Provisional translation

Press Conference by FSA Commissioner Takafumi Sato


June 23, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have anything to report to you.

[Questions and Answers]


Yesterday marked the 10th anniversary of the establishment of the Financial Supervisory Agency (the predecessor of the Financial Services Agency [FSA]). Could you tell me how you evaluate the FSA's achievements over the past 10 years, and what challenges lie ahead?


Personally, various things have come to mind following the 10th anniversary of the establishment of the Financial Supervisory Agency. My personal thoughts aside, however, I recognize the significant progress made over those 10 years in the three primary objectives of financial regulation - "stability of the financial system," "protection of users and enhancement of their convenience" and "establishment of a fair and transparent market" - in terms of both practice and institution. I believe this has been achieved through the substantial efforts made by both the public and private sectors; namely, through combined efforts by lawmakers and regulators in the form of the Financial Supervisory Agency and the FSA, as well as the country's financial sector and private sector.

We must now work to have our achievements and lessons so far firmly established in our financial regulation so that we can look toward its further evolution. In this sense, we are at a turning point. To use a medical analogy, we needed to put an emphasis on symptomatic treatment until recently, but are now shifting the emphasis to preventive medicine. Furthermore, we are now at a stage where we should begin proactive efforts to enhance health further. At this stage, it is extremely important that financial institutions use resourcefulness, make self-improvement efforts and pursue best practices. For our part, we must reform the regulatory framework in order to respect such self-improvement efforts. Our recognition of the need for these matters lies behind the initiative toward better regulation in which we have been engaged since last summer. We will proceed steadily with the initiative toward better regulation.

We have two immediate challenges in mind.

One is to acquire the ability to grasp market developments - global market developments in particular - in an appropriate and timely manner and analyze them. As you know, the subprime mortgage problem is a financial crisis that originated in the market, and in that sense it may be a 21st century-type financial crisis. The problem is distinctive in that the cause of the financial crisis is hidden in market developments. In light of this, as I said earlier, the FSA believes that it is important to grasp market developments in a timely manner and fully analyze them, and to reflect the results effectively in the designing and planning of a regulatory framework, inspection and supervision. To establish arrangements and procedures for doing this is one challenge.

The other challenge - this is closely related to what I was talking about just now - concerns the remarkable increase in the FSA's international activities and the increasingly international nature of its operations. For example, meetings of working groups of the FSF (Financial Stability Forum) have been held very frequently in relation to the subprime mortgage problem, and it is important for us to actively involve ourselves in such international activities and make contributions. As I understand it, establishing and enhancing arrangements and procedures for doing that is the other immediate challenge facing us.

In any case, the FSA will continue its efforts toward the further evolution of financial regulation, firmly resolving to meet the needs of the time and create a necessary and sufficient regulatory environment of a high standard, while keeping in mind that we are conducting regulation for the sake of the people.


The liaison and coordination consultative group on financial disputes is scheduled to hold a meeting and issue an informal report tomorrow. At the meetings of this group held since March, there have been differences of opinion between industry groups, which have advocated settlement of out-of-court disputes through voluntary efforts, and consumer groups and lawyers. How do you think the framework for supporting dispute settlement should be enhanced?


Regarding the framework for supporting out-of-court settlement, or so-called ADR (alternative dispute settlement), in the financial sector, the liaison and coordination consultative group on financial disputes was established based on a recommendation issued by the Financial System Council in 2000, and various activities have been conducted since then. As you know, this group is based on voluntary participation by consumer groups, self-regulatory organizations, industry groups, lawyers' associations, academics and relevant administrative organizations. Because of the voluntary efforts made through the group over the past eight years, a definite improvement has been made with regard to the framework for financial sector ADR. Still, the numerical results achieved so far have been insufficient, leading consumer members of the group, among other participants, to point out the need for measures that transcend the limits of voluntary efforts.

At this group, discussions have been ongoing regarding the tasks that must be undertaken in order to improve the framework for financial sector ADR, and preparations are under way to issue an informal report at tomorrow's meeting. In the discussions held so far, two lines of argument have been presented. The first line of argument, offered mainly by consumer members, is that a legal framework should be established, while the other, supported mainly by industry groups, is that voluntary activities should be enhanced.

Unlike government-appointed councils, this group is operating on the basis of voluntary participation by various parties, including industry groups, in order to enhance the framework for financial-sector ADR, so it does not have a mandate for issuing policy recommendations, as I understand it. In any case, the FSA will strive to improve the framework for financial sector ADR and consider how the framework should be developed in the future, based on the results of discussions held by the group.


Some people say that the results of efforts by self-regulatory organizations representing industrial sectors do not deserve a passing grade. In what respects do you think the current state of affairs is found wanting?


Rather than giving scores to the current state of affairs, we should establish a framework that enables dispute settlement which provides sufficient satisfaction to both sides of the dispute, namely the provider of financial services and the consumer. This should be the ultimate goal. I think that we should continue our study on what kind of framework is the most realistic one that produces sustainable effects for Japan.


Late last week, the U.S. prosecution authorities indicted two fund managers of a hedge fund under the umbrella of Bear Stearns, representing the first criminal case stemming from the subprime mortgage problem. Could you tell me whether there are Japanese investors such as financial institutions that have become victims in this case, and to what extent the Japanese authorities have grasped the facts related to this case? Also, what do you think of the fact that the subprime mortgage problem has led to a criminal case, in the form of the arrest of senior officials of a major securities company?


I would like to refrain from commenting directly on the activities of foreign law enforcement authorities. This is a point that the FSA has been aware of since last autumn and that has been pointed out in the first report of Minister Watanabe's Financial Markets Strategy Team, but behind the fact that the subprime mortgage problem has led to a criminal case is the fact that this problem is related to a business model known as "originate-to-distribute" (which creates credit on the premise that risks will be transferred from the originator to other parties), based on the financial engineering technique of securitization. This business model involves a series of processes in which the underlying asset created through a deal between the lender and the borrower is securitized by the arranger and sold to investors. We have recognized the risk that the problem of moral hazards could occur during various stages of the securitization process. Specifically, the credit risk involved in the underlying asset may not have been sufficiently communicated or disclosed, or the nature of the product may not have been sufficiently explained by the lender to the borrower during the process of origination of the underlying asset. In particular, there is the risk that the lender may have eased the borrower screening criteria because the credit risk involved is to be immediately transferred away from itself through the sale of the asset or securitization. Also, the lender may have encouraged overly easy borrowing, on the assumption that refinancing and repayment would be easy as housing prices continued to rise. Sufficient information concerning the risk involved in the underlying asset may also not have been provided to the arranger of the securitized product. Against the background of such potential problems, the subprime mortgage crisis has spread beyond the U.S. housing market to the market for securitized products in general, as well as the global financial and capital markets.

The responsibility of the parties involved in the serious problems caused by the originate-to-distribute business model is being investigated properly in the United States, where a substantial portion of - or I should say most of - the transactions concerning this business model were implemented, and this will contribute to efforts to prevent the occurrence of problems like the subprime mortgage crisis by restoring the shaken confidence of market players and imposing enhanced discipline on lenders.

As I said earlier, most of the transactions concerning this business model were done in the United States. Although non-U.S. markets were involved in terms of sales to end investors, most of the transactions were done in the United States, and the U.S. authorities' move that you mentioned came in this context. Besides the U.S. market, the London market is another place where a substantial portion of the transactions were done. In contrast, the use of this business model was very limited in Japan. The volume of transactions involving subprime-related products was particularly limited, as I understand it.


I would like to ask you about the 10 years since the establishment of the FSA. Before the reorganization, the Ministry of Finance used to be criticized for allegedly allowing sectionalism to undermine the functions of the ministry as a whole. Now that 10 years have passed since the FSA was separated from the ministry as a new organization, is there not concern that the organization has become rigid, for example hampering communications between the agency's bureaus (although there are only three bureaus)? Are you aware of the issues and problems in terms of organization?


There are two aspects to the organization of the FSA. As the FSA is responsible for conducting financial regulation in a comprehensive manner, the basic logic of financial regulation is shared widely and deeply ingrained throughout the agency. In this sense, although the FSA has three separate functions - namely planning institutional frameworks, inspection (which in this context includes the monitoring of market developments and market transactions in the broad sense), and supervision of business sectors under its jurisdiction, exchanges, certified public accountants and other relevant parties - there is a common logic to all these functions. Nonetheless, planning institutional frameworks, inspection and supervision are different in nature. Thus, it is also important to ensure that common knowledge and standards are shared with regard to each business sector, and that a consistent logic is maintained when individual cases of institutional and supervisory matters are handled. All bureaus face a huge workload, as they handle a number of matters at any one time, so bureau-to-bureau communication may be insufficient in some cases. In this context, we recognize the growing importance of promoting the sharing of information throughout the agency and exchanges of opinions. For example, we are making efforts to share the recognition and analysis of market developments related to the subprime loan problem and make effective use of the results.


Am I correct in understanding that what you talked about just now amounts to a declaration of your resolve to continue in office as FSA Commissioner in the upcoming new program year?


Please understand that it is too early to comment on that at this time.


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