Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

December 22, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

In a draft budget for fiscal 2009 compiled by the Ministry of Finance (MOF), approval was given to the allocation of funds to the establishment of the new post of deputy commissioner for international policy coordination and an increase in the FSA staff intended to strengthen supervision. How do you feel about this?

A.

According to an informal notice of the MOF’s draft budget for fiscal 2009, the allocation of funds was approved for measures to strengthen the FSA’s organization and staff, including the establishment of the new post of deputy commissioner for international policy coordination and a net increase of 45 members in the FSA staff, so I appreciate the budget examiners’ understanding of our request.

As you know, the conditions of the real economy are continuing to deteriorate and markets remain unstable around the world amid the ongoing global financial market turmoil. In this situation, I understand that it is necessary for the FSA to strengthen cooperation and coordination with other countries’ authorities in financial regulation and supervision. In particular, it is becoming increasingly important to build a network of high-level communications and share information with other countries’ authorities. In this context, it is essential for the FSA to enhance its ability to monitor the actual financial conditions of financial institutions. Therefore, strengthening cooperation with foreign authorities and enhancing the ability to monitor global market developments are positioned as priority matters under the Better Regulation (improvement in the quality of financial regulation) Initiative, so I am strongly encouraged by the approval of the measures to strengthen our organization, which constitute the backbone of those efforts. As I understand that our budget request was approved with due consideration of our circumstances, I believe that it is important for us to make full use of our organization and staff to properly tackle a variety of policy tasks.

Q.

This is probably your last press conference for this year. Could you look back at the past year and sum it up? Also, could you tell me what you think has been the significance of the year 2008 for the FSA and its financial regulation?

A.

Although it seems to be a bit too early to look back at the year 2008, this is my last regular press conference for the year, so I will answer your question. I suppose that the year 2008 will probably go down in the history as a memorable year because of the turmoil in the global financial and capital markets and the authorities’ response to it, although the year has not yet ended.

As you know, bankruptcies of financial institutions, including major investment banks, are continuing in the United States and Europe and many financial institutions are still writing off huge losses due to the turmoil in the global financial and capital markets that was triggered by the subprime mortgage problem. In response, the authorities of individual countries are dealing with this crisis through the injection of capital into financial institutions and the large-scale provision of liquidity and taking medium- and long-term measures to rebuild the financial architecture so as to prevent the recurrence of financial crisis. The medium- and long-term measures include review and revision of the role of credit ratings and the method of using them, improvement of the credibility of information disclosure and strengthening of the regulations on the soundness of financial institutions, and we will tackle these tasks to rebuild the financial architecture.

As I already mentioned, it is becoming more and more important to strengthen international cooperation between the authorities of individual countries. It is also becoming increasingly important to participate in various international meetings, to be actively involved in debates there and to share information. In relation to this, the FSA has taken such measures as publishing Japanese financial institutions’ total exposures, first exposures to subprime-related products and then those to a broader range of securitization products, and carefully monitoring the soundness of individual Japanese financial institutions in the current market environment. In addition, in order to mitigate the negative effects of excessive market movements on Japan’s real economy, we have revised the Act on Special Measures for Strengthening Financial Functions and taken various measures to facilitate financing for small and medium-size enterprises.

While making efforts to deal with the global financial crisis, the FSA is also engaging in the Better Market Initiative. At the same time, it is implementing the Better Regulation initiative. Thus, we are tackling medium- and long-term, forward-looking policy tasks, too.

Meanwhile, June 2008 marked the 10th anniversary of the establishment of the Financial Supervisory Agency, the FSA’s predecessor. Over the 10-year period, we have made efforts to conduct financial regulation in a transparent and fair manner. All FSA staff will work as one to achieve the three objectives of financial regulation, namely, stabilizing the financial system, improving the protection of users and their convenience and establishing fair, transparent and vibrant markets.

Q.

The Liberal Democratic Party (LDP) approved a bill for the resumption of stock purchases by Banks’ Shareholdings Purchase Corporation, and as much as 20 trillion yen will be allocated for this in the second supplementary budget. Although stock purchases by this corporation are expected to be resumed quickly if the bill is passed in a Diet session next year, some bank officials expect that this will have limited effects as banks find it difficult to sell their shareholdings at the current slumping stock prices. How do you view the effects of the resumption of stock purchases by this corporation?

A.

As I said earlier, I think that the volatility of stock prices has increased very much amid the global financial turmoil. Stock price drops have affected the financial conditions of Japanese financial institutions, which in turn produced adverse effects on their financial intermediary function. Thus, the global financial turmoil has affected Japan’s real economy. We have taken various measures to minimize this causal link, including revising the Act on Special Measures for Strengthening Financial Functions, changing the treatment of loans for which lending terms have been eased and partially relaxing the capital adequacy regulation.

Using and enhancing Banks’ Shareholdings Purchase Corporation is also one of those measures. I believe that this is certain to be effective in easing concern about the extraordinary volatility of stock prices. The book value of stocks may vary between different financial institutions and management decisions as to whether or not to continue to hold stocks may vary from institution to institution. In any case, I am sure that this will be effective in providing a sense of relief so as to avoid a negative impact on the stock market.

Q.

I have a related question, which may have already been asked previously. Financial institutions are very vulnerable to stock price movements, and this leads to calls for the purchase of their shareholdings each time stock prices slump. What do you think of the argument - a similar idea has been floated in the LDP yesterday - that banks’ practice of owning shares should be reviewed?

A.

Broadly speaking, it is up to individual institutions to decide which assets to own under which business model and how to allocate risk assets while conducting risk management properly. On the other hand, it is true that most Japanese financial institutions have tended to have large exposures to stocks compared with their foreign counterparts. In light of this, the Act on Limits on Shareholdings, etc. of Banks, etc. requires banks to limit the amount of their shareholdings to less than the amount of their Tier 1 core capital. This requirement is now fully observed, with banks’ shareholdings falling well below their Tier 1 capital amount.

If financial institutions own a large amount of shares, they naturally hold a certain level of market risk. So, it is important that individual financial institutions decide as necessary whether or not it is sufficiently rational to continue owning shares as a business management strategy or from the viewpoint of risk management. In any case, the basic principle of risk management is securing a loss-absorbing buffer commensurate with the risks taken or limiting the size of risks to less than the capacity of the risk-absorbing buffer.

Q.

Am I correct in understanding that the FSA is not considering strengthening the capital adequacy regulation to lower the upper limit on shareholdings from a half of the Tier 1 capital to a third, for example, and that you basically think individual private financial institutions should conduct risk management based on their own management decisions?

A.

Basically, that is my thinking for the moment.

(End)