Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Tuesday, September 7, 2010, from 11:44 a.m. to 12:29 p.m.)

[Questions & Answers]

Q.

With new capital adequacy requirements for banks slated to be finalized at a meeting of the Group of Central Bank Governors and Heads of Supervisors (Basel meeting) to be held on the weekend, it appears to me that there are two significant issues: the core capital adequacy level and the length of the transition period leading up to the implementation of the new requirements.  What kind of reports have you received as to the progress of those debates?

A.

Given the global economic downturn that has been affecting banks in the U.S., Europe and elsewhere since the Lehman crisis two years ago - which is reminiscent of the financial crisis of ten years ago in Japan - the coming meeting is a very important economic and financial conference.  Its July meeting was attended by Japan's central bank governor and the head of the authorities responsible for banking supervision, that is, the Commissioner of the Financial Services Agency (FSA).  The requirement standards at issue have both quality and quantity aspects.  There is also a question of how long the transition period should be until their full-scale implementation.  Seeing that every country has considerably different circumstances, as you know, it has been made clear that this and other points will be taken into consideration once again in the deliberations at the September meeting.

As the definition of capital adequacy and some other matters agreed on at the July meeting reflect consideration for the circumstances that have actually taken place in Japan, I believe that the argument that Japan and some other countries have been pushing forward has been accepted.  That is how I see the situation, as I also stated at my last press conference.  With respect to deferred tax assets, they were not slated to be included into the core capital when the Basel III initiative began, but Japan, as well as some other countries, insisted strongly that they should be included.  As you also know, deferred tax assets arise from timing differences between tax and accounting treatments and are allowed to be carried forward for up to, if I remember right, seven years in Japan.  As for stakes in other financial institutions, Basel III has not allowed the inclusion of the entire amount, but attaches conditions.  It has been decided that the amount of 10 percent or more holdings in common shares of financial institutions, combined with other allowable amounts, can be included in the Tier 1 core capital, which basically consists of common equity and retained earnings, up to 15 percent in the aggregate.

Another change will be in the treatment of software, as I also mentioned last week.  The treatment of computer software and other assets accounted for as intangible fixed assets has also been addressed in such a fashion that the inequality arising from a difference in accounting standards can be rectified.  As continental Europe is situated in an economic condition rather similar to Japan and, accordingly, banks in France or Germany are basically in a different shape than their Anglo-American counterparts, Japan's position is currently being shared increasingly by participating countries, of which there are I believe 27, to form a collective view - that is the current state of affairs as has been reported to me.

At this time when the negotiation is still forthcoming, I would like to refrain from making reference to any specific level.  The FSA's stance is that while the role of financial services is critical amid the economic globalization - as you are also well aware - and the new requirements will contribute to greater capital adequacy and liquidity of Japanese banks over the medium to long term, it is important to pay attention to the actual circumstances and the process of economic recovery in Japan.  From such a perspective, we are hoping to continue asserting Japan's position in a proactive fashion.

As I repeatedly say, it is true that a higher capital adequacy figure may appear to imply security at a glance, but it can also lead to a credit crunch or oppressive debt collection practices, as we experienced 10 years ago.  Back then, even healthy companies went under.  As a Diet member of the ruling party in a ministerial post, I was faced firsthand with the confusion that prevailed in the Japanese economy at that time.  It was in 1997 that the Hokkaido Takushoku Bank went under and Yamaichi Securities failed, soon ushering in what would be called the "Financial Diet Session."  The Basel meeting is attended by 27 countries and, for all of them, a higher ratio figure, which does provide peace of mind and security, is at the same time not necessarily better in that light.  As making a capital adequacy ratio too high can lead to a credit crunch and oppressive debt collection and hence a shrinking economy, we are hoping to maintain a good balance in view of all those factors.  We are determined to make our point in the new requirement debate, keeping in mind where we stand as a country that actually experienced a financial crisis 10 years ago.

Q.

On a related note, the Association of German Banks is, according to some press reports, predicting that the developed countries will agree on making the core capital adequacy ratio 6 percent.  Having just stated that a higher ratio figure is not necessarily better, what would you think if an agreement is reached on the 6 percent requirement?

A.

Having said what I said, I still believe that without a certain level of capital, trust in banks would be jeopardized in turn and we must not let that happen again in the direst of situations.  Therefore, although it is news to me that there has been such press coverage, I am sure that each country is following reports like that very attentively.  I assume that various figures are going around at this time but, considering that the negotiation is just about to begin, I would like to refrain from making comments as someone responsible for financial matters.

Q.

One more thing, if I may.  The Asahi Shimbun reported this morning that the Incubator Bank of Japan is examining the possibility of forming a capital tie-up with a financial institution, investment fund, etc. of Japan and from abroad.  Please fill us in about two points - what kind of report you have thus far received about this development, and how do you see the current status of operation of the Incubator Bank?

A.

All right.  As a capitalization policy of an individual financial institution is, as you know, an issue in the realm of the institution's own corporate decision-making, I would like to refrain from making any comments in my capacity as the authority.  In any case, seeing as the FSA has issued a business improvement order against the Bank, I understand that the Bank is currently taking steps to improve its operation in accordance with its business improvement plan, and what the FSA is intending to do at this stage is to follow up on and rigorously supervise the efforts that the Bank is thus making.

Q.

I am Sonoda from Hokenmainichi Shimbun.

There has been press coverage reporting that refunds associated with the double taxation on life insurance payments will begin in October. Please give us your view on that and also on the work of reviewing the regulation for the over-the-counter sales of insurance products by financial institutions, which is scheduled to be wrapped up by December.

A.

I assume that you are asking what I think about the press coverage reporting that the Ministry of Finance and the National Tax Agency are now set on starting the refund procedures associated with the so-called double taxation of pension-type life insurance payments.  My understanding is that the work of examination by the tax authorities is in progress on the issue of the refunds and related matters associated with the so-called problem of pension-type life insurance payment double taxation.

I am refraining from making any comments on behalf of the FSA on the details of their deliberations but, in any event, the FSA is committed to keeping in contact and maintaining cooperation with the tax authorities and appropriately following up on life insurers to see if they comply with any action policies of the tax authorities, from the perspective of insurance policyholder protection.  That is the first point.

The other issue is the over-the-counter sales of insurance by banks.  Now that it will have been roughly three years this December since the ban against the over-the-counter sales of insurance by banks was fully lifted in December 2007, I assume you are asking what kind of changes will be made.  For insurance solicitations by banks, etc., the Ordinance for Enforcement of the Insurance Business Act and other regulations were amended several times since 2001 in an attempt to - most importantly - establish harmful practice prevention steps, including non-disclosure information protection.  Put simply, the issue of over-the-counter sales of life insurance by banks frequently came up on the agenda when I was a Liberal Democratic Party (LDP) member, which remained the case for a long time.  Being providers of loans to a variety of businesses and individuals, banks are always in a very dominant bargaining position.  Therefore, the significant worry was the possibility of the party in such a dominant bargaining position taking advantage of it for sales purposes - for instance, making a customer purchase a life or non-life insurance product by tying it to a promise to make a loan.  It was for that reason that the 2007 amendment, which approved the insurance product sales by banks in a phased-in form, was passed only after steps for the prevention of harmful practices, including non-disclosed information protection, were set in place as a sort of firewall.

The ban was fully lifted in December 2007, with the sales of all insurance products approved as a result and, now that roughly three years have passed, the steps for prevention of harmful practices are slated to be changed as necessary on the basis of monitoring results and other information from the perspective of the protection and convenience of insurance policyholders, etc.  However, I do not feel it appropriate to make a definite statement about any future orientation now.  From what I heard, however, over-the-counter sales make up 1 percent of non-life insurance sales and approximately 6 percent of life insurance sales, which are the figures that I believe have been reported to me.  Judging from those, it seems to me that the firewall or information on financing deals is protected fairly strictly.  I recall the debate that took place in the past about the possible highly negative impact of the insurance sales by banks on the livelihood of sales agents marketing life insurance products but some regional banks are actually not engaged in life insurance sales.  In the meantime, I hear that the three mega-banks are selling life insurance, but my guess is that it rather reflects their effort to have a full line of products, so to speak.  The possibility of the insurance sales by banks posing a real threat to the life insurance industry, particularly the livelihood of life insurance sales agents, was a subject of a heated debate in the LDP as well.  It turns out that more liberalization does help add more convenience for the people, as the results show: the over-the-counter sales by banks make up 6 percent of life insurance sales and 1 percent in non-life insurance sales.  Let me also point out that it is extremely important to protect life insurance policyholders and that the greater the convenience for prospective policyholders, the more accessible life insurance becomes.  I cannot give any definite word at this point in time - if I may be a little daring, however, I would say on the issue of the scheduled review after three years that the statistics look acceptable to me, but that is just my personal opinion.

Q.

Your new supervisory policies for financial institutions contain a statement envisaging the enhancement of financial functions by way of backup for the real economy and enterprises, which seems to me to be the sort of idea that the FSA had never proposed in the past and accordingly appears to be a potential sea change.  Please tell us once again what implications the supervisory policies for financial institutions involve.

A.

All right.  At the beginning of each program year, the FSA develops and announces its basic inspection policy and supervisory policies in order to articulate matters of importance in the work of our inspections and supervision.  As you know, we announced the inspection policy and supervisory policies for the new program year on August 28.

In the basic inspection policy for this program year, we presented basic inspection and enforcement frameworks and priority inspection items under our approach focused on inspecting whether a financial institution has set in place a system designed to serve the role of appropriately and smoothly providing funds to those with financing demand and offering quality financial products and services to users, an adequate financial base to fulfill that role and a robust and comprehensive risk management system, all in view of the recent economic conditions and other factors.  On an additional note, our basic inspection policy for this year is formulated to act on the New Growth Strategy, which was approved by the Cabinet in June of this year, and contains - I particularly want to stress this point - an extensive statement concerning smooth financing from financial intermediation service providers in accordance with the SME Financing Facilitation Act, which was enacted last December as former Minister Kamei successfully gained the Diet's approval on the basis of the three-party pact, and it also emphasizes our forward-looking approach to supervision, through, among other things, adherence to macro-prudence, in areas of risk management and financial system stabilization.  In accordance with those policies, the FSA is committed to delivering appropriate and effective inspections and supervision from the viewpoint of financial institution users and the public.

As I just stressed in particular, I believe that, in a sense, the SME Financing Facilitation Act brought about a sweeping change.  This is the type of statute that could only be enacted thanks to the change of administration.  My hometown is Kitakyushu.  It is a classic SME town, and SME owners there have said to me again and again, "Mr. Jimi, I am really happy that you created this law."

Amid the current economic downturn, financial institutions are after all in a more advantageous position in relation to SMEs.  This means that SMEs could not voice their opinion much.  Thanks to the enactment of this law, they can now straightforwardly request a change of terms or other matters.  Apparently, (former) Minister Kamei also proclaimed a transformation in attitude in the area of financial institution supervision as well.  As banking is also a consultancy service, there must be a perspective of not just lending money and getting the money back, but of how to help industry survive and operate decently.  That is why a sound and robust financial institution or a generous financial institution is needed and I, as the head of the FSA, pushed forward with conviction a policy for our work of inspections and supervision that is in line with that spirit.

Thank you very much.

(End)