Press Conference by FSA Commissioner Takafumi Sato
January 15, 2009
[Opening Remarks by FSA Commissioner Sato]
I do not have any particular statements to make.
[Questions and Answers]
According to recent statistics released by private research companies, the number of corporate bankruptcies last year rose to the highest level in several years. An increasing number of companies have cited deterioration in the fund-raising situation as the cause of their bankruptcy. While the FSA (Financial Services Agency) has strengthened measures to prevent curbs on new loans in order to facilitate fund-raising, such as conducting inspections and putting into force the revised Act on Special Measures for Strengthening Financial Functions, how do you assess the existing measures and what additional measures, if necessary, do you think should be taken?
As you know, the turmoil in the global financial markets has triggered a worldwide recession, hurting Japan’s real economy and stock market and is starting to have a major impact on local economies and small and medium-size enterprises (SMEs). Under these circumstances, SMEs face very severe business conditions, so it will become increasingly important for financial institutions to exercise their financial intermediary function properly and actively.
So far, the FSA has taken a variety of measures to ensure smooth fund-raising by SMEs, such as quickly putting into force the revised Act on Special Measures for Strengthening Financial Functions, expanding the scope of loans which are not deemed to fall under the category of loans for which the lending terms have been eased, and partially relaxing the capital adequacy ratio requirement. In addition, the FSA has repeatedly requested private financial institutions to facilitate financing by holding a forum for exchanges of opinions between Minister Nakagawa and representatives of financial institutions, for example. Moreover, in financial inspections, we are focusing on checking whether or not financial institutions are engaging in practices that could be regarded as curbs on new loans or forcible collection of outstanding loans. Also, in the second supplementary budget for fiscal 2008, which is now under deliberation in the Diet, we are planning to expand the amount of funds set aside for capital injection by the government to 12 trillion yen under the revised Act on Special Measures for Strengthening Financial Functions and we are repeatedly asking, through Local Finance Bureaus across the country, financial institutions to positively consider using this scheme.
As for your question regarding my assessment of the exiting measures and the possibility of taking additional measures, I believe that the most important thing to do for now is to steadily implement the measures that I mentioned and carefully watch their effects. In this period leading to the end of the current fiscal year, we will continue to make efforts to enable financial institutions to fully exercise their financial intermediary function, as expected by borrowers, by properly and actively providing funds.
Regarding the announcement by Citigroup of the United States of a plan to sell Smith Barney, which is a securities subsidiary, speculation is growing about the possibility of more businesses being put up for sale. How do you feel about the crisis of the world’s largest financial conglomerate and - although you may find it difficult to answer this question as it concerns an individual company - how do you expect this will affect the company’s financial business in Japan?
I understand that on Tuesday, January 13, Citigroup of the United States announced a plan to establish a wealth management joint venture with Morgan Stanley. I would like to refrain from commenting on matters concerning management decisions, such as business restructuring and reform of a business model by a specific financial group.
Generally speaking, it has become obvious that the business model that has until now been employed by most major U.S. and European financial institutions has partially failed amid the ongoing turmoil in the global financial and capital markets, which was triggered by the U.S. subprime mortgage problem. They have maximized short-term profits by using high leverage and, in this process, originated and sold complex and opaque financial products and engaged in off-balance sheet transactions. The causes of these problems, as well as other various problems, were analyzed in a report issued in April last year by the FSF (Financial Stability Forum). In this situation, some U.S. and European financial institutions are apparently moving toward business integration and restructuring. It is important for individual financial institutions to make appropriate management decisions in light of their circumstances. This is a global issue.
As for the impact of Citigroup’s announced plan on its financial business in Japan, I understand that the planned joint venture does not involve the group’s financial institutions in Japan. Also, I am not aware of any information that indicates the announced plan could have a major impact on the group’s financial institutions in Japan. In any case, we will continue to watch future developments carefully. Stress remains in the global financial and capital markets, and the financial market turmoil has had a serious adverse impact on the real economy. The FSA will keep a close watch on the financial situation both in Japan and abroad with a high level of vigilance and will strive to act in an appropriate manner.
Last week, there was a media report that the FSA was considering making simultaneous capital injections into more than 10 banks whose capital adequacy ratio is low under the revised Act on Special Measures for Strengthening Financial Functions, and this news apparently caused a significant ripple throughout private financial institutions. Could you give me factual confirmation and tell me whether the FSA is considering such a move?
I would like to refrain from commenting on the contents of any specific media report. However, I deny that we have started considering making simultaneous capital injections using public funds at the end of the current fiscal year.
As you know, the revised Act on Special Measures for Strengthening Financial Function is intended to support local economies and SMEs, which face severe conditions, by strengthening financial institutions’ financial intermediary function through governmental capital injection. However, governmental capital injection based on this act must be made in response to applications from financial institutions under the current recapitalization scheme. Meanwhile, in order to encourage active use of this scheme, the FSA held briefing sessions for financial institutions before the end of last year so as to fully communicate the purpose and contents of this scheme to them. Moreover, we continue to actively ask them to consider using this scheme.
I believe that if financial institutions are to exercise their financial intermediary function properly and actively as expected by SMEs and other borrower companies, they should engage in “forward-looking management,” and if they decide to strengthen their capital bases, I hope that they will positively consider using this scheme.
The issue of reputational risk for financial institutions considering making an application for capital injection is sometimes cited as a background factor for the argument for simultaneous capital injections. However, I think that considering making an application for capital injection will mean, so to speak, making judgment as part of forward-looking management, namely considering how the management should be conducted and how the operating environment will change one year, three years and five years from now. It may also be regarded as the expression of a commitment to supporting local economies and local SMEs by exercising the financial intermediary function properly.
On January 20, a new U.S. administration will be inaugurated as Mr. Obama takes office. While a variety of challenges have been pointed out, I suppose that the administration will debate, or I should say, explore new ways of regulation in the financial sector and what kind of regulation should be introduced in place of regulation based on market fundamentalism. As a financial regulator, what is the focus of your attention as you look at the new U.S. administration and what are your hopes for it, although these questions may be a little vague.
I am not in a position to lecture the new U.S. administration, so I would like to talk about how regulation and supervision should be conducted, an issue which you mentioned in your question.
Since the subprime mortgage problem emerged in the summer of 2007, major regulatory and supervisory authorities, including the FSA, have put very high priority on analyzing the cause of that problem and rebuilding the framework of regulation and supervision in the medium term based on the analysis. As a result, major regulatory and supervisory authorities, including the FSA, have very frequently held meetings and reached some consensuses through repeated discussions.
Of course, nobody thinks that the existing financial systems and markets should remain as they are, and on the premise that the existing market mechanism is not properly functioning, it is necessary to identify the cause of the malfunction and strengthen regulation and supervision in ways to tackle the identified cause. In this sense, the perception that market fundamentalism and laissez faire lead to the best possible results has apparently weakened considerably, and the consensus is that regulation should be reformed or strengthened where necessary.
I understand that viewpoints like this were endorsed at G-7 meetings (meetings of the Group of Seven Finance Ministers and central bank governors) in April and October last year and at the G-20 summit (Summit on Financial Markets and the World Economy) in November. This means, for example, that various issues are on the agenda, including the need to maintain the soundness of banks, ensure the transparency of market transactions and conduct appropriate due diligence, as well as problems related to credit rating agencies, the remuneration systems of U.S. and European financial institutions, and so-called procyclicality (the possibility that regulation may magnify fluctuations of the economic cycle depending on how it is conducted).
At the moment, no firm conclusion has been reached. While a conclusion is about to be reached with regard to some themes, discussions are apparently ongoing with regard to most themes. In any case, I am sure that market fundamentalism is undergoing modification. The financial regulatory and supervisory authorities around the world, including those in the United States, are expected to work together to rebuild the framework of regulation.
One thing we should keep in mind is that while we face the task of rebuilding the framework of regulation and strengthening regulation in the medium term, the financial markets and the financial system are in a state of great turmoil now, producing a negative impact on the real economy and triggering something like a global recession, and the deterioration of the real economy has in turn undermined the soundness of the financial sector. Therefore, we must tackle the medium-term task of rebuilding the framework of regulation in ways to prevent this effort from leading to further deterioration of the severe situation we face now.
I understand that the procedures for the transfer of the business operations of failed Yamato Life Insurance is making progress. In a financial situation like this, some people expect that the amount of the company’s negative net worth will expand, while others worry about how much consideration is being given to ensuring that the company will be transferred to an appropriate party. Also, from the standpoint of the policyholders of the former Taisho Life Insurance, who were forced to accept insurance benefit cuts twice, it may be doubtful whether the transfer of failed insurance companies has been implemented in an appropriate manner and whether appropriate supervision has been conducted. What are you views on these matters?
I am aware of a media report that the negative net worth of Yamato Life Insurance, which is undergoing the corporate rehabilitation procedure, may be expanding. However, as Yamato Life Insurance is undergoing a court-supervised rehabilitation procedure under the administrator of the rehabilitation, we would like to refrain from making any specific comment while the procedure is ongoing.
On the other hand, it is needless to say that the protection of insurance policyholders is a very important issue. Matters such as modification of the terms of insurance contracts should be determined under a rehabilitation plan. In Japan, there are safety net measures, including financial support provided by the Life Insurance Policyholders Protection Corporation of Japan, and insurance policyholders are compensated with an amount corresponding to up to 90% of the policy reserves under this framework. The FSA will keep a close watch on future developments, including the appropriateness and eligibility of the entity to which Yamato Life Insurance’s business operations will be transferred. Also, from the viewpoint of protecting policyholders, we hope that a rehabilitation plan, including the selection of the sponsor company, will be drawn up quickly.
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