• Speeches and Material

Speech by Mr. Katsunori Mikuniya
Commissioner, Financial Services Agency

High Level Meeting Jointly Organized by the Financial Stability Institute (FSI)
and the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP)
Working Group on Banking Supervision

Tokyo, November 29, 2009

I. Introduction

Good evening ladies and gentlemen. I would like to express a warm welcome to you all.

It is a critical time for us as we must overcome a variety of global problems due to the financial crisis triggered by the subprime mortgage debacle.

As economic activities have become increasingly globalized and the financial sector has grown in scale, it is more important than ever for regulatory authorities to exchange information with each other on a real time basis. We feel very honored to host a high-level meeting of officials from the public and private sectors in the Asia-Pacific region in this situation.

II. Japan's Experiences of Financial Crises

While the current financial crisis has been described as a once-in-a-century credit tsunami, Tokyo as a financial center has experienced two tsunamis over the past decade.

The history of the Financial Services Agency (FSA) is one underlined by efforts to overcome financial crises, taking great care to avoid undermining economic recovery, while redesigning the financial architecture with a vision of the future financial landscape.

Last year, we witnessed the failure of Lehman Brothers, AIG's near collapse and a liquidity crunch, all of which led to various other problems. When we look back at these incidents with our past experience in mind, we feel a need to look at them from a broad perspective.

To begin with, the perception is growing now that the worst of the financial crisis is behind us. However, in light of Japan's experiences, we will likely see more ups and downs before a full-fledged recovery is assured.

I would like to particularly emphasize that, in the process of resolving Japan's non-performing loan problems, the FSA identified the problems squarely, and carried out what was truly necessary without fearing criticism. This had to be done while bearing in mind a vision of the future financial landscape and conscientiously embracing public opinion.

In our past financial crisis, more than 180 Japanese financial institutions failed, and in order to overcome the crisis, the Japanese government made efforts to establish the necessary institutional frameworks and better manage those frameworks mainly in four areas.

First, we have established a framework for directly dealing with the disposal of non-performing loans by individual financial institutions, and the failures of individual financial institutions. Second, we have created and strengthened various safety net schemes over time, and as a result, I believe that Japan has become the most advanced country in terms of the development of the financial-sector safety net. Third, we have improved infrastructures for Japan's financial and capital markets from a long-term perspective. Fourth, we have established and managed institutional frameworks from the standpoint of protecting consumers of financial services.

The disposal of non-performing loans must follow three steps. The first is properly valuing assets, and the second is removing non-performing assets from the balance sheet or improving the quality of the assets. The third step is supporting the banks through recapitalization and other measures, if necessary.

While Japan's financial system has remained relatively stable compared to other countries, the US and many European countries have swiftly carried out public support measures including recapitalization in dealing with the current financial crisis. However, the process of removing non-performing loans from the balance sheet or improving the quality of the loans has apparently been lagging because of the difficulty in valuing complex securitized products and other non-performing assets. My impression is that the process of properly valuing assets is still middle of the way.

Therefore, in order to completely overcome the financial crisis and secure an economic recovery, it is necessary to take measures that encourage financial institutions to ensure proper valuation of the assets, which have been at the root of the current crisis. And it is essential to deal with the problem to reduce non-performing assets with speed and determination.

I understand that in your home countries, you have accumulated your own experiences and know-how, including how to deal with a bad-loan problem. I expect that if our countries share such experiences, it will be of great help to devise effective ways to deal with the current global financial crisis.

As I have just explained, we are now in a better condition in some aspects and in a worse condition in others than we were in the 1990s. The majority view on the economic outlook is that Japan’s real economy is not expected to recover rapidly. Meanwhile, Japan’s financial system has so far maintained its relative soundness. Therefore, Japan’s financial sector is increasingly relied upon in supporting the real economy and preventing its further deterioration.

III. International Debate on Enhancement of Capital Adequacy Ratio Requirement

Based on the lessons learned from the current crisis, a debate is ongoing with regard to plans to tighten regulation so as to ensure the soundness of banks. In order to prevent future financial crises, and from the viewpoint of supporting sustainable economic growth, Japan also subscribes, over the longer term, to the need for establishing international rules intended to improve banks' capital in terms of both quality and quantity, and to curb excessive leveraging, as agreed at the Pittsburg Summit.

The Basel Committee on Banking Supervision is currently considering specific measures, including the improvement of capital in terms of quality and quantity and the introduction of a leverage ratio, regulation on liquidity, and capital buffers that would mitigate the procyclicality of the banking system. We feel strongly that it is necessary to fully study and understand what impact the introduction of such changes in the regulation as a whole will have on the real economy.

To that end, it is necessary to carefully analyze not only the estimated effect of the new regulation on the behavior and management of financial institutions, but also their likely collective effect on the economy as a whole. To be more specific, it is important to conduct such a thorough analysis in the quantitative impact assessment survey that is scheduled to be conducted next year by the Basel Committee.

In this context, I would also emphasize the need for the Basel Committee to carefully manage market expectations over the new capital rules to avoid unintended repercussions from announcing the new capital rules. Sending a wrong message could lead to tightened lending conditions and restrictive asset management at significant banking institutions world-wide, which is most certain to have negative consequences for economic recovery. Therefore, any announcement by the Basel Committee needs careful wording and thoughtful presentation. It should be made clear that no decision will be made on the specific requirements of stronger capital rules until a full quantitative study is conducted, and a comprehensive analysis of the effects of all the elements of the proposal is made after public consultation.

In introducing the new regulation, it is important to adopt a phase-in approach, so as to avoid a credit crunch. It should be done only when sustainable recovery of the financial markets and the economy has been assured, and take into consideration the specific features of each country's financial sector. When we introduce macro-prudential regulation at the international level, it is also necessary to keep in mind that the economic situation varies very much from country to country.

Finally, I would like to emphasize that, even though banks need to carry out recapitalization, this alone will not be sufficient to prevent a recurrence of a financial crisis. For example, we need to review whether sufficient measures are taken against lax lending practices under the originate-to-distribute securitization business model, which was the root cause of the current crisis. It is also important to further improve banks' risk management, enhance their corporate governance and strengthen cooperation between regulatory authorities. I presume that the EMEAP will have an important role to play on these issues.

IV. Conclusion

At international forums for discussing financial regulations, such as the G-20 and the Basel Committee, the Asia-Pacific region has recently increased their representation. In order to overcome the current financial crisis, it is necessary for the whole world, including not only the countries where the crisis started, but also countries in the Asia-Pacific and other regions that are not responsible for causing the crisis, to enable balanced discussions on the remedies.

I understand that the participants in this meeting have been involved in efforts to deal with the Asian currency crisis of 1997, Japan's financial crisis of the late 1990s and the current global financial crisis. Therefore, I hope that this meeting will provide an opportunity for all of us to share our experiences of the crises with each other, and find common ground and harmony of reform on how to prevent future crises and ensure sustainable economic growth.

Thank you very much.

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