Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

February 23, 2009

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make. Please ask me questions.

[Questions and Answers]

Q.

This morning, SFCG, which is a major lender of “shoko” loans (high interest rate loans provided mainly to small and medium-size enterprises (SMEs)) filed an application for court-led rehabilitation proceedings, thus virtually going bankrupt. The loan collection method used by this company is partly regarded as problematic, while there were apparently some fund needs, mainly from SMEs. Could you tell us what impact you expect from the bankruptcy of this company?

A.

I understand that SFCG, a lender of “shoko” loans, filed an application with the Tokyo District Court for court-led rehabilitation procedures today, February 23, and the application was accepted. I would like to refrain from commenting on any particular company. However, generally speaking, I understand that it is so intended that a company that has applied for court-led rehabilitation will seek corporate rehabilitation while continuing its business operations after filing the application. I recognize that the current business environment for money lenders is severe, as interest income has declined and the number of requests for the refunding of (interest) overcharges remains high. We, regulatory authorities, intend to keep a close watch on the situation surrounding money lenders and movements on the part of borrowers.

Q.

As Minister of Economy, Trade and Industry Yosano has been appointed to concurrently serve as Minister for Financial Services, he now serves in three ministerial posts, including the post of Minister of Finance. Minister Yosano said, perhaps jokingly, “I am at a loss as to which ministry I should go to.” As he concurrently serves in three ministerial posts, isn’t there concern on the part of FSA staff that the weight of the duties as Minister for Financial Services in Minister Yosano’s overall duties may be reduced?

A.

No, there is not.

Q.

Are you sure that there is not any concern?

A.

Yes, I am sure.

Q.

Yesterday, major European countries held an emergency summit meeting and agreed to strengthen legal regulation on hedge funds and surveillance on markets, as I understand it. First, I would like to know how you feel about this meeting, and, turning to Japan, I have the impression that Japan has not been active enough in making proposals regarding financial supervisory issues like these. Given the lessons it learned a decade ago, which may serve as an example to be avoided, I suppose Japan may be able to actively make proposals regarding financial supervisory issues through international conferences and on other occasions. What is your thinking in this regard?

A.

First, I will answer the question concerning an emergency summit meeting held by major European countries. I think that major European countries such as Britain, Germany, France and Italy held this meeting as a preparatory meeting of leaders, so to speak, ahead of the second G20 summit meeting, which is scheduled to be held in London in April. At this meeting, it was agreed that all financial markets, financial products and market participants, including hedge funds that could trigger systemic risk, should be placed under appropriate supervision and regulation, as I understand it.

I think that this move is part of the efforts being made at a time when it is a common task for various countries to rebuild a regulatory framework based on the recognition that it is necessary to restore the robustness of financial systems and markets so as to prevent the recurrence of the global financial turmoil that was caused by the U.S. subprime mortgage problem. Japan is also engaging in efforts in this direction and shares the underlying recognition of problems. In addition, I think that it is important for Japan to actively participate in international debate in the run-up to the next summit meeting while cooperating with relevant countries about important themes like these.

Now, I will move on to your second question, in which you suggested that Japan may not have been active enough in making proposals or communicating its views. I believe that the experiences Japan accumulated in trying to avoid a collapse of the financial system indicate some useful lessons as to measures that should be taken by the authorities of individual countries in order to deal with the current global financial crisis. Let me cite some main lessons. First, in order to break the negative cycle of an increase in non-performing assets and a credit crunch leading to a deterioration of the real economy, it is essential to quickly and accurately recognize losses. Secondly, when a financial institution holds a huge amount of non-performing assets, it is desirable to remove the losses from the balance sheet in order to dispel concern about the possibility of additional losses arising. Thirdly, while it is important to deal with a financial institution’s capital shortfall by quickly implementing a capital increase, a capital injection with public funds is necessary if market-based measures alone are not sufficient. The fourth lesson is that extremely exceptional measures like full protection of deposits and temporary nationalization of a troubled bank may be considered as options in a crisis situation. The fifth lesson is that it is necessary to implement short-term anti-crisis measures and perform the medium-term task of rebuilding a regulatory framework at the same time while seeking to strike the right balance between these two approaches. We have already been communicating the lessons Japan has learned through its experiences at international conferences, such as G7 meetings (meeting of Group of Seven Finance Ministers and central bank governors) and the financial summit (Summit on Financial Markets and the World Economy). As we are continuing such efforts, I believe that it is important to play a role in international initiatives to deal with the global financial crisis while cooperating with relevant countries at various international conferences and on other occasions.

I would also like to remind you that in addition to publishing information related to events that draw high publicity, which is carried in media news, the FSA (Financial Services Agency) is disseminating information and exchanging opinions at various levels, including at the working level and through a variety of channels. We are exchanging opinions with the authorities and lawmakers, as well as market participants, in the United States and Europe. In this context, I am making efforts myself regarding the dissemination of information while bearing in mind the goal of “enhancing the dissemination of information” under the Initiative toward Better Regulation (improvement in the quality of financial regulation). I have devoted much effort to English language speeches, and in my speeches, I mentioned matters like Japan’s lessons that I talked about earlier. Major speeches have been published on the FSA’s website, and there have been a reasonable number of accesses, as I understand it.

Q.

Regarding the case of SFCG, it was revealed at a press conference that the company has 50,000 SME borrowers, so concern has been expressed that a lack of loans could cause chain-reaction bankruptcies. Are there any measures the FSA is considering in relation to this?

A.

The financial intermediary role played by business finance in Japan’s entire economy has a certain degree of importance. In this sense, I am hoping that this will not have a considerably negative impact on financing for SMEs. As the application for court-led rehabilitation was filed just today, we will keep a close watch on its impact, as I said earlier.

Q.

Some lawmakers are arguing that the revised Money Lending Control Act should be reviewed again from the viewpoint of facilitating the provision of funds to corporations, including “shoko” loans. What is your view on this matter, including on the need for such a review?

A.

The revised Money Lending Control Act is now in the process of being put into force in stages. The revised Money Lending Control Act is essentially a legal framework established with a view to identifying a variety of problems related to the protection of borrowers and resolving or minimizing the problems so that consumer finance and business finance can be shifted to a more desirable state. Although this act has partially been put into force, some provisions remain to be put into force. Therefore, the most important thing to do is to first implement measures in line with this legal framework. As I said earlier, the management condition of money lenders may be generally becoming severe due to such factors as the continued high number of requests for the refunding of overcharges. However, as I said earlier, I think it is necessary to make efforts to shift financial intermediation by money lenders to such a state that harmful effects that it may generate would be minimized.

Regarding a legal framework, I believe that the duty of the administrative authorities is to calmly deal with the situation in line with the existing legal framework, and it is important to keep a close watch on the actual situation while enforcing the law. In this sense, I believe it is important to keep a close watch on the situations of both money lenders, which are on the lending side, and consumers and SMEs, which are on the borrowing side.

Q.

In relation to the bankruptcy of SFCG, I understand that some financial institutions had very close business relations with the company. Do you think that, for example, the business conditions of other financial institutions could be affected?

A.

As this issue could affect particular business clients of particular financial institutions, I would like to refrain from making any specific comments. In any case, I expect that in response to this case, individual financial institutions will consider how to properly deal with it and take appropriate risk management measures.

Q.

Amid the global stock price slump, the Nikkei Average is dropping at such a rapid pace that it may hit a new low since (the failure of) Lehman Brothers last year. In relation to this, how do you expect Japanese banks’ capital will be affected at the closing of the fiscal term ending in March? Also, do you think that companies’ fund-raising to secure funds maturing beyond the closing of the fiscal term will be affected?

A.

Today, the TOPIX index closed at 735.28, falling below the low since the collapse of the bubble economy that was recorded on October 27 last year and marking the lowest point since the low of 731.82 that was recorded on December 30, 1983.

As market movements are determined as a result of investment activities based on respective judgments made by various market participants, I think I should refrain from making any definitive comments in this respect.

As for the impact on the financial conditions of financial institutions, Japanese banks have relatively small exposure to subprime-related products and opaque securitized products at the moment, compared with their U.S. and European counterparts, so they have suffered relatively little damage in this financial crisis. On the other hand, it is true that Japanese banks have a relatively large amount of shares. Generally speaking, while stocks are not opaque products, they have large price volatility.

Therefore, banks that continue to hold a relatively large amount of shares based on their business judgment need to properly manage share-related risks, including volatility, and it will also be very important for them to hold risk buffers. On the other hand, in order to prevent a considerable impact on Japan’s stock market if banks decide to reduce shareholdings, the Bank of Japan has recently decided to resume purchasing shares from banks, and preparations for the resumption of the business operation of Banks’ Shareholdings Purchase Corporation, which is a matter under deliberation in the House of Councillors, are under way, so this scheme should be utilized.

In any case, I strongly hope that individual financial institutions will properly perform their financial intermediary function, including financing in the period up to the end of the fiscal year, which is the most important role of financial institutions, by conducting appropriate risk management while anticipating future developments.

Q.

I think that there is widespread speculation that Citigroup and Bank of America will be nationalized. Although I suppose it is difficult for you to comment on particular cases like this, what impact do you expect nationalization, should it occur, would have on Japanese financial institutions?

A.

As this is a hypothetical question and concerns developments in the U.S. market, I would like to refrain from making any comments.

Q.

Although this may be too local a matter, Fuji House, which is a medium-size housing maker based in Shizuoka Prefecture, apparently went bankrupt at the end of January, and there are more than 1,000 cases of unstarted construction on land for housing construction. Financial institutions that should have been naturally aware of the precarious business conditions of the housing maker provided a large amount of bridge loans, worth 10 million or 20 million yen, to construction clients, and there is a local voice arguing that it may be problematic that financial institutions provided loans to construction clients while being aware of the housing maker’s conditions. Could you tell us whether you think that the FSA should provide guidance or take other measures with regard to financial institutions that are in a position to know the conditions of housing makers?

A.

Regarding the management of financial institutions, generally speaking, I believe it is very important that individual financial institutions conduct appropriate risk management and properly develop a legal compliance system at the same time, thus ensuring compliance regarding daily business operations. As for the case you mentioned in your question, I cannot make any detailed comments, as this is a particular case and I am not knowledgeable about the nature of this case. However, as financial institutions conduct business based on contractual relationships in accordance with laws and regulations, I believe that it is important, first of all, to take appropriate measures in accordance with the contracts concluded between the parties concerned.

(End)