Press Conference by FSA Commissioner Takafumi Sato
April 14, 2008
[Opening Remarks by FSA Commissioner Sato]
Good afternoon. For my part, I have nothing to report to you.
[Questions and Answers]
I will ask you about the G-7 meeting. In response to the financial instability, measures for tightening supervision and regulation have been unveiled. Meanwhile, the issue of injection of public funds (into distressed financial institutions) has not come to the fore, leading some people to argue that those measures are not satisfactory. First, I would like you to tell us about how you assess the financial stabilization unveiled at the G-7 meeting. Also, what actions do the Japanese supervisory authorities intend to take in response?
As matters related to the G-7 in general belong to the jurisdiction of the Ministry of Finance, I would like to make comments from the viewpoint of financial administration in particular.
One outcome of the latest G-7 meeting is that it has produced a shared recognition of the cause and severity of the global financial market turmoil triggered by the subprime mortgage problem. Secondly, based on that recognition, it confirmed the importance of taking a variety of policy measures, specific actions, mainly with regard to institutional frameworks, to ensure the resilience of the financial system and financial markets in reference to a report issued by the Financial Stability Forum (FSF). Thirdly - this is quite a natural thing - it reconfirmed the readiness of the G-7 countries to cooperate and coordinate with one another to tackle this problem.
In addition, it is important that the G-7 countries have expressed strong support for the report issued by the FSF and their commitment to the implementation of the measures recommended by the report.
Some of the recommended measures are earmarked for implementation within 100 days as matters of high priority. The first of them is to require thorough and immediate disclosure of risk exposure by financial institutions. The second is to have international standard-setting bodies improve the disclosure standards for off-balance sheet vehicles and enhance the accounting guidance for market-based valuation. The third is to require financial institutions to enhance their risk management practices and, as necessary, reinforce their capital. The fourth, last measure is to have the Basel Committee on Banking Supervision issue a revised guideline concerning liquidity risk management and the International Organization of Securities Commissions revise the code of conduct for credit rating agencies.
In addition to these measures for implementation within 100 days, there are measures that should be implemented by the end of 2008, including strengthening regulation and supervision to ensure the soundness of financial institutions with regard to capital, liquidity and risk management and enhancing transparency and valuation in relation to off-balance sheet schemes, securitization products and liquidity commitment. Regarding the role and uses of credit ratings, it was recommended that credit rating agencies should properly manage conflicts of interest, that they should differentiate ratings on structured products from those on other ordinary financial products and that they should enhance disclosure concerning rating processes. There was also a recommendation concerning review of and improvement in the quality of information provided by originators (arrangers and issuers) involved in structured products. Moreover, regarding the strengthening of the authorities' responsiveness to risks, it was recommended that the authorities should enhance their exchange of information, and that for the largest global financial institutions, the relevant authorities should form an international group (to address cross-border crisis management planning issues). Lastly, regarding the assessment of response to a financial system crisis, it was recommended that a review should be conducted to examine the provision of liquidity by central banks and the supervisory framework for dealing with weak banks.
As you know, the Financial Services Agency (FSA) has expressed Japan's position with regard to issues such as the communication of information between the parties involved in securitization processes, risk management and the importance of enforcing the Basel II regulation at international forums of discussion and deliberation, including the FSF, based on the contents of the first report issued last November by the Financial Markets Strategy, as we tried to obtain other countries' understanding of the Japanese position. A statement issued at the latest G-7 meeting and the FSF's report indicated basically the same way of thinking and response as Japan's with regard to those issues. I therefore think that we have obtained other countries' understanding of our position to a large extent.
As you know, regarding this matter, a report on the implementation status of the recommended measures is due to be submitted to a meeting of the Group of Eight finance ministers in Japan in June and to a G-7 meeting scheduled for autumn. The FSA will continue to be actively involved in international discussions and deliberations at forums like the FSF.
As for what to do in Japan, the FSA, as the supervisory body, will strive to keep track of the situation in order to strengthen risk management by Japanese financial institutions and ensure the stability of Japan's financial system. At the same time, the FSA is ready to take appropriate measures as necessary.
I will ask you about the impact of the subprime mortgage problem on Japan. Last Friday, Mizuho Financial Group revised downward its earnings estimate for the third time. Could you tell me how you think this problem is affecting Japanese financial institutions?
As you know, the global financial markets remains in a state of turmoil caused by the subprime mortgage problem. My understanding is that in this situation, not only subprime mortgage-related products but a broad range of securitization products are being affected and the impact is continuing to spread from the market for securitization products to the stock and other markets, too. In this context, Mizuho Financial Group revised downward its earnings estimate for the fiscal year that ended in March 2008 for the third time and some other financial institutions also announced downward revisions of their earnings estimates.
Under these circumstances, I think I should refrain from making any conclusive comment as to how much of an impact the global market turmoil triggered by the subprime mortgage problem will have on Japanese financial institutions in the future. Judging from the details of the downward revisions of earnings estimates so far announced, I think that earnings for the business year that ended in March 2008 have been pressured by the write-down of some holdings of stocks and securitization products and by losses related to the holdings of such products in the trading account in the wake of drops in their prices caused by the global market turmoil. Regarding the state of Japan's deposit-taking financial institutions in general, meanwhile, the FSA has compiled figures concerning their exposure to securitization products directly related to subprime mortgages and announced that the total value of such products owned by them came to around 1.5 trillion yen as of the end of last December and that the combined size of realized losses and valuation losses amounted to around 600 billion yen by that time.
Since the impact of the global market turmoil is spreading to financial products not directly related to subprime mortgages as I told you earlier, we must keep watch on this from a broad perspective. Nevertheless, if we compare the situation of Japanese financial institutions and that of the so-called LCFI (large and complex financial institutions) in the United States and Europe, some of which have booked losses to the tune of trillions of yen, we can say that the impact on Japan has been relatively limited. In addition - this is also what I have told you before and my view on this remains unchanged - the size of losses booked by Japanese financial institutions is limited relative to their financial strength, as represented by the size of their profits, and their capital base. Therefore, I remain unswerved in my view that we are not facing a situation in which the financial market turmoil will have a serious impact directly on Japan's financial system.
Nevertheless, as the financial market turmoil is continuing, my understanding is that it will take a considerable amount of time before the market conditions are normalized. The FSA will remain vigilant and keep close watch on financial institutions' earnings as well as future developments in the stock, credit, foreign exchange and other markets by gathering necessary information promptly in cooperation with relevant authorities in and outside Japan.
My question concerns the FSF's recommendations made at the G-7 meeting. Are there any new tasks that the FSA in particular must undertake in response to them? Or may I understand that the FSA will act in step with international authorities?
The items contained in the FSF's report for which a timetable or things like that has been set concern a diverse range of areas. As you mentioned in your question, there are themes that must be tackled by international organizations such as the Basel Committee on Banking Supervision and IOSCO (International Organization of Securities Commission), within the framework of international cooperation and discussion. Also, there are items concerning which the supervisory authorities of individual countries should take action against the financial institutions they supervise or urge them to take action. Therefore, the important thing to do for the supervisory authorities of Japan is to prudently consider what action to take after "translating" the recommendations of FSF's report into actions to be taken by Japan. Also, it is important to be actively involved in discussions and deliberations held at international organizations. As for what specific actions to be taken, it is necessary to carefully "translate" the G-7's statement and the recommendations of the FSF's report, including the timetable, into actions to be taken by Japan, and we must do such work before considering specific actions.
My question may be relating to the previous one. As you mentioned in relation to the FSF's recommendations, it was recommended that financial authorities should form a group to keep watch on major financial institutions. Do you think that Japanese financial institutions will be included among them?
I think that this will be a matter to be decided based on discussions held at international forums by international organizations and the supervisory authorities of individual countries. If I remember correctly, this is a matter to be implemented by the end of 2008. I expect that deliberations will be held with the timetable in mind. What I mean is that the implementation will not be slow.
Regarding the abolition of the per-customer ceiling on liquid deposits taken by Japan Post Bank, an issue which we have already asked you about last week, I hear that the regional banking industry decided today to demand that the request for the abolition be withdrawn. The regional banking industry has shown a tough stance on this issue, indicating that if its demand is rejected, it will oppose the connection of Japan Post Bank to the Zengin System (which is an interbank payment system). This seems to reflect the banking industry's long-running opposition to an expansion of a state-run bank. Could you tell us once again about your thinking as to how to deal with this issue as the FSA considers whether or not to accept Japan Post Bank's request?
As for the privatization of Japan Post, as I told you before, it is important to ensure that Japan Post Bank and Japan Post Insurance are absorbed into Japan's financial system as a whole without causing any significant confusion, in ways to contribute to an improvement in the quality of financial services and the convenience for users. This is the essential point of the privatization from a broad perspective. As a specific mechanism for enabling this, a transition period of up to 10 years has been set on the condition that Japan Post Bank and Japan Post Insurance are confined to the existing scope of businesses in the initial part of the transition period but that after the transition period, the scope is to be expanded to allow them to engage in the same range of businesses as private-sector financial institutions. During the transition process, they will have to obtain approval from the authorities if they are to begin new business.
As for the abolition of the per-customer ceiling on the liquid deposit amount, we received Japan Post Bank's request for a revision of the relevant cabinet order, on April 1 if I remember correctly. As we have received the request only recently, we are now asking for full explanations from the company.
As for the connection of Japan Post Bank to the Zengin System, we are not in a position to make a comment, since this system is, as you know, voluntarily managed by financial institutions engaged in domestic exchange. I am aware that the Regional Banks Association of Japan has made the decision that you mentioned in your question. However, I think that the important thing for the FSA to do is to deal with this issue from a broad perspective, within the context of the privatization of Japan Post as a whole, as I already told you.
I would like to make sure about one thing. You said that it will depend on future discussions whether or not Japanese financial institutions should be included among institutions to be watched by a new group formed by the supervisory authorities. May I understand that in deciding which financial institutions should be included, selection priority will be given to U.S. and European institutions that have suffered a large amount of losses?
As I understand it, at the moment, there are no specific criteria as to which financial institutions to select. Nevertheless, I think that since the purpose of the establishment of the new group is to ensure the stability of the global financial system and the resilience of the global markets, the selection will be made from that viewpoint. A framework or approach like this is nothing new. For example, before the implementation of the Basel II framework - as you know, Japan was the first in the world to put it into force at the end of March last year - the supervisory authorities of the countries in which Japan's three megabanks are operating, namely, the supervisory authorities of the world's major markets, gathered in Tokyo for a "supervisory college" meeting. On that occasion, the foreign supervisory authorities, together with the FSA, monitored the three megabanks' risk management status. Thus, the recommended measure is not necessarily an entirely new approach. Meanwhile, I think that the specific selection criteria regarding the approach mentioned in the G-7's statement are still open for discussion.
- About FSAPage list
- Ministerial Team
- Annual Reports
- Financial Policies Monitor
- Laws & RegulationsPage list
- Name of Laws and Regulations(PDF)
- Financial Instruments and Exchange Act
- Recent Changes
- Public Comment
- No Action Letter System
- PrinciplesPage list
- Strategic Directions and Priorities
- Progress and Assessment of the Strategic Directions and Priorities
- Policy Approaches to Strengthen Cyber Security in the Financial Sector
- Financial Monitoring Policy
- AnnouncementsPage list
- Press Conferences
- Press Releases
- Official Statements
- Great East Japan Earthquake-Related Information
- The Earthquake Centered in the Kumamoto Region of Kumamoto Prefecture 2016-Related Information
- List of Institutions
- To Operators of Specially Permitted Businesses for Qualified Institutional Investors, etc.