Press Conference by FSA Commissioner Takafumi Sato
May 19, 2008
[Opening Remarks by Commissioner Sato]
Good afternoon. First, I have two matters to report to you.
The first matter is the progress of the initiative toward better regulation. As you know, the Financial Services Agency (FSA) has been making efforts to improve the quality of financial regulation, namely achieving better regulation, since last summer. We have set forth four pillars and five areas of immediate focus. Today, we are releasing a report that we have compiled mainly with regard to the progress made between July last year and April this year, with a view to checking how much progress we have made so far or how we have lagged, for reference in our future efforts.
I think we must accept that it will take time for the concept of the initiative toward better regulation to take root and for the initiative to start producing results. Therefore, we would like to make constant, sustained efforts. We intend to conduct periodic checks in order to keep track of the progress of this long-term initiative. We would like to check the progress every six months or so.
The current report shows the progress with regard to the four pillars and five areas of immediate focus, mainly in relation to the two particular measures I will mention. The first measure is the sharing of the principles we announced last month. We believe that this sharing represents a major achievement, since it plays a very important role in promoting the "optimal combination of rules-based and principles-based supervisory approaches." The second measure is a response to the subprime mortgage problem. Regarding this, the second of the pillars - "timely recognition of priority issues and effective response" -is particularly important. In recognition of the extent and depth of this problem, we have intensively allocated our administrative resources to efforts to analyze and grasp its impact on Japan's financial system and to keep a careful watch on the status of Japanese financial institutions' risk management. While making these efforts, we have also strengthened our cooperation with overseas authorities, accurately grasped market developments and enhanced the dissemination of information. As part of our efforts to grasp the progress (of the initiative toward better regulation), we conducted an anonymous questionnaire survey of banks, insurance companies and securities companies as well as exchanges, audit firms and other institutions subject to our supervision, and decided to release the survey results to be used as reference material. The issues taken up in the questionnaire survey included "improving the transparency and predictability of regulatory actions," "enhancing dialogue with financial institutions" and "enhancing dissemination of information." One prominent feature of the survey is that, rather than seeking answers on a company-by-company basis, it collected answers from different ranks of officers and employees-specifically, from presidents and governors, from executive director-class officials and from manager-class employees-within an organization, targeting a total of 1,500 respondents. In light of the assessment given by outside people, including the results of this survey, I believe that we have made a reasonable degree of progress in our initiative toward better regulation. Meanwhile, future tasks for us include getting all FSA employees to understand the concept of better regulation, enhancing working-level dialogue and increasing opportunities to disseminate information, such as briefing sessions. As I said earlier, we must accept that it will take time for the concept of the initiative toward better regulation to take root and start producing results. In the future, we intend to make constant efforts to change the mindset of all FSA employees, including those assigned to Local Finance Bureaus.
The second matter I have to report to you concerns insider trading. Recently, a certified public accountant engaged in insider trading, and administrative action was taken against that accountant. Regarding this case, the Japanese Institute of Certified Public Accountants asked all audit firms on March 18 to improve their internal control system, among other measures. After that, however, a securities company employee was arrested for suspected insider trading, making it more necessary than ever for parties involved in the infrastructure of the financial and capital markets to take effective measures to ensure the prevention of insider trading. In light of this situation, we asked the Japanese Institute of Certified Public Accountants today to take additional measures. The specific details of our request are shown in the request document distributed to you. For further details about this request, please check with the Corporate Accounting and Disclosure Division of the Planning and Coordination Bureau.
These are all I have to say.
[Questions and Answers]
Regarding the progress of the initiative toward better regulation, what do you think about the results of the questionnaire survey of financial institutions in particular? Do you think that a lack of progress in this initiative or other problems have been indicated? Also, what specific action do you think the FSA should take in order to improve the quality of financial regulation in light of the survey results?
The survey results show that nearly 80% of the respondents recognized "improvement" or "slight improvement" in transparency and predictability. Moreover, nearly 60% of the respondents recognized "improvement" or "slight improvement" in the FSA's dialogue with financial institutions. Compared with domestic financial institutions, foreign financial institutions have provided relatively positive assessments. By rank of the respondent, it is notable that higher ranking officials have provided relatively positive assessments. Also, regarding the dissemination of information, nearly 80% recognized "improvement" or "slight improvement." As for the dissemination of English-language information, more than 60% recognized "improvement" or "slight improvement," according to the survey results. In light of these results, I believe that we have made a reasonable degree of progress. Meanwhile, as I said earlier, future tasks for us include getting all FSA employees to understand the concept of better regulation, enhancing working-level dialogue and increasing opportunities for free exchanges of opinions. As for enhancing the dissemination of information, we should hold more briefing sessions and make the FSA website more user-friendly. Anyway, we must accept that it will take time for the initiative toward better regulation to start producing results. Regarding the principles, for example, although the fact that the FSA agreed on them with financial service providers last month represents a major achievement, it does not mean we have achieved our goal. Building on this, we must aim to get all FSA employees to understand the purpose of the shared principles. Also, when enforcing laws, regulations and rules, we must try to make appropriate judgment by reflecting on their underlying philosophy, namely the principles.
Last week, Shonai Bank, which is based in Yamagata Prefecture, and Hokuto Bank, which is based in Akita Prefecture, announced a business integration plan. In light of the circumstances surrounding regional financial institutions, what do you think of the two banks' integration and the possibility of a realignment of regional financial institutions?
I understand that Shonai Bank and Hokuto Bank announced on May 14 that they had signed a basic agreement on a capital tie-up, with an eye to future business integration. According to their announcement, following Shonai Bank's acceptance of new shares issued by Hokuto Bank, the two banks plan to jointly set up an open platform-type holding company that combines their middle and back office functions by around April 2010, and they will negotiate toward integration in earnest.
As for the possibility of a realignment of regional banks, it is important for individual regional banks to make serious efforts to set forward-looking management strategies and enhance their management based on their own management judgment. For its part, the FSA is not conducting supervision on the assumption that there will be realignment. Of course, I think that realignment and business integration are important options for individual regional banks when they consider what management strategies to adopt and how to enhance management. However, I understand that these are matters to be decided based on the management judgment of individual regional banks.
Last week, major banking groups such as Mizuho Financial Group and Sumitomo Mitsui Financial Group disclosed their financial results for the year ended March 2008. This week, some other banks announced their results. How do you assess the results disclosed and the state of disclosure in relation to the market turmoil that followed the emergence of the subprime mortgage problem? Also, what do you think about the market turmoil since the emergence of the subprime mortgage problem and its impact on Japanese financial institutions?
Some banks have yet to announce their financial results for the fiscal year ended in March 2008. The results announced so far show that net core business profits, which represent profits from banks' core operations, decreased slightly from the previous year due to factors such as: 1) a limited improvement in profit margins and a limited increase in the balance of outstanding loans, 2) a decrease in fee revenue due to the deterioration of market conditions, and 3) an increase in expenses on forward-looking measures.
Meanwhile, net income declined sharply. Among the factors behind the sharp profit decline are losses related to securitization products, including subprime mortgage-related ones, and increases in the write-down of the value of stock holdings and credit-related expenses, which more than offset a year-on-year decrease in losses related to non-bank operations. I also understand that evaluation profits on stock holdings have decreased due to the stock price decline caused by the global market turmoil.
In light of these factors, my view is that the global market turmoil triggered by the subprime mortgage problem has substantially affected the financial results of Japanese financial institutions. However, compared with the large and complex financial institutions in the United States and Europe, each of which has booked (subprime-related) losses of as much as 3 to 4 trillion yen, Japan's financial institutions have incurred only a limited amount of losses. Of course, the size of losses varies from bank to bank, but their losses have been relatively limited. Also, the aggregate amount of losses is small enough to be covered by the total amount of net core business profits, and banking groups are in the black on an annual basis. In light of this, I believe that the subprime mortgage problem is unlikely to have direct, serious effects on Japan's financial system. I still maintain this view.
As for the other question, the state of disclosure, a report issued on April 11 by the FSF (Financial Stability Forum) stated in relation to the disclosure of securitization products that financial institutions, in reference to examples of leading disclosure practice, should make appropriate disclosure regarding risk exposures that are most closely related to current market conditions. However, we should note that the FSF report does not call for uniform disclosure in line with leading disclosure practices. I understand that it allows for flexible measures, such as changing the level of detail required according to the extent of exposure and adopting a two-stage disclosure in which the key points are presented when the financial results are announced and detailed data is disclosed later through IR materials, disclosure documents, etc. In the case of items not specified by laws and regulations, it should be left to individual financial institutions to decide whether to make disclosure. Nonetheless, the FSA believes that it is important that individual financial institutions make appropriate disclosure based on their own judgment in reference to leading disclosure practices cited in the FSF report. Looking at the financial results announced so far, I think that disclosure has generally been enhanced compared with before. Nonetheless, we will keep a close watch on the financial results to be announced by other financial institutions and on disclosure to be made through IR materials and disclosure documents.
Following the system glitch that hit the Bank of Tokyo-Mitsubishi UFJ last week, a system problem disrupted the ATM operations of Sumitomo Trust & Banking this morning. In response to this recent series of problems, would you like to strengthen the supervision and inspection of major banks' computer systems, or do you have any other ideas?
I have received a report that Sumitomo Trust & Banking's ATM operations have been unstable since the system start-up this morning. I understand that the bank is now dealing with this problem by disclosing the present state of ATM operations at its branches and guiding users to counters. Anyway, it is regrettable that a problem that affects customers has occurred. It is also regrettable that system glitches have hit one major bank after another, affecting their customers. The FSA believes that it is extremely important to properly handle the customers affected by the problem, accurately identify its cause and take appropriate measures to prevent it from recurring. Regarding regulatory action in terms of inspection and supervision, we will continue to encourage the implementation of forward-looking measures as much as possible by using the administrative resources available to the FSA as effectively as possible.
Have you demanded the submission of a report from Sumitomo Trust & Banking under the Banking Act, or are you planning to do so?
As I said in relation to the case of the Bank of Tokyo-Mitsubishi UFJ, banks are required to submit a report in a case like this, in accordance with a comprehensive standing order based on Article 24 (of the Banking Act). If we find it necessary to demand the submission of a more detailed report on a case-by-case basis, generally speaking, we may take additional action.
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