Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

November 17, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

The financial summit that was held the other day set forth a policy under which countries will act in concert with each other in implementing pump-priming measures to stimulate domestic demand, in addition to strengthening cooperation regarding financial supervision. Meanwhile, emerging countries strongly criticized the existing U.S.-led international financial regime. Could you tell me how you evaluate the outcome of the latest summit? Also, how do you think the statement issued at the summit will contribute to resolving the current financial crisis?

A.

As you know, the Summit Meeting on Financial Markets and the World Economy was held in Washington on November 15 with the participation of the leaders from 20 developed and emerging countries and regions. A declaration of the G-20 leaders issued after the summit first called for implementation of macroeconomic policy actions in response to the deterioration of global economic conditions, including measures to stimulate domestic demand as necessary. It secondly set forth five common principles for the reform of the financial markets: “strengthening financial market transparency and accountability” through measures such as “enhancing required disclosure on complex financial products,” “enhancing sound regulation” by reviewing the products and market participants subject to regulation, “promoting integrity in financial markets,” “reinforcing international cooperation,” including cooperation between supervisory authorities, and “reforming international financial institutions” such as the IMF. Thirdly, the declaration also set forth an action plan to implement these principles for reform comprising 47 specific items, many of which were proposed by Japan, as I understand it. In their declaration, the leaders from developed and emerging countries that have significant influence on the global economy shared a recognition of the current financial crisis and agreed on a framework for implementing necessary measures while cooperating in dealing with the deterioration of the global economic condition, preventing a recurrence of the crisis and strengthening the financial system. So, I believe that the summit was very significant for the stability of the global economy and the global financial markets. I also believe that it is significant that the leaders’ declaration reflected many of the items that Japan has argued for, including Prime Minister Aso’s proposals regarding international cooperation in the supervision of financial institutions and the treatment of credit ratings and accounting standards.

In any case, the FSA (Financial Services Agency) intends to strive to steadily implement measures under the action plan included in the leaders’ declaration while maintaining cooperation with the authorities of other countries as well as with relevant authorities in Japan so that the maximum results can be achieved by the next financial summit, which will be held by April 30, 2009. At the same time, the FSA will continue to actively involve itself in international discussions to be held at organizations such as the Financial Stability Forum (FSF) on ways to prevent a recurrence of the financial crisis and strengthen the financial system.

Q.

Although it has been said that Japanese financial institutions have received a limited impact from the subprime mortgage problem compared with U.S. and European financial institutions, the financial results of most of them, including major banks and regional banks, deteriorated in the fiscal first half that ended in September 2008. Please tell us how you view the impact on Japanese financial institutions now.

A.

If we examine the financial results for the fiscal first half ended in September 2008 that have been announced so far by Japanese banks, including major banks, we recognize that many of them suffered sharp profit drops compared with the same period of the previous year. Some of them have slipped into the red. I suppose that major causes of the poor performances are a decrease in fee revenues due to the deterioration of the market condition, an increase in credit-related expenses and an increase in the write-downs of the value of stockholdings.

Meanwhile, some major U.S. and European financial institutions posted huge losses in the most recent fiscal term due to the global financial market turmoil, and the U.S. and European authorities have implemented a series of extraordinary measures, such as recapitalization using public funds and temporary nationalization of banks. Compared with this situation, I believe that the direct impact of the global market turmoil on the soundness of Japan’s financial system remains limited. Nonetheless, Japan’s financial sector has been hit by the negative effects of the market turmoil through stock price movements and the downturn of the global economy, which has in turn affected the Japanese economy. Therefore, I would like to keep a close watch on future developments while maintaining a high level of vigilance.

Q.

Mass media reported on Sunday that the U.S. parent of Hartford Life Insurance has applied with the U.S. Treasury Department for the injection of public funds. Could you tell me what impact the FSA, as the supervisory agency, expects this will have on the Japanese subsidiary and what Japanese policyholders should do?

A.

I understand that the Hartford Financial Services Group Inc. of the United States, which is the parent of Hartford Life Insurance, has announced it applied to the Office of Thrift Supervision regarding an organizational change and applied to participate in the U.S. Treasury Department's capital injection program. As this is an announcement that concerns an individual financial institution’s management decision regarding its capital policy and the move is still in the application stage, I would like to refrain from making comments.

Meanwhile, Hartford Life Insurance is operating in Japan as a 100% subsidiary of the Hartford Financial Services Group. The FSA has already been striving to ensure appropriate supervision based on the Insurance Business Act through offsite monitoring of the appropriateness of the company’s business operations and the soundness of its financial condition. Regarding media reports about variable pension insurance products sold by the Japanese subsidiary, I would also like to refrain from making comments, as this matter concerns specific products sold by an individual financial institution. Generally speaking, under the Insurance Business Act and the guideline for the supervision of insurance companies, we have been requiring life insurance companies and insurance sales agents, including banks, to make sure to provide customers with appropriate and sufficient explanations regarding the risks involved when selling variable pension insurance and other investment-like products with high risks and to obtain their confirmation that they have received such explanations. The FSA believes that it is important to ensure that appropriate explanations are provided to customers in solicitation activities for insurance, including insurance sales through banks, and that customers make rational investment decisions based on the explanations they receive, so we intend to continue our efforts in this regard.

Q.

I will ask you again about the same matter. Am I correct in understanding that there is no particular problem with the soundness of the Japanese subsidiary’s financial condition?

A.

As the company is operating in Japan as a local life insurance subsidiary, it is entirely subject to Japan’s Insurance Business Act, and the FSA is subjecting it to normal supervision based on this act. Although I should refrain from commenting on specifics, I understand that Hartford Life Insurance on November 12 issued a press release denying a media report the same day that losses totaling some 20 billion yen have arisen due to the suspension of the asset management of variable pension insurance plans provided by the company because of the recent stock slump.

Q.

I have a question concerning the ongoing debate at the Financial System Council’s working group on settlements (the working group on settlements under the Financial System Council’s Second Subcommittee). In the debate, the planned regulation of the payment-on-delivery service has apparently drawn opposition from home-delivery service companies. How does the FSA view the regulation, which I understand is intended to protect consumers?

A.

I suppose that your question concerns the debate at the working group on settlements under the Financial System Council’s Second Subcommittee. This council has been established based on the recognition that it is important to conduct broad, comprehensive deliberations on settlements in general, with due consideration of changes in the environment surrounding settlements, such as the dissemination of new settlement services, including those using e-money. The debate on the payment-on-delivery service you asked me about is part of these deliberations. The FSA believes that it is important to consider what measures would be appropriate to be taken from various viewpoints, such as the protection of users, the safety and efficiency of settlement systems, the improvement of convenience for users and the promotion of innovations, while taking account of the findings of the Financial System Council.

Q.

I have questions concerning the action plan set forth at the summit. The first question concerns medium-term actions regarding the item “Enhancing Sound Regulation.” It is stated there that credit rating agencies that provide public ratings should be registered. In Japan, the Financial System Council has been debating relevant issues, including whether or not to introduce the registration system. Now that a conclusive statement has made on this, how will the Financial System Council proceed with future deliberations? Also, if the registration system is to be adopted, when do you think it is likely to happen?

A.

As you know, regulation has been introduced under the registration system in the United States. The European Union has also decided to adopt the registration system. With this in mind, Japan has already started deliberations with a view to introducing regulation on credit rating agencies from the viewpoint of protecting investors. If the deliberations proceed smoothly and a clear policy emerges, we will consider submitting a relevant bill to the next ordinary session of the Diet.

Credit ratings are assigned to financial products traded across national borders, and credit ratings used across national borders are useful for investors. So, I believe that in order to ensure integrity and fairness, it is important that individual countries introduce internationally consistent regulations and cooperate with each other in supervision. In this sense, a direction for Japan’s deliberations has been indicated by the facts that at the summit, the Prime Minister proposed debate on plans to grant legal jurisdiction over credit rating agencies to the authorities of individual countries and that an agreement was reached on supervising credit rating agencies in accordance with international codes of conduct and introducing the registration system for credit rating agencies that provide public ratings.

Q.

I have another question, which concerns “Immediate Actions by March 31, 2009” regarding the same item. The proposed actions include authorities’ efforts to ensure that financial institutions maintain adequate capital in amounts necessary to sustain confidence, and international standard setters’ efforts to set out strengthened capital requirements. The package of measures announced at the end of October by the government, including measures to stabilize the market, comprised a plan to introduce flexibility into the regulation of banks’ capital adequacy ratios, and I understand that the plan is already underway. Doesn’t this move run counter to the action plan, which seeks to maintain and secure adequate capital and set out strengthened capital requirements?

A.

Does your question concern the action plan or the declaration?

Q.

It concerns the third of the four items cited as “Immediate Actions by March 31, 2009” regarding prudential oversight.

A.

The action plan is based on the recognition that the ongoing global financial turmoil has revealed insufficient risk management by major financial institutions and their failure to secure capital in amounts commensurate with the risks they face. I understand that this has underscored the importance for financial institutions to maintain sufficient capital while conducting risk management in a manner suited to control the risks they face and prompted the proposal for the implementation of these actions by the end of March next year. The capital adequacy ratio regulation is very important as a common framework for maintaining the soundness of banks’ financial conditions, so I believe that Japan also needs to conduct this regulation based on the basic recognition that I mentioned. The rule change regarding the capital adequacy ratio was recently decided and announced and is now in the public comment process. The partial introduction of flexibility into the capital adequacy ratio regulation reflects circumstances specific to Japan, as exemplified by Japanese banks’ relatively large exposure to stocks. Behind the increasing volatility of Japanese stock prices are foreign investment funds’ activities, as a result of which we are now witnessing seemingly irrational events, such as the average PBR (price-to-book ratio) for stocks listed on the Tokyo Stock Exchange dropping below one. Meanwhile, valuation losses on securities holdings are required to be deducted from the Tier 1 capital in the calculation of the capital adequacy ratio. We have concluded that for the management of the Japanese economy, it is essential to prevent foreign investment funds’ activities from significantly affecting and undermining the financial intermediary function of Japanese deposit-taking financial institutions, so we have decided on this as an extraordinary measure. This decision was made in a situation that requires the right balance between dealing with the variable factors of an emergency nature like this and achieving medium- and long-term objectives, such as maintaining the reliability and discipline of the regulatory framework.

(End)