulty raising capital on its own although there is the risk of a capital shortage in light of the economic condition, thereby helping it exercise its financial intermediary function properly. I believe that this purpose also applies to agriculture-related financial institutions and other financial institutions like banks.

(End)