Press Conference by FSA Commissioner Takafumi Sato
May 26, 2008
[Opening Remarks by Commissioner Sato]
Good afternoon. I have nothing particular to report to you.
[Questions and Answers]
Representing the press corps, I will ask you three questions. The first question concerns the financial results announced last week by major banks. On May 20, the Financial Services Agency (FSA) compiled data concerning non-consolidated results, which showed a drop in net core business profits from the previous year, with the profits eroded by the subprime mortgage problem. How do you view the lack of improvement in these banks' profitability? Also, do you expect this situation to continue for a while?
Major banks' non-consolidated financial results for the year ended in March 2008 showed a slight year-on-year drop in net core business profits, which represent profits from their core banking businesses. Of the various factors behind this, I will talk about major ones. First, the improvement in the profit margin and the growth in the balance of outstanding loans were limited. Secondly, fee revenue from investment trust sales decreased due to the deterioration of the market condition. Thirdly, expenses increased, although they included "forward-looking" expenditures that sow the seeds of future business.
Net profit dropped sharply from the previous year. While losses related to non-bank operations decreased, additional losses arose from securitization products, including subprime mortgage-related ones and the write-downs of the value of stockholdings increased. Also, credit-related expenses expanded. In addition, I understand that evaluation profits on stockholdings have decreased substantially due to stock price drops triggered by the global market turmoil, although this is not directly reflected in the profit-loss statement.
Thus, the global financial market triggered by the subprime mortgage problem has had substantial effects on the financial results of Japanese financial institutions. Nonetheless, compared with LCFIs (large and complex financial institutions) in the United States and Europe, each of which incurred losses of as much as 3 trillion to 4 trillion yen as you know, Japanese banks have suffered a limited amount of losses. Also, their 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 still believe that the subprime mortgage problem is unlikely to have direct, serious effects on Japan's financial system.
As for major banks' profitability, the lack of improvement is due in part to weak growth in the profitability of their core businesses such as lending and fee-generating businesses. I believe that it is very important for major banks to accurately grasp the needs of customers and come up with creative ideas to provide a more diverse range of substantial financial services in Japan and abroad in order to improve their profitability and maintain a sound business foundation in the medium to long term.
Although their losses are limited compared with those incurred by U.S. and European banks, it is also important that, from the viewpoint of improving their profitability, major Japanese banks enhance their risk management by learning lessons not only from their own experiences but also from the past cases of losses incurred by other Japanese and foreign financial institutions. I believe that reliable risk management is a prerequisite for appropriate risk taking.
As banks make improvement efforts, small and medium-size enterprises (SMEs) face a tough business environment. Facilitating smooth fund-raising by SMEs while managing risk in an appropriate manner is also an important task for major banks.
Next, I will ask you about the financial results of non-life insurance companies, which were also announced last week. In addition to announcing their financial results, non-life insurance companies offered estimates of the amount of overcharged insurance premiums, based on reviews conducted upon the FSA's instruction in December 2006. According to their estimates, the final number of premium overcharge cases will total about 1.33 million and the final amount of overcharged premiums will come to about 29.8 billion yen. How do you assess these figures and what action will the FSA take?
In December 2006, the FSA asked 30 non-life insurance companies handling fire insurance to conduct a review of their customer solicitation activities related to fire insurance in order to ensure appropriate solicitation and take appropriate action in customer relations based on the review results. As for the figures announced, I just acknowledge them as a result of the reviews conducted. As you know, upon the FSA's request, non-life insurance companies have investigated the appropriateness of fire insurance contracts. In addition, the General Insurance Association of Japan has decided that non-life insurance companies should conduct a similar investigation regarding their insurance products other than fire insurance. I understand that the companies are conducting their investigation in their own ways and according to their own plans. The figures you mentioned include overcharged premiums for contracts other than fire insurance contracts. The 29.8 billion yen and 1.33 million cases are final figures estimated by six major non-life insurance companies at the time of their announcement of fiscal 2007 financial results.
The FSA believes that it is important that the companies not only investigate the number of cases and the total amount but also fully analyze the cause of the overcharging and examine their customer solicitation system that may underlie this problem. Also, it is important for them to take effective measures to prevent the recurrence of this problem based on their analysis and examination. At the same time, it is essential to promptly take necessary action in customer relations and reimburse customers who have been overcharged or damaged in other ways. As a basic stance on this problem, the FSA will follow up on the measures taken by non-insurance companies.
Life insurance companies are scheduled to announce their financial results late this week. Last year, they were busy dealing with the scandal over unpaid benefits, leading to a decline in the number of new contracts. Meanwhile, over-the-counter sales of insurance products by banks started in December last year, and some life insurance companies are said to have managed to reverse their negative spreads. Are their any particular points of interest for you regarding the announcement of life insurance companies' financial results late this week?
Although I know that major life insurance companies are scheduled to announce their financial results for the fiscal year ended in March 2008, I would like to refrain from commenting on the matter prior to the announcement. In the first half of the fiscal year, namely in April through September 2007, the total value of insurance policies in force continued to decline, dropping about 5% year-on-year, due to a shift in customer needs from death benefits to living benefits. Basic profits, or profits from core insurance businesses, decreased about 4% from the same period of the preceding year, as an improvement in the return on investment was offset by an increase in the payout of benefits.
Regarding the financial results for the full year ended in March 2008, too, the FSA will pay attention to the trend of the value of insurance policies in force and the circumstances surrounding the three major profit items, including changes in the profit level and improvement in the negative spreads, as well as the soundness of insurance companies' overall financial conditions. Generally speaking, efforts by insurance companies to make their financial conditions healthier, including reversing the negative spreads, are important from the viewpoint of the protection of insurance policyholders, too, so I hope that the companies will continue their management improvement efforts.
Regarding the planned Consumer Agency, a draft of the final report was wrapped up at a government meeting the other day. Although the general outline is still unclear, I expect debate to be conducted on the possibility of transferring the jurisdiction of some laws from the FSA to the Consumer Agency. What do you think of the idea of transferring the jurisdiction over some laws to the new agency?
As I have said on several occasions, debate on the Consumer Agency should be based first and foremost on the principle that administrative services should be conducted in the interests of the people. The government's task is to conduct administrative services in the interests of the people. Thus, the most basic principle should be that the government takes effective measures to protect users at minimum cost. Namely, the government should protect users in the most efficient way. With this as a grand principle, the FSA will participate in debate on the plan.
As I have said several times, the FSA has positioned the protection of users as the central pillar of its financial administration. Regarding this as one of the three most important objectives of the financial administration, along with "stability of the financial system" and "establishing transparent and fair markets," the FSA has been implementing various measures. To cite some specific examples, the FSA has dealt with the problem of unpaid insurance benefits, which we talked about earlier, inappropriate business practices used by foreign exchange margin trading companies, and the issue of mutual aid associations operating without a license, as well as institutional issues, including a revision of the Money Lending Control Act. While dealing with these issues, the FSA has been striving to establish a framework for the protection of users based on a consistent philosophy regarding both matters of inspection and supervision and the institutional design. Also, it has been conducting inspection and supervision in ways to ensure the effectiveness of this framework.
Furthermore, we are trying to reflect the opinions of users and consumers in our financial administration through an office for handling inquiries from financial service users, and disseminating information actively in order to diffuse financial knowledge and educate the people about financial affairs.
The FSA hopes that the Consumer Agency will function effectively as the command center of consumer-oriented administration undertaken by various government organizations. With this as a grand principle, we will participate in debate on the plan.
In relation to gold futures trading, police raided an intermediary company in Fukuoka. Could you tell me about facts you know about this, and what action will the FSA take?
Which case are you referring to?
This case apparently involves Loco London gold futures trading.
I would like to refrain from commenting on a specific case like this. Generally speaking, if we detect a case that constitutes violation of the revised Financial Instruments and Exchange Act, we will first check facts and then take appropriate and strict action in accordance with laws and regulations. This is the FSA's basic stance.
I would like to make sure about one point. In relation to the Consumer Agency, you talked about establishing an effective framework based on a consistent philosophy regarding both matters of inspection and supervision and the institutional design. Does that mean you cannot accept the transfer of the FSA's jurisdiction over various consumer-related laws to the Consumer Agency?
I was not talking specifically about what should be done with regard to the jurisdiction over individual laws. I was explaining the FSA's efforts regarding the protection of users, which we view as one of the three most important objectives of our financial administration.
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