Press Conference by FSA Commissioner Takafumi Sato
March 16, 2009
[Opening Remarks by FSA Commissioner Sato]
Please ask me questions.
[Questions and Answers]
I would like to ask you about the G-20 meeting that was held over the weekend. A joint statement adopted at the meeting clearly indicated the recognition that it is important to restore the financial functions through the disposal of non-performing loans, with top priority placed on “tackling problems in the financial system head on.” Could you tell us how you evaluate the outcome of this meeting in general and how the Japanese authority will act in relation to the introduction of the registration system for hedge funds, which was mentioned in the statement?
At the G-20 meeting (meeting of the G-20 Finance Ministers and Central Bank Governors) that was held last weekend, I understand that an agreement was reached on the need to take further actions to restore global growth and support lending, including the disposal of non-performing assets, and on the contents of the reform intended to strengthen the global financial system from a medium- to long-term perspective.
More specifically, an agreement was reached or a reconfirmation was made under the framework of the G-20 on both short-term measures to stabilize the financial system, including restoring lending through continued liquidity support and bank recapitalization, and medium-term measures to reform the financial regulation, including the introduction of the registration system for hedge funds. Of course, this agreement will contribute to the stability of the global economy and the global financial markets, and I expect that as the G-20 summit approaches, it will be highly appreciated as a reconfirmation of a commitment by the authorities of relevant countries and international organizations to make efforts to cooperate to build a more robust financial system.
As for hedge funds, as you know, although Japan has not introduced regulation targeted specifically at hedge funds under the Financial Instruments and Exchange Act, there is a framework that requires funds in general to register with the authorities and submit reports. To be more specific, the notification system is applied to business operators engaging in sales, solicitation and asset investment targeting professional investors as customers, while the registration system is applied to those engaging in sales, solicitation and asset investment targeting non-professional investors. I believe that it is important that the authorities will pay attention to risks that may be posed to the market by the presence and activities of hedge funds while giving consideration to their role of providing liquidity to the market.
Generally speaking, hedge funds handle a fairly large amount of funds and they are global in some aspects as they move very fast across national borders in their investment activity. So, when we consider how to properly regulate them, international cooperation and information sharing between relevant countries are important in order to ensure the effectiveness of the regulation.
In any case, the FSA (Financial Services Agency) will continue to actively participate in international debates on how to prevent a recurrence of the financial crisis and strengthen the financial system so that maximum results can be achieved at the summit in April.
Regarding the injection of public funds into three second-tier regional banks, which was announced last week, the three banks announced that they will write off losses on securities holdings on the premise of receiving public funds. However, my understanding is that the purpose of the injection of public funds is to facilitate financing for small and medium-size enterprises (SMEs). How will the FSA conduct supervision so as to avoid merely strengthening the financial foundation of banks or bailing out banks?
As you know, we decided on Friday, March 13, to inject capital into three banks, namely, Hokuyo Bank, Fukuho Bank and Minami Nippon Bank, based on the Act on Special Measures to Strengthen Financial Functions. I understand that the three banks applied for the capital injection with a view to better ensuring the stability of their financial foundation by actively writing off losses on securities holdings in the fiscal year ending in March 2009, thus minimizing risk from future drops in securities prices. Taking risks and providing credit is one of the most basic roles of banks, and to perform this role, it is of course necessary to maintain financial soundness. I expect that the three banks will actively perform the financial intermediary role after ensuring their financial soundness through these efforts.
As for your latter question, each of the banks submitted a management enhancement plan, so I hope that they will make efforts to ensure the implementation of the plan. For its part, the FSA will keep a close watch on the implementation of the plan so as to ensure that the primary purpose of the capital injection is reflected in their activities.
As the amounts of loans to be provided by the three banks under their management enhancement plans are smaller than the amounts of capital injection into them, it is not clear how their management efforts are reflected in the plans. In short, this gives the impression that there is little increase in the amount of their loans. What is your view on the amount of loans?
Regarding the three banks’ specific, quantitative lending targets, I suppose that circumstances differ between the banks, and the economic conditions of the regions in which they operate vary. I think that the banks have arrived at these figures as a result of striking the balance between the need to perform the financial intermediary function as actively as possible and the need to bear in mind feasibility, rather than coming up with overly ambitious plans that may be difficult to implement, with due consideration of the severe conditions of the regional economies; however, if the actual amount of loans exceeds the planned amount of loans to SMEs, it will be no problem, and I would like to see that happen.
Last week, Sompo Japan Insurance and Nipponkoa Insurance, both of which are non-life insurance companies, announced a business integration plan. Before that, three companies, including Mitsui Sumitomo Insurance, announced a business integration plan. As a result, Japanese non-life insurance companies will be consolidated into three major groups. How do you view this situation?
Sompo Japan Insurance and Nipponkoa Insurance announced on Friday, March 13, that they had agreed on a plan to integrate their business operations in April next year, as I understand it.
Business integration and other reorganizations of financial institutions are made based on the voluntary judgment of individual financial institutions, so I would like to refrain from commenting on a particular case. Generally speaking, it is very important that individual insurance companies properly identify the challenges they face and engage in forward-looking management while taking into consideration the severe conditions of the global financial markets and the changing market needs for insurance services. I hope that the competitiveness of individual insurance companies will be enhanced through their conscientious efforts to set forward-looking business strategies and strengthen their business foundation based on their own judgment. I also hope that convenience for users and the quality of services will be improved through such efforts.
Last week, the postal privatization committee issued a report, which apparently indicated a significant change in its stance on matters, such as the public financial sector and supervision, compared with the original stance. Could you tell us about your view on how financial supervision should be conducted and the relationship between the private and the public financial sector from a long-term perspective?
As I have been saying, the elements of the postal privatization that directly concern the FSA are two financial institutions, Japan Post Bank and Japan Post Insurance. In any case, this is a major project based on the postal privatization act. Regarding these two financial institutions, it is important that they are absorbed into Japan’s private-sector financial system without any major disruption and contribute to invigorating competition in the banking and insurance industries, thereby strengthening the financial functions for the whole of Japan and raising the standard of services as viewed by users. While bearing in mind a broad direction like this, the FSA will supervise the two financial institutions and make efforts to facilitate the process of privatization based on the postal privatization act.
I presume that the purpose of your question is to find out my view on an argument, made in a position paper issued by the postal privatization committee, that those two financial institutions should be allowed to engage in new businesses even before being listed, for example. Generally speaking, if the two financial institutions apply for authorization to engage in new businesses, the FSA’s role will be to consider, together with the Ministry of Internal Affairs and Communications, whether or not to grant the authorization. When considering this matter, we are required to take into consideration such matters as the ratio of voting rights of the two financial institutions that are held by Japan Post Holdings, events that could affect the status of competition with other financial institutions and the management status of the two financial institutions, including the status of the development of a business execution system. So, we will deal with this matter in accordance with the purpose of this act and the legal framework.
The quality of banks’ capital was apparently mentioned in the G-20 statement. The statement read, “Definitions of capital should be harmonized in order to achieve consistent measures of capital and capital adequacy.” It is often pointed out that the quality of the Tier 1 core capital of Japanese banks has deteriorated compared with the quality of U.S. and European banks’ such capital. How do you assess the quality of the Tier 1 capital?
What is mentioned in the G-20 statement adopted at this time is the need to deal with the procyclicality (effect of amplifying economic cycles) — in other words, to ensure that the financial regulations dampen, rather than amplify economic cycles by building buffers of capital during the good times and implementing measures to constrain leverage. In addition, the statement points out it is important that capital requirements remain unchanged until recovery — economic recovery and stability of the financial system — is assured.
Meanwhile, on March 12, the Basel Committee on Banking Supervision issued a press release, and there have been media reports that capital requirements for banks will be strengthened. However, although it of course refers to the need to raise the level of capital in the future in order to strengthen the financial system, the press release, if correctly read, points out, more specifically, that it is necessary to enhance the level of capital in the banking system through measures such as introducing standards to promote the buildup of capital buffers that can be drawn down in periods of stress, strengthening the quality of bank capital, improving the risk coverage of the capital framework and introducing a non-risk based supplementary measure. In addition, as was mentioned in the G-20 statement, the Basel Committee’s press release stated that minimum capital requirements will not be raised during this period of economic and financial stress.
Regarding the quality of capital, the reason why capital requirements are imposed under the capital framework is that from the standpoint of the regulatory authorities, capital is important as a buffer that enables banks to maintain financial soundness and continue business operations when they incur losses in the banking business. In light of this purpose of the capital requirements, the role of capital is to bear losses before various stakeholders, including creditors, holders of preferred shares and holders of subordinated debt instruments, when losses arise. The quality of capital will become an issue of debate when we consider whether the capital has a sufficient quality to enable this role to be performed adequately. This matter has been discussed over and over again on various occasions, including at the Basel Committee on Banking Supervision. This cannot be discussed apart from how individual banks and supervisory authorities view this matter, the conditions of the financial markets in which individual banks and supervisory authorities are involved and the quality of assets, which constitute the denominator (of the calculation formula of the capital ratio). This matter should be considered by taking into consideration all such things, including the quality of assets and the degree of the volatility, which is a source of losses, in a comprehensive manner. In this sense, while I know that some people are discussing this matter based on their own definition of the quality of capital, I believe that it should be discussed in a broad context and under the broad framework that I explained.
Regarding the injection of capital, this is apparently a very convenient scheme given that the interest rate is set at between 1.5% and 2% and that no more than the amount of injected funds will have to be repaid after the passage of 10 years even if latent losses arise. Minister Yosano told a press conference after the cabinet meeting that the FSA would welcome an application from a financial institution wishing to strengthen their capital bases. Will you welcome an application from a megabank, for example?
Minister Yosano was speaking on behalf of the FSA as a whole when he said he would welcome an application from a financial institution that has judged that this is a favorable option when considering its future capital policy.
Of course, the Act on Special Measures for Strengthening Financial Functions will be enforced in accordance with the legislative framework, which does not exclude any particular business type, as I see it.
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