Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

November 27, 2008

[Opening Remarks by Commissioner Sato]

I do not have any particular statement to make.

[Questions and Answers]

Q.

Life insurance companies have announced their financial results for the fiscal first half, which showed a rapid deterioration of their financial conditions due to such factors as stock price drops. As stock prices have continued to drop since October, these companies’ conditions have probably deteriorated further. Could you tell me what the FSA (Financial Services Agency) intends to do about its stress testing and what supervisory measures it plans to take?

A.

Yesterday, many life insurance companies, including major ones, announced their financial results for the first half of fiscal 2008. The basic profits, or profits from core business operations, and net profits of the nine major life insurance companies generally declined compared with the same period of the previous year. Their basic profits declined about 17%, while their net profits dropped about 32%.

I understand that the decline in the basic profits is attributable to a decrease in the amount of insurance policies in force due to weak growth in new contracts, a drop in dividend receipts due to the financial market turmoil, and a buildup of reserves related to variable pension plans that guarantee minimum benefits. In addition, because of the global financial market turmoil and the domestic stock market slump, their valuation losses on securities holdings and losses from securities sales increased while their unrealized profits decreased. Meanwhile, from a longer-term perspective, it is true that their financial conditions have improved compared with some time ago as a result of their efforts to strengthen their business foundation through an improvement in management efficiency and buildups of internal reserves. Despite such efforts, loss factors have apparently grown due to the global financial market turmoil.

In this situation, the solvency margin ratio, an indicator of the soundness of life insurance companies’ financial conditions, declined by between 30 and 120 percentage points at the nine life insurance companies compared with the same period of the previous year. However, I understand that the ratio is far above 200%, a supervisory benchmark level, at all of the nine companies. The weighted average of the nine companies’ solvency margin ratios came to 1,033%.

In any case, the FSA will strive to quickly collect information regarding life insurance companies’ financial conditions and risk management to examine their soundness and keep a close watch on the conditions with a high level of vigilance amid this severe situation.

Q.

The Democratic Party of Japan (DPJ) plans to submit to the House of Councillors a bill for the facilitation of regional finances, which requires financial institutions to make information disclosure, regarding their loans to small- and medium-size enterprises (SMEs). In the past, there were moves by local assemblies and SME associations to request a similar information disclosure requirement. As the ongoing financial crisis has drawn attention to the need to facilitate financing for SMEs, what is your view on the necessity of such a bill?

A.

I understand that the DPJ announced a package of measures to cope with the economic and financial crisis on November 5. Although I am aware that this included a recommendation of the establishment of a financial assessment act or an act for the facilitation of regional finances, I am not familiar with the details, so I would like to refrain from making comments.

In relation to your question, the FSA believes that it is important for regional financial institutions to come up with resourceful and innovative ideas that would facilitate regional financing in a manner suited to the circumstances of the regions. From this viewpoint, the FSA is striving to ensure that financial institutions strengthen and maintain their efforts regarding the so-called relationship banking, including making contributions to regional economies, by requiring them to disclose the contents and results of their efforts, thus subjecting them to public pressure. We intend to continue encouraging them to make efforts in this respect.

Q.

Four “shinkin” banks in Aomori Prefecture are planning to merge into one entity that will cover the whole prefecture. The role of regional financial institutions is attracting growing attention amid the increasingly severe management conditions of SMEs. Could you tell me how you view the planned merger and what effects you expect it to have?

A.

I understand that four regional banks in Aomori Prefecture (Hachinohe Shinkin Bank, Aomori Shinkin Bank, Too Shinkin Bank and Shimokita Shinkin Bank) announced today that they had agreed to merge by November 2009.

As a management realignment move like this is basically a matter concerning management decisions of individual financial institutions, I would like to refrain from making direct comments. Generally speaking, I would like to express my respect to them for making management decisions from a long-term perspective. I hope that this merger will strengthen their financial foundation and enable them to offer financial services that match users’ needs and provide smooth financing, thus contributing to the development of regional economies.

Q.

I have a related question. Is the FSA hoping or expecting that a move like this will spread to other regions amid the ongoing financial crisis?

A.

As I said earlier, I understand that mergers and realignment moves should be decided based on individual financial institutions’ own management judgments. Generally speaking, a merger could lead to an improvement in management efficiency through efficient allocation of branch offices and personnel, increased efficiency in system investment and diversification of know-how. In this sense, I am sure that a merger would be an option worth considering in order to strengthen a financial institution’s management foundation so as to ensure a stable and effective exercise of the financial intermediary function.

In any case, it is very important that from a long-term perspective, individual financial institutions make efforts to establish management strategies and strengthen their management foundations based on their own judgment.

Q.

Norinchukin Bank, which has become a source of controversy in the deliberations on the bill for revising the Act on Special Measures for Strengthening Financial Functions, has announced a plan to raise more than one trillion yen in capital. How do you view moves by financial institutions to raise capital on their own?

A.

I understand that Norinchukin Bank today announced a plan to raise more than one trillion yen in capital by the end of March 2009 and request support from its members.

A financial institution’s capital policy is a matter concerning its management decision, I would like to refrain from making comments from the FSA’s standpoint. Generally speaking, it is very important that financial institutions make efforts to strengthen the management foundation from a long-term perspective amid the ongoing global financial market turmoil.

Q.

In relation to this matter, what is your view on the necessity for regional financial institutions in general - I suppose that the FSA is now adding up first-half financial results announced by them - to strengthen their capital base?

A.

First, regarding regional financial institutions’ financial results for the fiscal first half, all regional banks made an announcement before yesterday. They mostly posted profit declines, with some of them slipping into the red, because of such factors as the write-down of the value of securities holdings and increases in credit costs and the cost of bad loan disposals. Of the 110 regional banks, 96 posted profit declines, with 35 slipping into the red. As for the overall picture of their financial results, we are now adding up the figures they announced.

Needless to say, behind the unfavorable results is the global financial market turmoil triggered by the subprime mortgage problem, which has had an impact on Japan’s real economy and stock market. The results also reflect the severe conditions of regional economies and SMEs in Japan. I know it has been pointed out that financial institutions have become cautious in screening borrowers under these circumstances.

As for your question concerning moves to strengthen capital bases, I believe that it is very important for financial institutions to do so from the viewpoint of consolidating the management foundation and exercising their financial intermediary function in regional economies by properly providing loans to SMEs. Therefore, the FSA has taken a variety of measures to ensure the exercise of the financial intermediary function. Of course, the FSA has submitted to the Diet the bill for revising the Act on Special Measures for Strengthening Financial Functions, which is now under deliberation, in case financial institutions find it difficult to smoothly strengthen their capital base through market-based capital-raising efforts. The bill represents part of our overall efforts in this regard.

Q.

I would like to ask you about the restriction on short selling, which Minister Nakagawa unveiled in a statement on November 18. The other day, regarding the requirement that securities companies should make sure that short sellers first borrow stocks they sell short, TSE President Saito made comments to the effect that the government should better take into consideration the practical work processes involved in the enforcement of restriction. Although the way of enforcement may change after the public comment period, which has just ended, could you explain the purpose of the restriction again and how you intend to enforce it?

A.

I am aware of TSE President Saito’s comments that you mentioned.

In Japan, the requirement for the confirmation of borrowing of stocks sold short and the ban on short selling of stocks without first borrowing the stocks have already been in place. The additional measure we have taken recently is intended to better ensure the effectiveness of the existing rules by providing legal clarification regarding securities companies’ confirmation procedures. To this end, we have implemented the public comment process. We will revise a relevant cabinet office ordinance in light of the opinions we have received through this process. In doing so, we will have to pay due consideration to the need to facilitate practical work processes at securities companies, albeit on the premise that the effectiveness of the restriction should be sufficiently secured.

Q.

I have two questions. The first question concerns the recent announcements of losses related to derivatives by an increasing number of universities as well as companies. Regarding universities’ asset management, how do you view financial institutions that sell such products to universities - I think they are mainly foreign financial institutions - from the viewpoint of the suitability rule? My second question concerns an additional financial rescue package announced on Monday by the U.S. Federal Reserve Board, under which up to 800 billion dollars will be used to purchase GSE (government-sponsored enterprise) bonds and securitization products. While both favorable and unfavorable effects have been pointed out, how do you view the package’s impact, including how it will affect the yen in relation to the declining confidence in the dollar?

A.

As for your first question, I understand that well-known universities that have made various investments as part of asset management are saddled with losses as a result of the materialization of risks caused by the recent global market turmoil. I should not make a definitive statement about the level of expert investment decisions involved in these cases, because the level probably varies on a case-by-case basis. Generally speaking, business operators that sell investment products with high risks should, as a matter of course, take care to offer products that match investors’ various needs and provide necessary and sufficient information in light of each investor’s level of understanding, so as to enable rational investment decisions. Under a legal framework based on the Financial Instruments and Exchange Act, investors are classified into professional investors and non-professional investors, or into specified investors and ordinary investors. In addition, the 14 principles on which various financial industry groups and the FSA agreed in April this year to share included a basic principle regarding the provision of sufficient explanations and information. In this sense, I hope that financial institutions will properly conduct business operations based on this principle.

As for your second question, additional market stabilization measures announced by the U.S. authorities include the establishment of a 200-billion-dollar lending facility for investors holding asset-backed securities, purchases of bonds issued by GSEs and residential mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae with the use of funds totaling up to 600 billion dollars. I understand that the United States has adopted these measures as a result of responsible decision-making. I hope that these measures, combined with the measures already implemented, will help to stabilize the financial markets.

Q.

Regarding the restriction on short selling, you said earlier that it is necessary to pay due consideration to the need to facilitate the practical work procedures of securities companies. Do you mean that it will be inevitable to substantially revise the way of enforcing the restriction? What action do you intend to take in light of the TSE president’s comments? I have one more question, which concerns the significance of the latest restriction on short selling. What is the proportion of stocks sold short without prior borrowing in the overall transaction volume?

A.

The public comment process is intended to receive opinions from people involved in practical work processes and from a broad range of investors, namely market participants actually doing transactions, and reflect reasonable opinions in our plan. As I said earlier, we will seek to strike the right balance between the effectiveness of the regulation and the smooth conduct of securities companies’ work processes with due consideration of opinions received through the public comment process. As for the proportion of stocks sold short in the overall trading volume, I understand that short selling usually does not account for a dominant portion. For precise figures, I would like you to consult the Planning and Coordination Bureau.

(End)