Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

March 2, 2009

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statement to make.

[Questions and Answers]

Q.

I would like to ask you about measures to support stock prices. As the end of the fiscal year approaches, there are growing calls from the ruling and opposition parties for the need to take measures to support stock prices. The other day, Minister Yosano also mentioned a plan to consider such measures. Could you tell us how you view measures to artificially support stock prices and improve the supply-demand balance?

A.

From a broad perspective, there are two sides to this issue, one of which is how to prevent stock price fluctuations from reducing the financial sector’s financial intermediary function and the other is how to moderate the excessive fluctuations of stock prices. As for the former side, since last year, we have already taken administrative measures such as revising the treatment of restructured loans and partially relaxing the capital adequacy ratio requirement, and introduced broader schemes, including the revision of the Act on Special Measures for Strengthening Financial Functions and a substantial expansion of the quota of governmental guarantee. As for the other side, a bill related to the Banks’ Shareholdings Purchase Corporation is under deliberation in the House of Councillors at the moment, and the Bank of Japan resumed the purchase of shares from banks last week. For the moment, I would like to refrain from making any further comments.

Generally speaking, it is important to study the purpose, benefits and negative side effects of every policy measure carefully and adequately.

Q.

Late last week, the U.S. government announced that it would own 36% of the common shares of Citigroup, thus becoming a major shareholder. Likewise, the British government announced additional support measures using public funds for major banks. In Germany, too, there is also a move to nationalize banks. Thus, activities aiming to stabilize the financial system are apparently becoming brisk again. How do you view the current situation?

A.

Let me sum up recent developments. As I understand it, in the United States, Citigroup on February 27 announced an agreement to convert up to 25 billion dollars worth of preferred shares held by the U.S. government into common shares. In Britain, Royal Bank of Scotland announced net losses of 24.05 billion pounds for the full fiscal year on February 26. I understand that the British Treasury has reached a basic agreement to provide governmental support to this bank through the Asset Protection Scheme and the injection of additional public funds. Furthermore, I understand that in order to stabilize the financial markets and financial system, the German cabinet on February 18 decided on legislation to enable forcible acquisition of shares in financial institutions that are held by existing shareholders so that the financial institutions can be put under state control.

These U.S. and European initiatives represent additional efforts by relevant authorities and financial institutions to resolve the financial crisis and ease the ongoing financial turmoil, as I see it. While I would like to refrain from commenting on specific measures taken by individual countries, I hope that these measures will be effective in strengthening the financial foundation of financial institutions and contribute to the stability of the financial markets.

Japan’s financial system itself is stable compared with the systems in the United States and Europe. However, since the effects of volatile movements in the stock and other markets and the deterioration of the real economy are growing, we will continue to watch the situation with strong concern while maintaining cooperation with the authorities in other countries.

Q.

It has been pointed out that as wages and bonuses for employees have declined in line with the deterioration of corporate earnings, the flow of funds to individuals has been somewhat squeezed, as shown by the tightening of the screening criteria for housing loans and the growing difficulty in getting consumer loans from nonbank lenders. Could you tell us how you view the current situation and what administrative measures, if any, will be taken?

A.

Recently, we have occasionally heard stories like that. Since last summer, the FSA (Financial Services Agency) has directed attention to financing for small and medium-size enterprises (SMEs) and engaged in various initiatives to facilitate financing for SMEs. However, since last autumn, there have been funding bottlenecks in financing not only for SMEs but also in direct financing, or market-based financing, and some larger companies have come to face funding bottlenecks. If we also see signs of increasing funding bottlenecks in financing for individuals, which was mentioned in your question, we will need to direct our attention to that matter, too, and keep a close watch. In this sense, I think that we will need to direct our attention to each of three major areas, namely financing for SMEs, financing for larger companies and financing for individuals.

Q.

Earlier today, Yamato Life Insurance, which went bankrupt last year, announced that the Prudential group of the United States has been selected as the sponsor of its corporate restructuring and revealed a plan to seek financial support from Life Insurance Policyholders Protection Corporation of Japan. According to media reports, the size of the support is estimated at around 30 billion yen. How do you view this case and, in particular, how do you feel about the possibility that there will be a certain impact on policyholders? Also, do you think that the safety net for insurance contracts, including both life and casualty insurance contracts, provides thorough protection, or that additional measures are necessary?

A.

At around 3 p.m., the administrator of corporate rehabilitation at Yamato Life Insurance announced the signing of a sponsor contract with Gibraltar Life Insurance, which belongs to Prudential Financial Group of the United States, to receive support for corporate restructuring.

The FSA believes that from the viewpoint of the protection of insurance policyholders, it is important that an appropriate rehabilitation plan be adopted quickly, and we welcome the signing of this sponsoring contract from that viewpoint. While the details of the rehabilitation plan will be discussed by the parties concerned, including the administrator and the sponsor, the FSA will deal with this matter appropriately during this process in light of the purpose of the Insurance Business Act and from the viewpoint of the protection of insurance policyholders.

As for the size of the financial support from Life Insurance Policyholders Protection Corporation, I understand that it will be determined through consultations among the parties concerned, including the administrator, the sponsor and this corporation, from the viewpoint of the protection of policyholders.

Regarding the question about the safety net, I believe that past cases of insurance companies’ bankruptcies have been handled with a high level of transparency under the same safety net and in accordance with the rules. Under this framework, as much protection as possible is provided to policyholders, as at least 90% of the policy reserves is covered. I expect that in order to maintain consistency with the past cases, as much effort as possible will also be made this time by the parties concerned under this framework from the viewpoint of the protection of policyholders.

Q.

Regarding measures to support stock prices, which were mentioned at the beginning of this press conference, there is an argument, mainly from within the ruling parties, that the function of Banks’ Shareholdings Purchase Corporation should be strengthened. For example, there are apparently proposals for purchasing ETFs (exchange-traded funds) and directly purchasing shares from the market. This corporation was originally established at the same time as the enactment of a law that limits excessive holdings of shares by banks so that it can absorb unloaded shares. What do you think of the consistency of this background to the establishment of the corporation and the related law with the idea of strengthening the function of this corporation so as to enable it to purchase a variety of items?

A.

As for your question concerning the Banks’ Shareholdings Purchase Corporation, I should refrain from making specific comments on behalf of the government, as an amendment bill submitted by the ruling parties is under deliberation in the House of Councillors as I said earlier.

If I am to talk about this matter in general terms for fact-checking, the Banks’ Shareholdings Purchase Corporation was established with banks as its members in order to prevent a situation in which fluctuations in the prices of shares held by banks affect their financial soundness and cause an excessive credit crunch by reducing confidence in them through a drop in their share prices. In this sense, the basic purpose and the framework of the existing law and the fundamental purpose of this corporation are as you stated in your question.

When the Bank of Japan recently explained its decision to resume the purchase of shares from banks, it indicated, as I remember it, that the decision was intended to put in place a mechanism to absorb shares in order to prevent the negative cycle of stock prices from coming under additional pressures if banks decide to unload their shareholdings so that they can shield themselves against the downside risk involved in shareholdings. The Banks’ Shareholdings Purchase Corporation as it now exists has been established basically for that purpose.

Q.

In the past securities market slumps, in the slump in 1965, for example, an organization to absorb unloaded shares was established under a private-sector initiative. Do you expect any such initiative from the private financial sector in this stock market downturn from that viewpoint?

A.

If something is to go ahead under a private-sector initiative and we are to make some requests, it would be in cases where there is concern from the viewpoint of the stability of the entire financial system and the protection of users and investors.

Earlier, I told you that it is important to study the purpose, benefits and negative side effects of every policy measure carefully and adequately, and I would say that this is also important when private-sector parties consider what to do.

Q.

Regarding Citibank, which was mentioned in an earlier question, what impact do you expect this rescue plan will have on the bank’s depositors in Japan? Also, how do you expect it will affect the transfer of the business operations of Nikko Cordial, which is under the wing of Citigroup?

A.

I believe that an entity operating in Japan, be it a Japanese subsidiary or branch office, will conduct business in accordance with Japanese laws such as the Banking Act and the Financial Instruments and Exchange Act. A change in shareholders — in this case, some voting rights may be transferred to the U.S. government — is subject to authorization under laws and regulations in many cases. What the FSA should do is to appropriately deal with this case based on laws and regulations from the viewpoint of the protection of users and customers.

Q.

Returning to the issue of the purchase (of shares), some negative side effects may arise if the government steps into the market to buy shares. For example, in 1998 (as the speaker said), the government of Hong Kong announced a plan to buy any amount of shares with the use of foreign reserves if the Hang Seng index dropped below a prescribed level. Although this measure is said to have proved successful, how do you view the very idea of a government stepping into the market to buy shares?

A.

I would like to refrain from commenting on that past case in Hong Kong. As I said earlier, I would like to refrain from making any particular comments on the specifics of negative side effects for the moment. In any case, it is important to adequately study the purpose, benefits and negative side effects of policy measures.

Q.

In your reply to an earlier question, you said that you will direct attention to financing for larger companies and individuals, Are there any particular policy measures under consideration? You have been cooperating with Small and Medium Enterprise Agency with regard to SMEs, and am I correct in understanding that from now on, you will cooperate with the Ministry of Economy, Trade and Industry with regard to larger companies?

A.

When I said earlier that we will direct fresh attention to three areas, I meant to say that we are bearing those areas in mind as our broad approach.

When we direct attention to financing for larger companies, it is important, of course, to consider what to do while maintaining communication with various authorities, including the Ministry of Economy, Trade and Industry, the Bank of Japan and, in the case of policy-based finance, the Ministry of Finance. Until now, larger companies have raised funds through direct finance to a substantial extent, rather than indirect finance, so the issue of alternative relationship or complementary relationship between direct finance and indirect finance is now emerging. As the Bank of Japan and financial institutions related to policy-based finance have already taken measures concerning the CP (commercial paper) market and the corporate bond market, I believe that it is important, of course, to maintain close communications with those relevant authorities.

(End)