FSA Newsletter No.86 2010

photo photo

Minister Jimi visits USA
(with Fed Chairman Bernanke (right))
(August 18)

Children Visitors Day “Let’s go to FSA!”
(in Senior Vice Minister’s office)
(August 18)

Table of Contents


Photo Gallery

*Provides photos and information on meetings, etc. attended by the Minister, Senior Vice Minister and Parliamentary Secretary.

photo photo

Minister Jimi (center front) visits Tokyo
Stock Exchange (TSE) - with TSE President
& CEO Atsushi Saito (right front), etc. -
(July 27)

Senior Vice Minister Otsuka
Greeting at the Tax Commission
(July 30)

International Related

Visits to USA & China by Shozaburo Jimi, Minister for Financial Services

Minister for Financial Services Shozaburo Jimi visited the U.S. for six days starting August 16. There, he met with Fed Chairman Bernanke, Treasury Under Secretary Brainard, Presidential Economic Advisor Volker, etc. In these meetings, they exchanged frank opinions on the effects of financial system reform on the macro economy and financial intermediary functions, financial and economic conditions, etc.

photo photo

Meeting with Treasury Under Secretary
Brainard (right)

Meeting with Presidential Economic
Advisor Volker (right)

Minister for Financial Services Shozaburo Jimi visited China for seven days starting August 27. There, he attended the Third China-Japan High Level Economic Dialogue, and met with Premier Wen Jiabao. He also held discussions with supervisory authorities for the banking, securities and insurance sectors, such as People’s Bank of China Governor Zhou Xiaochuan.

In particular, in the meeting with Premier Wen Jiabao, from the perspective of further promoting China-Japan mutual cooperation in the financial sector, in order to facilitate further support by Japanese financial institutions for capital raising by Chinese companies, he requested flexible deposit and loan ratio regulations for Japanese financial institutions. Premier Wen Jiabao etc. gave the reply that funds required by Japanese companies in China would definitely be assured.

photo photo

Third China-Japan High Level Economic
Dialogue

Wen Jiabao, Premier of the People’s
Republic of China (right) shakes hands
with Minister Jimi in meeting

Featured

Press release “The Group of Governors and Heads of Supervision reach broad agreement on Basel Committee capital and liquidity reform package” announced by the Group of Governors and Heads of Supervision

The Group of Governors and Heads of Supervision is the oversight body of the Basel Committee on Banking Supervision (Basel Committee). On July 26, it announced a press release on the regulatory reform under study in the Basel Committee.

1. Background and History

On December 17, the Basel Committee announced a package of regulatory reform proposals related to internationally active banks as a consultative document. This regulatory reform package was agreed on at the G20 London Summit last April, and reconfirmed at the Pittsburg Summit in September. This is a draft of international rules which improve both quality and quantity of bank capital, hold down excess leverage, and determine liquidity standards.

After last December’s announcement of the regulatory reform package, the Basel Committee did a Quantitative Impact Study (QIS) on the degree of impacts on individual banks, based on data collected from each country’s banks. To analyze impacts on entire economies, it also did economic impact assessment using a macroeconomic model. Based on these studies, the Basel Committee considered the many comments provided by each country until April 16 this year regarding the consultative document, and proceeded to investigate revisions to the regulatory reform package. This press release by the Group of Governors and Heads of Supervision announced the design of regulations on which broad agreement was reached as a result of this investigation.

2. Points of Broad Agreement by Group of Governors and Heads of Supervision (July 26)

Clarified that the core portion of capital should only be comprised of common shares and retained earnings (capital with strongest loss absorbency) (in principle, deducts deferred tax assets, intangible fixed assets, etc.).

→ Under this agreement, corresponding to each country’s conditions, partial exceptions are allowed for the following deduction items.

Draft regulations last
December
Revised draft this July
Deferred tax assets Entire amount deducted
from capital
Items based on temporary differences
between accounting and taxation are
included up to 10% of core Tier 1 portion (note)
Intangible fixed assets Entire amount deducted
from capital
Corrects unequal treatments due to
differences in accounting standards
Minority interests Excluded from capital Included up to minimum required capital of
bank subsidiaries

Note:Deferred tax assets, important investments in common stock of other financial institutions, etc are totaled and included up to 15% of core Tier 1.

The leverage ratio regulations aim to complement the risk basis capital adequacy requirements.

→ Under this agreement, it was decided to pass through a transition period, and while keeping in view the transition to treatment under Pillar 1, do final adjustment of indices and levels in the first half of 2017. During this transition period, based on an index with capital (the numerator) for Tier 1, and total assets (denominator) with a low credit conversion factor applied to part of the off-balance sheet items, it will be tested whether the 3% level functions as a complementary index.

The liquidity coverage ratio seeks the maintenance of liquid assets which are able to handle a 30 day period of harsh liquidity stress.

→ This agreement lowers the retail deposit outflow ratio, expands the definition of qualified liquidity assets, etc.

The net stable funding ratio seeks stability of the capital raising side corresponding to the degree of liquidity risk of invested assets

→ Under this agreement, an observation period is established for this ratio, which is to be finalized by January 2018.

3. Future Plans

The Basel Committee and Group of Governors and Heads of Supervision will continue to discuss the details of the regulatory reform package. The results of these studies are to be announced at the G20 Seoul Summit planned for November this year, and the plan is to put together the final regulatory reforms package by the end of this year.

*For details, please go to the FSA’s web site and access July 27, 2010: Press release “The Group of Governors and Heads of Supervision reach broad agreement on Basel Committee capital and liquidity reform package” announced by the Group of Governors and Heads of Supervision at the “International Related Information” section. (Available in Japanese only)

[Topics]

Money Lending Consultation Desk Established

Aiming to resolve the multiple debt problem, the Amended Money Lending Business Act which “lowers the maximum interest rate” and “introduces total quantity regulations to prevent excess borrowing and excess lending” etc was passed unanimously in December, 2006.

This act came into force in stages over a 3.5 year period, and was completely in force on June 18 this year.

After it was completely in force, the “Amended Money Lending Business Act Follow-up Team” was established on June 22, in order to facilitate enforcement of the Amended Money Lending Business Act, and to study prompt and appropriate responses as needed.

This “Follow-up team” is the first pillar in measures to promote “thorough awareness of the system concerning the Amended Money Lending Business Act.” It is working to make this system widely known, including by expanding and extending to the end of August the “Borrowers, Beware’ Campaign,” which was scheduled to end at the end of June this year.

As part of these initiatives, the FSA established the “Money Lending Consultation Desk” on July 23, as a contact point for consultations, etc. regarding the Amended Money Lending Business Act. The “Money Lending Consultation Desk” handles inquiries about the Amended Money Lending Business Act, like

and consultations about borrowing from money lending businesses.

If you have questions, need consultation, etc., please contact the Money Lending Consultation Desk (below).

In cooperation with related institutions etc, the FSA will continue its work to enhance and improve consultations, to make the system thoroughly known, and to understand the actual status.

Name :“Money Lending Consultation Desk”
Began :July 26, 2010
Period open :Until December 28, 2010
Hours :Weekdays 10:00 - 18:00
Tel :0570-001127
*From an IP tel or PHS, dial 03-3506-7229.
Service :Consultation etc on Amended Money Lending Business Act

*For details, please go to the FSA’s web site and access “Money Lending Consultation Desk opened” (July 23, 2010)at the “Press Releases” section. (Available in Japanese only)


Regarding relationship-based local banking by regional financial institutions, the FSA puts together a summary once each year on results of initiatives, evaluations by users etc.

The situation of relationship-based local banking initiatives in FY2009 was summarized and published on July 23. An outline is provided below.

This covered at total 537 financial institutions (as of publication date): 106 regional banks (including Saitama Resona Bank), 272 shinkin banks and 159 credit unions.

1. Results of Efforts by Regional Financial Institutions

For the results and effects of each financial institution’s efforts, the following shows major trends based on each financial institution’s announcements and summaries by industry associations.

(1) Further Strengthening of Support for Client Companies Corresponding to their Lifecycle

(i) Support for Establishment and New Business

The number of financings concerning support for establishment and new business grew since the previous fiscal year. Use of company development funds decreased since the previous fiscal year.

(*) Before FY2007, this was “Financing by products to support establishment etc.” Since FY2007, in addition to the results of dedicated financial products, this includes results of support by usual finance, therefore it cannot be simply compared with previous fiscal years.

(ii) Management Improvement Support

The percent upgraded among recipients of management improvement support efforts was lower than the previous fiscal year. The number of business matching contracts was higher than the previous fiscal year.

(iii) Business Revitalization Support

There was an increase over the previous fiscal year in the number of customers supported in cooperation with Small and Medium-size Enterprise Revitalization Support Councils, which reached the point of creating a revitalization plan, and in the number of customers supported by the financial institution itself, which reached the point of creating a revitalization plan. The number of cases of support decided on by The Resolution and Collection Corporation decreased from the previous fiscal year.

The number of Debt-Debt Swaps (DDS) and Debt-Equity Swaps (DES) were higher than the previous fiscal year. On the other hand, use of corporate revitalization funds decreased from the previous fiscal year.

(iv) Business Takeover Support

The number of M&A support cases related to business takeovers supported was lower than the previous year.

(2) Thorough use of Fund Provision Techniques Suitable for Small and Medium-Sized Enterprises, such as Financing Techniques which Focus on Business Value

(i) Efforts for Financing which does not Excessively Rely on Real Estate Collateral nor Individual Guarantees, etc.

There was a decrease from the previous year in the number of movables/credits transfer collateral financing, and in financings using financial covenants.

(ii) Exhibit Ability to Accurately Evaluate the Potential and Technical Abilities of a Company, Efforts for Human Resources Development

Each financial institution is exhibiting and enhancing its evaluation abilities, such as by establishing a department dedicated to the training of human resources, or a support desk centered on holders of specialized qualifications.

(3) Contributions to Sustainable Local Economies using Local Information Gathering

(i) Efforts for Simultaneous Integrated Comprehensive Revitalization, Focused on Stimulation of the Entire Region and Sustainable Growth

The number of PFI projects increased from the previous fiscal year.

(ii) Provision of Diverse Services which lead to Local Revitalization

The number of financings for NPOs etc increased from the previous fiscal year.

2. Evaluations by Practitioners of Financial Institutions

According to results of a survey questionnaire given to practitioners of financial institutions, in evaluation of efforts for each policy, the number evaluated as “meeting user expectations” exceed those “not meeting user expectations,” except for business takeover support.

“Accurately understand user needs” is given as a major reason for meeting user expectations, but on the other hand, “Insufficient understanding of user needs” comprises a significant percent of replies giving a reason for not meeting expectations for some items.

Also, “Use of and cooperation with external institutions etc are functioning effectively” is given as a major reason for meeting user expectations. On the other hand, “Lack internal specialized know-how and human resources” is the most commonly raised reason for not meeting expectations. Thus we see that insufficient internal specialized know-how and human resources are sometimes supplemented by using external institutions.

Regarding the effects of relationship-based local banking on management of regional financial institutions, there are different aspects depending on the policy, but in addition to direct effects such as stronger credit risk management by continual monitoring of debtors’ financial situations etc, and debtor classification upgrades by customers’ business improvements etc, they also value the appearance of indirect effects such as enhanced screening abilities of staff and enhanced trust in relationships with customers and the community.

Summary of Results of Survey Questionnaires Given to Practitioners of Financial Institutions
(Survey in May 2010)

(unit: %)
Meeting user expectations Not meeting user expectations
Establishment and new business support 71.1 25.7
Management improvement support 87.3 10.5
Business revitalization support 68.2 26.2
Business takeover support 44.1 47.1
Finance which does not excessively rely on collateral nor guarantees, etc. 85.6 12.4
Exhibit ability to accurately evaluate the potential and technical abilities of companies 59.9 35.7
Human resource development 68.6 27.6
Comprehensive revitalization focused on revitalization of the entire region 58.9 33.5
Provision of diverse services leading to regional revitalization 77.4 18.8

3. Evaluations by Users, etc.

According to results of a questionnaire survey on evaluations by users etc, regarding overall efforts for relationship-based local banking, about 50% continue to be evaluated as active (total of “Great progress” and “Progress”).

Also, regarding individual policies, small but increasing percentages give an active evaluation for business revitalization support, business takeover support, exhibit ability to accurately evaluate the potential and technical abilities of companies, etc.

For some individual policies, many users replied “Don’t know” whether efforts of financial institutions are progressing.

Summary of results of questionnaire survey on evaluations by users etc.
(Survey in February-March, 2010)

(unit: %)
Evaluated as active Evaluated as passive Don’t know
Overall efforts for relationship-based local banking 51.1 29.6 19.3
Establishment and new business support 33.9 36.1 30.0
Management improvement support 41.9 33.2 24.9
Business revitalization support 20.4 34.9 44.7
Business takeover support 22.9 32.5 44.7
Finance which does not excessively rely on collateral nor guarantees, etc. 29.8 47.4 22.8
Exhibit ability to accurately evaluate the potential and technical abilities of companies 20.9 49.1 30.0
Human resource development 26.2 34.6 39.2
Comprehensive revitalization focused on revitalization of the entire region 28.2 36.5 35.3
Provision of diverse services leading to regional revitalization 31.9 40.7 27.4

4. Future Challenges

(1)Looking at the situation of efforts by regional financial institutions in FY2009, overall results were produced via various efforts such as management improvement support, business revitalization support by use of Small and Medium-size Enterprise Revitalization Support Councils and by creating the financial institution’s own revitalization plan, and loans which do not rely excessively on collateral or guarantees to facilitate financing for small and medium enterprises.

(2)Looking at the evaluations by financial practitioners, we see their evaluations that efforts for each policy by many regional financial institutions are meeting user expectations. Among these, insufficient internal specialized know-how and human resources is often given as a reason for not meeting user expectations. It seems that building know-how by human resources development and use of external institutions etc is an issue.

(3)On the other hand, looking at the evaluations by users etc, overall efforts for relationship-based local banking continue to be evaluated as active by about 50% of users, efforts for many individual policies are evaluated as insufficient, etc. Thus we see a gap between evaluations by users and evaluations by financial institutions.

For some individual policies, many users reply they “Don’t know” whether efforts by regional financial institutions are progressing. We should keep in mind the aspect that evaluations tend to be harsh for policies in which results of efforts are difficult for users to see.

(4)It seems important that regional financial institutions continue to develop human resources and strategically use external institutions, while they work to enhance their evaluation abilities and build know-how, for continual progress in efforts by the entire organization to accurately meet user expectations and needs.

It also seems important that they work to actively provide information to users in an easily understood form regarding results of these efforts.

*For details, please go to the FSA’s web site and access “Situation of Efforts for Relationship-based Local Banking in FY2009” (July 23, 2010)at the “Press Releases” section. (Available in Japanese only)


On July 21, 2010, the Financial Services Agency published the “Collection of Examples of Issues Pointed out in Financial Inspections (Program Year 2009).”

1. Collection of Examples of Issues Pointed out in Financial Inspections

The Collection of Examples of Issues Pointed out in Financial Inspections has been compiled and published since Program Year (PY) 2005 from the perspective of both further improving the transparency and predictability of financial administration and encouraging financial institutions to strengthen their internal control systems based on the principle of self-responsibility.

This collection of examples has been compiled based on examples where inspections were completed (inspection results notified) during PY2009 (July 2009 - June 2010).

This Collection of Examples of Issues Pointed out in Financial Inspections has the following features

(1) In order to promote the goal of “Enhancing dialogue with financial institutions and enhancing dissemination of information” raised in “Efforts for Better Regulation in Financial Inspections (Action Plan II),” we are working to increase the number of examples. (Note)

This collection of examples is comprised of “Business Management (Governance),” “Finance Facilitation Section,” and ”Risk Management Section,” in accordance with the “Financial Inspection Manual” revised last year (December 2009).

(2) Considering the situation with expectations for exhibiting smooth financial intermediary functions of financial institutions, the “Financial Inspection Findings Casebook for Financial Facilitation” (43 cases) was published at the end of last year. Cases were selected from among inspection results notices sent by this June, and were described in the “Finance Facilitation Section” in this edition.

(3) We also created new “supplements” for this casebook: “Financial Group Management Systems,” “System Risk Management Systems,” “Foreign Bank Branches in Japan, etc.” and “Management Systems concerning Anti-social Forces,” with a collection of cases for each. These are reference cases chosen from casebooks published since FY2004, to encourage stronger self-regulatory systems in areas of financial institutions where appropriate risk management is recently needed.

(Note)“Collection of Examples of Issues Pointed out in Financial Inspections” has 47 ratings cases, and 305 findings cases. The “Supplement” has 35 financial group related cases, 87 system risk related cases, 59 foreign bank branch in Japan related cases, and 42 anti-social forces related cases. It has a total 575 cases (there were 433 cases in last fiscal year’s edition).

2. Collection of Examples of Opinions Submitted

The “Collection of Examples of Opinions Submitted” selects cases of opinions, which have been submitted since the introduction of the Opinion Submission System (January 2000), that are instructive for business management, and presents an outline of those examples. It has been compiled and published since 2005.

However, there were few reference cases for financial institutions in Program Year 2009, so it only published the number of submitting institutions and number of opinions.

Two financial institutions submitted 15 opinions in Program Year 2009.

* For further details, please refer to the Publication of the “Collection of Examples of Issues Pointed out in Financial Inspections” (July 3, 2009) in the “Press Releases” section of the FSA website. (Available in Japanese only)

Past collections can also be viewed from the Press Releases section: Program Year 2004 (July 27, 2005), Program Year 2005 (July 5, 2006), Program Year 2006 (July 5, 2007), Program Year 2007 (July 4, 2008), Program Year 2008 (July 3, 2009) and “Financial Inspection Findings Casebook for Financial Facilitation” (December 17, 2009). (Available in Japanese only)


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