Press Conference by the Minister for Financial Services

(Excerpt)

23 July, 2001

Q.

Stock prices are falling: Nikkei 225 set a new all-time low since the collapse of the bubble economy, and TOPIX marked a new low for the year. Could you give us your perspective on the likely effects to the fiscal condition of financial institutions?

A.

As we are approaching the introduction of fair value accounting, the effects would inevitably be negative, and we are therefore cautiously observing the situation from all angles. As we have previously explained, we believe that it is important to create an environment that is suitable for raising the weight of direct financing, especially for individual household funds to flow into the capital market. The Financial Services Agency is currently working on a plan to realize such an environment, so that measures for institutional reform can be fully implemented as required in due course. We will make a public announcement as soon as the plan is finalized.

Q.

Are efforts to develop such an environment going to center on the tax system related to securities?

A.

Yes. Additionally, in order to raise public confidence in the securities market, the Financial Services Agency will endeavor to further stimulate various activities, as well as expect particularly those of the Securities and Exchange Surveillance Commission.

Q.

Last week, you stated that major banks should be inspected at least once a year. Please elaborate on the details of the schedule and other plans relating to the inspection.

A.

Exhaustive efforts have been made to meet the inspection requirements on a case-by-case basis since the days of the Financial Supervisory Agency, before the establishment of the Financial Services Agency. For example, when public confidence in the insurance sector declined, we were required to focus on the insurance industry. Further, during the 1-year postponement of pay-offs, we had to finish the inspection of all credit unions as well. As we need to tackle mounting issues on an ad-hoc basis, our principle is to inspect major banks biannually.

In the meantime, the general public is extremely concerned about the asset quality of Japanese financial institutions, especially in regard to non-performing loans. We have explained that such concerns are ungrounded, based on the comprehensive understanding of the self-assessment process under the rule of self-responsibility, external auditing conducted by certified public accountants and audit corporations, and inspection. Some explanation on the effectiveness of each checking function in this triple checking system would help increase public confidence in the financial sector en bloc. In response to some questions, I did state that inspections revealed a deviation between the results of bank's self-assessments and of our inspections, and I have explained that the deviation amounted to around 25% of the bank's risk management loans.

Simultaneously, we want to quickly restore public confidence based on thorough inspections fulfilling such checking function, and that is why we stated that major banks should be inspected once a year, focusing especially on credit risks. As it would be extremely difficult to conduct a full inspection on an annual basis with the existing human resources, we intend to at least annually inspect their credit risks, depending on the situation.

Another issue is how the inspection findings would be reflected in their next financial statements. This does not in any way mean that banks have failed to reflect them in the past, but we will follow up the inspections in order to make sure that the results are completely reflected in the next financial statements. It is in this context that we planned the Financial Services Agency would inspect major banks for the purpose of checking the accurate next financial statements in the process of preparing it.