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| Meeting to Exchange Views on the Facilitation of Finance for SMEs (December 10) |
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[Topics]
On November 30, 2009, the Act concerning Temporary Measures to Facilitate Financing for SMEs, etc. (SME Financing Facilitation Act) was passed in the Diet and enacted, before being promulgated on December 3 and being enforced on December 4. In addition to the enforcement of the act, Cabinet Orders and Cabinet Office Ordinances, supervisory guidelines and inspection manuals pertaining to the act have also been in force since December 4, having gone through a public comment process before starting.
The following is an overview of the key parts of each of the recently enforced Cabinet Orders and Cabinet Office Ordinances, supervisory guidelines and inspection manuals.
*Some technical corrections have been made in light of the views and opinions received through the public comment process.
[Cabinet Orders and Cabinet Office Ordinances]
- Scope of SMEs covered by the Act (Cabinet Order)
The SME Finance Facilitation Act defines the scope of “Small and Medium-sized Enterprises” (SMEs) based on the Small and Medium Sized Enterprise Basic Act and related acts, and Cabinet Orders also prescribe other corporations to be included or excluded as “SMEs” in consideration of the characteristics of their business. - Organizations with whom financial institutions should strive to cooperate closely (Cabinet Office Ordinance)
The SME Financing Facilitation Act sets forth the Japan Finance Corporation (JFC) and the Credit Guarantee Corporations as examples of organizations with whom financial institutions should cooperate in revision of loan terms, etc., and Cabinet Office Ordinances also prescribe the Shoko Chukin Bank and other government-related organizations as organizations with whom financial institutions should cooperate closely. - Methods and contents of disclosure and reporting to relevant authorities, required of financial institutions (Cabinet Office Ordinance)
The SME Finance Facilitation Act requires financial institutions to periodically disclose information and make reports to relevant authorities, and Cabinet Office Ordinances also prescribe the frequency for disclosure and reporting (quarterly for banks, and half-yearly for other financial institutions) as well as other details (number/amounts of applications for revision of loan terms and number/amounts of accepted/rejected applications etc.).
[Guidelines for financial supervision based on the Act Concerning Temporary Measures to Facilitate Financing for SMEs, etc.]
- Response to applications for changes, etc. to loan terms
The guidelines prescribe evaluation points used for financial supervision, which relate to measures dealing with applications for changes, etc. to loan terms
The main points of focus are described below.(1) Whether the financial institution responds in a conscientious manner in the event it receives a request for advice from an obligor concerning an application for changes, etc. to loan terms. Also, in the event it receives an application from an obligor for changes, etc. to loan terms, whether the financial institution causes the application to be withdrawn against the obligor's will.
(2) In the event the financial institution rejects an application for changes, etc. to loan terms, whether it provides a careful and detailed explanation about the reasons leading up to the rejection, taking into account such factors as the business relationship thus far and the knowledge and experience of the obligor.
(3) When holding talks with SME managers, whether the financial institution engages in serious discussion aimed at the formulation of a business turnaround plan. Also, if a request is received from an SME manager who wishes to formulate a business turnaround plan, whether the financial institution supports the formulation of such a plan.
(4) If a business turnaround plan has been formulated, whether the financial institution manages the progress of the plan appropriately, and whether it gives advice to the SME manager where necessary.
(5) If an application is received for changes, etc. to loan terms from an SME manager who has loans with other financial institutions, whether the financial institution, while being mindful of its duty of confidentiality, strives to maintain close cooperation with the other financial institutions, such as confirming information with each other, on the assumption that the SME manager has given his/her approval.
(6) In the event an application is received from an SME manager for changes, etc. to loan terms, if it can be confirmed that another financial institution has met changes, etc. to loan terms for the SME manager in question, whether the financial institution strives to satisfy the application as much as possible.
(7) Before using the guarantee for accommodating term changes, whether the financial institution takes measures based on the intended spirit of this system, such as giving serious consideration to improvements or the rehabilitation of the SME manager's business.
(8) Whether the financial institution grants credit appropriately to SME managers who have had changes, etc. made to their loan terms. For example, whether the financial institution rejects applications for new loans or changes, etc. to loan terms based purely on the fact that the applicant has a history of changes, etc. to loan terms.
(9) If an application is received for changes, etc. to loan terms from a home loan borrower, whether the financial institution provides careful consultation aimed at repayments that are reasonable for the borrower, while being mindful of the obligor's property and income situation.
- Provision of systems at financial institutions
The guidelines prescribe evaluation points used for financial supervision, which relate to the provision of systems at financial institutions. The main points of focus are described below.(1) Whether the financial institution has formulated a policy related to the implementation of measures that contribute to reducing the burden relating to its repayment of debt (basic policy).
- Whether the financial institution has described in detail their approach and arrangements for changes, etc. to loan terms (including the leadership and commitment by management).
- If there are differences to the measures that existed prior to the date of the law coming into force, whether the financial institution has described the contents of those differences clearly and in detail.
(2) Whether the financial institution has a system in place for gaining a proper understanding of its response to applications for changes, etc. to loan terms.
(3) Whether the financial institution has set up a complaint and consultation service at its headquarters for changes, etc. to loan terms. Also, whether the financial institution has a system in place at each of its sales offices for receiving complaints and providing consultation relating to changes, etc. to loan terms.
(4) Whether the evaluation of sales offices and other standards of performance evaluation and so forth are consistent with the basic policy. Whether there are any evaluation standards likely to recommend measures that are not in line with the basic policy.
(5) Whether the financial institution has a system in place at its headquarters and sales offices for providing appropriate interim control of the management conducted by its SME managers who have made changes, etc. to loan terms (continual monitoring, management consultation, management guidance, etc.).
[Financial Inspection Manual]
- Upon revising the Manual, the structure and content of the Manual were refocused from the
conventional risk management to the following two main points:(1) Financial facilitation, including the consulting function of financial institutions (management consultation, management guidance, etc.), and
(2) Maintenance and improvement of the soundness of financial institutions.
Specifically, in addition to (1) Business Management (Governance), a new chapter , (2) “Financial Facilitation” was established, covering fulfillment of the consulting function and general financing facilitation in financial institutions, and the existing areas such as legal compliance, customer protection and risk management were consolidated into (3) “ Risk Management” chapter. Furthermore, necessary revisions have also been made to Business Management (Governance) and the Risk Management chapter from the perspective of financing facilitation.
- Chapter of Financial Facilitation
As mentioned above, the “Chapter of Financial Facilitation” covers the fulfillment of the consulting function and general financing facilitation in financial institutions. This Chapter also includes checkpoints on the responsibility to make changes, etc. to loan terms and the obligation to provide systems, which were prescribed in the SME Financing Facilitation Act.
Given that financing facilitation is one of the crucial roles played by financial institutions, those areas in the Financial Facilitation chapter that are generally useful for financing facilitation will continue to apply to inspections even after the expiration of the act.
Specific details are as follows.(1) Following are some of the specific perspectives for inspections, which have been set with regard to the fulfillment of the consulting function by financial institutions:
- Does the financial institution have in place rules and procedures with regard to business consultations, business guidance and support for the formulation of business improvement plans by the debtors?
- Does the institution endeavor to fully grasp the actual status of the borrowing companies' corporate management, including information concerning qualitative factors such as the companies' strengths in terms of technology and sales as well as senior management's capabilities, by visiting the companies on an ongoing basis, and does it conduct loan management accordingly?
- Is the institution actively involved in corporate and business rehabilitation through the provision of elaborate management consultations and guidance?
- Is the institution providing support for debtors by utilizing its information function and network, including information concerning business matching and M&As?
(2) Proper implementation to facilitate financing
- When the institution has received a request for consultations or an application for new loans or changes of loan terms from a customer, does it strive to take action and respond promptly? In the case of rejecting the requests or collecting loans, does it strive to obtain the understanding and satisfaction of the customer by explaining the reasons for such actions as much as possible?
- When explaining to the customer, does the institution strive to promptly understand the customer's situation in detail and make explanations in accordance with the status of the customer's business relationship with the institution and its knowledge and experience?
- Does the institution have in place an independent counter for changes of loan terms at the head office and a system to receive complaints and inquiries about changes of loan terms at branch offices?
- Does the institution appropriately provide credit to the debtors for whom it has agreed to change loan terms? Does it not reject applications for new loans or changes of loan terms simply because of the debtors' records of loan-term changes?
- Does it avoid using the financial inspection manual established by the authorities as an excuse for inappropriate practices such as refusing to extend loans to customers conducting sound business operations or retrieving loans from such customers?
- Also, the FSA has revised the “Checklist for Business Management” in order to confirm whether the institution has implemented specific measures that attach importance to business consultation and guidance and other financial facilitation, legal compliance, customer protection, comprehensive risk management, and management of various risks and internal audits, instead of placing too much emphasis on sales and profits divisions. (e.g. Has the institution established a system to ensure that the staff members engaged in such operations are treated fairly regarding performance assessment and personnel evaluation in accordance to the strategic importance of those operations?)
(3) Establishment of systems required under the SME Financial Facilitation Law
- Does the institution have in place a well-designed policy to deal with requests for consultations and applications for changes of loan terms from SMEs?
- Does the institution has a system necessary to properly deal with requests for consultations and complaints about changes of loan terms from SMEs, based on the Law?
- Are the disclosure of its financial facilitation conditions and its reporting to the authorities, required by Law, appropriate?
[The overview of the revision of Supplement to the Financial Inspection Manual]
- In the past, the fact that changing the terms of a loan would result in it becoming a restructured loan has been one of the reasons given for why financial institutions are sometimes not able to respond positively to applications from customers for changes to loan terms.
In this regard, in view of the actual conditions of SMEs such as business improvements taking time and SMEs lacking the capacity to formulate business improvement plans on November 7, 2008: (1) the period of time taken for business improvement was relaxed from “within three years” to “within five years” (up to a maximum of “within ten years”), and (2) even if a business improvement plan had not been formulated, if there were plans agreed to by the financial institution and obligor for future asset sales or cost reductions, then these could now be treated in the same way as a business improvement plan using materials prepared and analyzed by the financial institution.
However, a shortage of personnel means that it is sometimes difficult for SMEs to formulate business improvement plans quickly. Due to this reason, the FSA decided to revise Supervision Guidelines and Supplement to the Financial Inspection Manual, so that at times when it is expected that an SME will formulate a business improvement plan within one year at the most, the formulation of such a plan could be deferred up to a maximum of one year from the time the loan terms are changed, and during this time, the loan would not fall under the category of a restructured loans. During this grace period (up to a maximum of one year), it is expected that the financial institution will exercise its consulting function, and that the SME and the financial institution would work together to formulate a business improvement plan.
“At times when it is expected that an SME will formulate a business improvement plan” refers to instances where, although agreement has not been reached between the financial institution and the obligor, it can be confirmed that resources exist which could be utilized for the business improvement of the obligor (for example, assets available for sale, expenses that could be cut, development plans for new products, or forecasts for market expansion), and where the obligor is willing to formulate a business improvement plan. Furthermore, it was also clarified that, when formulating a business improvement plan or the like, rather than necessarily requiring some kind of restructuring, such as future plans to sell assets or cut expenses, consideration should be given collectively to such factors as the obligor's technological and selling capabilities and their growth potential.
Moreover, in cases where an SME is already required by a different financial institution (including the Japan Finance Corporation (JFC), a credit guarantee corporation, etc.) to formulate a business improvement plan or the like, the financial institution shall be able to determine the likelihood of business improvement based on that plan.
*For further details, please refer to the Publication of enforcement orders and cabinet office ordinances concerning temporary measures for facilitating the financing of small- and medium-sized enterprises, etc. (December 3, 2009) and the Publication of the guidelines and financial inspection manuals, etc. for financial supervision based on the Act Concerning Temporary Measures to Facilitate Financing for SMEs, etc. (December 4, 2009) in the “Press Releases” section of the FSA website.
On December 9, 2009, the Roundtable Committee on Fundamental Issues of the Financial System Council, compiled and published a report entitled “Designing the Japanese Financial System in Light of the Global Financial Crisis.” Beginning in July 2009, the Roundtable Committee held eight sessions of deliberations on what Japan's financial system should be like in the future in light of the global financial crisis. The report by the Roundtable Committee summarizes the results of their deliberations.
<Executive summary>
The financial crisis that started in the United States has had a significant impact on the financial and capital markets in countries around the world. While Japan's financial system itself has remained stable compared with the U.S. and European systems, the financial crisis has had a serious impact on several areas, including the real economy, stock prices, corporate financing and the government bond repo market, and the impact is still lingering in some areas.
Since the bursting of the so-called bubble economy in the 1990s, Japan has been seeking to establish a two-track financial system oriented toward the development of both the banking and market sectors. However, the banking sector still has a large presence and, although this mitigated the initial impact of the financial crisis, it is one of the factors behind the fact that the impact of the crisis later expanded in Japan compared with in other countries.
These circumstances have reminded us that Japan faces the challenge of further enhancing the banking sector's financial intermediary function and developing the market sector's financial intermediary function while increasing the resilience of the banking sector against stock price fluctuations, and other sudden changes in markets.
Specifically, first of all, it is urgent to reform the financial intermediary function of the banking sector, which is deemed to have relied on credit security based on collateral. It is desirable that banks will aim for a business model of supporting value creation by companies. The social responsibility of the banking sector is attracting renewed attention, and the significance of the banking sector's financial intermediary function has been recognized anew.
At the same time, it is necessary to establish a well-balanced financial system by strengthening the financial intermediary function of the market sector, whose weight in the Japanese financial system is still small. In other words, the efforts to establish a two-track system that have continued since the 1990s should be maintained. These efforts are intended to contribute to the formation of the people's assets.
Although there are some differences in the recognition of, and the response to, the crisis between Japan and other countries, countries around the world are cooperating in the implementation of measures to prevent the accumulation of imbalances that could trigger a financial crisis originating in the markets and to curb the spread of a crisis.
While it is necessary to continue promoting such measures, it is also essential to make use of the experiences and knowledge so far accumulated in order to deal with potential risks that could lead to a new financial crisis. Related to this matter, for example, regarding emissions trading, it is important for Japan to make active contribution to the establishment of international rules, accounting standards and monitoring systems in order to ensure the appropriateness and transparency of transactions, while paying due attention to the impacts on economic activities.
It is also important to take care to avoid the situation where the efforts to improve the soundness of the banking sector in major countries produce the unintended effect of hurting the real economy or the financial intermediary function. In particular, if the strengthening of regulation produces an excessive impact on the economies of the G-20 countries, including Japan, which have a significant weight in the global economy, it would not be beneficial for the global economy as a whole. A gradualist, pragmatic approach is therefore warranted.
Moreover, it is important to enhance the regulation and supervision that focus on the interconnectedness among financial institutions and markets, in addition to the financial supervision that focuses on the soundness of individual financial institutions.
In light of the above, in future efforts to build a financial system, the “3S” approach (ensuring “Suitability,” “Sustainability and “Stability”) is important.
In addition, given that the impact of the financial crisis on the real economy is serious in Japan compared with in other major countries, the authorities are making every effort to take policy measures to control the routes through which the impact of a financial crisis could spread to the real economy.
The government and the central bank must take great care, at the same time, to avoid the situation in which fiscal or monetary imbalances would have adverse effects on the Japanese economy as a result of such measures. As countries around the world are confronted with the need to deal with huge fiscal deficits and take unconventional monetary measures, they must come up with creative policy measures expanding the frontiers of effective policy-making to tackle unprecedented challenges that cannot be dealt with by conventional economic theories and conventional economic measures. This situation is especially pronounced in Japan, so it is desirable for the country to play a pioneering role in tackling such unprecedented challenges through expanding the frontiers of effective policy making.
*For further details, please refer to Publication of the “Report by the Roundtable Committee on Fundamental Issues of the Financial System Council” (December 2009) in the “Press Releases” section of the FSA website.
Following announcements by major banks, etc. of their financial results as of September 30, 2009, the FSA has compiled the figures announced by these banks and released them on December 2, 2009.
Below is a summary of the financial results of the major banks, etc. as of September 30, 2009.
- Condition of profit
The operating profits from the core business of major banks remained virtually unchanged from the previous year (1.4 trillion yen) as a result of sluggish gross profits.
The net incomes increased by 53.4% from the end of September 2008 (0.5 trillion yen) as a result of the impairment of losses from the disposal of NPLs, and losses on charge-offs of equity securities, etc. - Condition of financial soundness
The non-performing loan ratio stood at 1.9% as of September 30, 2009. This was an increase of 0.2% compared to March 31, 2009.
Their capital adequacy ratio stood at 14.3% as of September 30, 2009. This was an increase of 1.9% compared to March 31, 2009.
*For further details, please refer to Overview of major banks' financial results etc. as of September 2009 (December 2, 2009) in the “Press Releases” section of the FSA website.
Following announcements by regional banks of their financial results for the period ended September 30, 2009, the FSA aggregated the figures announced by these banks and released them on December 2, 2009.
Below is a summary of the financial results of the regional banks as of end-September 2009.
- Profit status
The net core business profits of regional banks increased 19.7% from the same period last year, in part, due to an improvement in gains (losses) related to bonds, etc.
Interim net profits increased 152.6% from the same period last year, in part due to the increase in net core business profits, as well as decreases in the disposal of non-performing loans (NPLs) and decreases in the valuation losses on shareholdings, etc. - Status of non-performing loans
The amount of NPLs held by regional banks and their NPL ratio were both at the same level as of March 31, 2009. - Status of capital adequacy ratio
The average capital adequacy ratio of the regional banks increased compared to March 31, 2009.
*For further details, please refer to Overview of the financial results of regional banks as of end-September 2009 (December 2, 2009) in the “Press Releases” section of the FSA website.
Exposures of Japanese deposit-taking institutions to subprime-related products and securitized products
On December 4, 2009, the Financial Services Agency (FSA) published the exposures of Japanese deposit-taking institutions to subprime-related products as of September 30, 2009 and their exposures to securitized products based on the leading disclosure practices summarized in the Financial Stability Forum (FSF) report (April 2008).
As of September 30, subprime-related products held by all Japanese deposit-taking institutions totaled 341 billion yen (down 66 billion yen compared to June 30). Their valuation losses totaled 24 billion yen (similarly down 46 billion yen), and the cumulative total of their realized losses from April 2007 to September 30, 2009 amounted to 1,046 billion yen (similarly up 6 billion yen).
Meanwhile, as of September 30, their total exposure to securitized products stood at 16,919 billion yen (down 1,030 billion yen compared to June 30). Their valuation losses totaled 335 billion yen (similarly down 192 billion yen), and the cumulative total of their realized losses amounted to 2,573 billion yen (similarly down 42 billion yen).
While there is possibly a range of overlapping factors underlying why valuation losses on securitized products decreased overall, the fact that write-downs and disposals by sale continued at deposit-taking institutions seems to be the main driver.
Since September 2007, the FSA has been publishing the exposures of Japanese deposit-taking institutions to subprime-related products and securitized products, using a uniform set of standards*.
We believe that efforts like this help promote a precise understanding of how the turmoil in the global financial markets (triggered by the subprime mortgage problem) is impacting on the Japanese financial system through securitized products.
The FSA will continue its efforts to publish information, and will also continue to make improvements so that the public can more easily access the current state of the Japanese financial system and the approaches to financial administration.
*As for exposures to securitized products based on the leading disclosure practices summarized in the FSF report, the FSA started survey and publication as of the end of March 2008.
*For further details, please refer to Exposures of Japanese deposit-taking institutions to subprime-related products and securitized products (December 4, 2009) in the “Press Releases” section of the FSA website.
Publication of the Revised Cabinet Office Ordinances, etc for the Voluntary Application of International Financial Reporting Standards in Japan
On December 11, 2009, the Financial Services Agency (FSA) published a set of revised Cabinet Office Ordinances, including “Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements” and “Cabinet Office Ordinance on Disclosure of Corporate Information,” etc
With these revisions, Japanese listed companies which meet certain requirements (“Specified Companies”) will be given the option to prepare their consolidated financial statements, starting from the consolidated fiscal years ending on or after March 31, 2010, by applying IFRSs designated by the Commissioner of the FSA through public notice. Please refer to the attached document for the summary of the revised Cabinet Office Ordinance, etc.
The publication of these revised Cabinet Office Ordinances, etc. officially provides an operational framework for the voluntary application of IFRSs, starting from the fiscal years ending on or after March 31, 2010, as the first step toward the application of IFRSs in Japan, following the roadmap, “Application of International Financial Reporting Standards (IFRS) in Japan (Interim Report)” released by the Business Accounting Council on June 30, 2009. On the second step, the decision regarding the mandatory use of IFRSs is to be made around 2012, while giving due consideration to various factors, including whether: 1) financial statements preparers, auditors, investors and other stakeholders are well prepared for practical application of IFRSs through sufficient training and education on IFRSs; 2) the due process for setting of IFRSs is ensured and governance of the IASCF strengthened; and 3) the process of setting IFRSs gives proper consideration to the economic reality of business and trade practices in various countries.
The revision also includes discontinuing the current treatment where certain Japanese listed companies are allowed domestically to submit their consolidated financial statements prepared under U.S. Generally Accepted Accounting Principles; the treatment will no longer be valid for consolidated fiscal years ending after March 31, 2016.
*For further details, please refer to Results of the public comments on the “Draft Cabinet Office Ordinance for Partial Amendment of the Regulations, etc. for Terminology, Forms and Preparation of Consolidated Financial Statements,” etc. and the “Draft Amendments to the Points to be Considered regarding the Disclosure of Corporate Information, etc. (Corporate Information Disclosure Guidelines)” (December 11, 2009) in the “Press Releases” section of the FSA website. (Available in Japanese only)
