Press Conference by FSA Commissioner Takafumi Sato
February 9, 2009
[Opening Remarks by FSA Commissioner Sato]
Thank you for rescheduling the time of my press conference.
First, we would like to reiterate our apology for the loss of administrative documents, which we announced last Friday (February 6). To prevent a recurrence of such an incident, we will make sure to take thorough care in document management.
[Questions and Answers]
All of the six major banking groups announced their financial results for April-December 2008 last week. Because of such factors as increases in the write-off of losses due to a stock price decline and the disposals of non-performing loans, their net profits declined nearly 90% compared with the same period of the previous year. Depending on the economic conditions and stock prices, their full-year profits could post sharper declines in the fiscal year ending in March 2009. How do you feel about this?
Also, do you think it is possible that, although it is up to them to make a decision, the megabanks and other major banks will apply for the injection of public funds? Do you think they may do so in order to cover a capital shortage or increase their lending capacity?
By last weekend, the six major banking groups announced their financial results for the fiscal term ended in December 2008. According to the announced figures, they posted sharp profit drops compared with the same period of the previous year, with some of them slipping into the red. The combined net profits of the six major banking groups totaled 135.2 billion yen, down approximately 90% from the same period of the previous year.
I think that among factors behind the profit drop are, first, a sharp deterioration in the profit and loss status of stockholdings due to a stock price decline, and, secondly, an increase in expenses related to the provision of credit. Of course, we can judge that behind this situation is the fact that the turmoil in the global financial and capital markets has had an adverse impact on Japan’s stock market and real economy and, through this process, affected the earnings and balance sheets of financial institutions. Although Japan’s financial system itself has received a limited direct impact from the turmoil in the global financial market compared with the financial systems of the United States and Europe, I understand that the adverse impact is starting to spread. The FSA (Financial Services Agency) will keep a close watch on developments in the financial markets by quickly gathering information concerning financial institutions’ financial conditions and risk management systems while maintaining a high level of vigilance.
As for your question concerning public funds, needless to say, each bank should first make appropriate efforts to conduct risk management and maintain and strengthen its financial foundations on its own responsibility. I think I should refrain from commenting on any particular types of business.
There is speculation that a G7 meeting (meeting of the Group of Seven Finance Ministers and central bank governors) will be held in Italy, although a formal announcement may not have been made. I suppose that this may be characterized as a preparatory meeting for the financial summit scheduled to be held in London in April. While there is an argument that something like an international financial surveillance organization should be established under the United Nations amid the ongoing debate on international finance, you have been calling for the enhancement of cooperation between the authorities. How do you feel about the idea of establishing an international surveillance organization or something similar?
Although G7 is a matter under the jurisdiction of the Ministry of Finance, I understand that a meeting of the G7 Finance Ministers and central bank governors is scheduled to be held in Rome, Italy, this weekend, on February 13 and 14.
As Italy, which will chair this meeting, has not announced the agenda, I would like to refrain from making specific comments on the agenda. Generally speaking, a G-7 meeting provides an opportunity for discussions on the state of the global economy and developments in the financial, capital and exchange markets, so, as usual, there will most likely be an exchange of opinions about policy actions to be taken in response to a slowdown of the global economy and measures to maintain or restore confidence in the financial markets.
As for the international surveillance organization that you asked me about, I understand there have been media reports that German Chancellor Merkel made statements in the period up to the summit (on financial markets and the world economy) to the effect that an agreement should be reached on some rules in order to prevent a recurrence of the financial crisis, and the establishment of an “economic council,” like the Security Council, under the United Nations as a framework for this may be considered. I understand that this is a proposal intended to enhance international cooperation to prevent a recurrence of the financial crisis. At the G20 summit that was held in November last year, the enhancement of international cooperation was agreed upon as one of the five principles on the reform of the financial markets, and action plans based on the five principles were set forth.
The FSA is making efforts toward this by implementing action plans set forth at the summit, for example by establishing a supervisory college to oversee major Japanese financial institutions that operate internationally, in cooperation with authorities in other countries, and I believe that steadily implementing these action plans first is important.
In any case, the FSA intends to actively participate in international discussions at the Financial Stability Forum and other gatherings about how to prevent a recurrence of the financial crisis and strengthen the financial system.
As we are approaching the end of the fiscal year again, could you tell us about the current state of fund-raising by small and medium-size enterprises (SMEs) and about measures, if any, that you are considering in order to facilitate fund-raising in the future?
We have engaged in various initiatives since last autumn in relation to year-end financing. Apart from how the actions taken in relation to year-end financing should be evaluated, financing in the period up to the end of the fiscal year will be the next critical challenge now that the end of the calendar year has passed. In any case, we intend to carefully monitor the state of financing for SMEs so as to ensure that Japan’s financial system functions as smoothly as possible on a daily basis and properly performs the financial intermediary function that is necessary for the real economy, and at the same time, if there is anything lacking, we will come up with some solution or other. With this stance, we will continue to deal with the situation. I think that we are not yet at a stage where we can talk about a package of specific measures.
Regarding financing for SMEs, the government started an emergency guarantee scheme last October to provide 100% guarantee for loans to SMEs. Problems with financial institutions’ actions in relation to this have been pointed out. For example, it has been pointed out from various quarters that some financial institutions have made business clients refinance from outstanding loans to guaranteed loans while others have refused to provide loans to companies that are eligible for this scheme. Could you tell us about the FSA’s recognition of the current state and these problems?
Regarding the enhancement of the framework of emergency guarantee in the period up to the end of the calendar year or the fiscal year, we strongly hope that SMEs will actively use this scheme and financial institutions will make adequate efforts in accordance with the goal and purpose of this scheme.
I believe that the use of loans backed by emergency guarantee to refinance outstanding loans, which you mentioned in your question, represents a deviation from the original purpose of this scheme.
In addition, as the emergency guarantee scheme provisionally removes the principle of responsibility-sharing and provides 100% guarantee, there is little credit risk from the standpoint of financial institutions. However, I hope that rather than relying entirely on the safety of emergency guarantee, individual financial institutions will properly and actively act as financial intermediaries by exercising the ability to assess borrowers that they have continued to foster in the “relationship banking” initiative.
Last week, the Bank of Japan (BOJ) announced the resumption of the purchase of shares held by banks. As the resumption is subject to approval by the FSA Commissioner, how do you view it? In relation to this, the governor of the BOJ said that although the amount of shares held by banks has decreased in absolute terms, the holding of shares involves significant risk. What do you think of the current state of banks’ shareholdings?
Last Tuesday, February 3, the BOJ decided at a Policy Board meeting to resume the purchase of shares from financial institutions, and upon the receipt of the BOJ’s application for approval, the government granted approval on the same day.
In this case, I believe that the BOJ made the decision in order to support financial institutions’ efforts to reduce the risk involved in the holding of shares and to ensure the stability of the financial system in light of the recent conditions of the financial and capital markets. The FSA believes that the BOJ’s move is a timely action that reflects the current conditions of the financial and capital markets, and we hope that it, coupled with a series of measures already taken by the government and the BOJ, will provide a sense of security to the market.
As for the risk involved in the holding of shares by banks, shares are fundamentally financial products with a fairly wide range of price fluctuations, so banks that hold shares need to conduct appropriate risk management regarding the risk related to this volatility. The restriction on banks’ shareholdings was introduced some years ago, and most banks have met the necessary criteria. However, apart from this, I believe that it is necessary for them to properly manage the risk involved in the holding of shares if they are to continue to hold a certain amount of shares.
While most banks are complying with the rule that limits banks’ shareholdings to less than the amount of their Tier 1 core capital, are you considering reviewing this rule?
For the moment, we have no such idea. However, as I said earlier, if they are to continue holding a substantial amount of shares based on their management judgment, they will naturally need to tackle the task of advancing their risk management by acquiring buffers to absorb losses, among other measures, with due consideration of the volatility I mentioned earlier.
In relation to the loss of documents that was announced on Friday, what measures — even if no disciplinary measure is taken — are expected to be taken to prevent a recurrence, including how to alert the FSA staff?
As a specific recurrence prevention measure, we will reiterate agency-wide efforts to ensure appropriate management of administrative documents, appropriate handover and storage of documents in the case of personnel transfers in particular and appropriate disposals of documents whose storage period has expired. In addition, in education programs concerning information management, we will reiterate efforts to ensure compliance with the rules on the management of documents. Furthermore, although this will take some time, we would like to examine whether there is room for further improvement with regard to the rules on the management of documents.
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