Press Conference by FSA Commissioner Takafumi Sato
April 6, 2009
[Opening Remarks by FSA Commissioner Sato]
I do not have any particular statements to make.
[Questions and Answers]
The second G-20 financial summit (the Summit on Financial Markets and the World Economy) was held last week. Regarding financial regulation and oversight, a statement issued at this meeting called for early adoption of measures to mitigate procyclicality in relation to the capital adequacy requirement for banks and their implementation after the end of the crisis, reconfirmed the introduction of regulation for all financial markets, transactions and market participants, including hedge funds, and proposed reestablishing (the Financial Stability Forum) as the Financial Stability Board. Could you tell us how you view these matters decided at the G-20 summit and how you intend to reflect them in Japan’s financial supervision?
Statements issued at the G-20 summit that was held in London last week, including the leaders’ statement, included an agreement to implement measures to restore growth and employment and strengthen financial regulation and oversight.
As you mentioned, firstly, the statements called for the implementation by the end of this year of the Financial Stability Forum’s (FSF’s) recommendations related to measures to mitigate the effect of amplifying economic cycles, namely, procyclicality. At the beginning of the FSF’s report on its recommendations, the FSF indicated the basic concept that the quality and level of capital in the banking system should be increased during strong economic conditions and can be drawn down during periods of economic and financial stress and then listed several specific recommendations.
Secondly, the G-20 leaders’ statement included an agreement to extend financial regulation and oversight to all systematically important financial institutions, instruments and markets, with the registration system to be introduced for hedge funds.
Thirdly, the statement called for reestablishing the FSF as the Financial Stability Board (FSB), which will have a stronger institutional basis and enhanced capacity, in light of the expanded role that should be played by this organization in promoting financial stability.
I think that underlying the ongoing international discussions on financial regulation and oversight is the common recognition that it is necessary that individual countries cooperate with each other because not only has the current financial market turmoil occurred on a global scale and the traditional financial intermediary industry lost financial soundness but the crisis also originated in the market and the market itself is in a state of turmoil.
The FSA (Financial Services Agency) will strive to implement what was decided at the summit in a manner suited to Japan’s own circumstances while maintaining cooperation with relevant authorities in Japan and abroad. We will also continue to actively participate in international discussions on how to prevent a recurrence of the financial crisis and strengthen the financial system.
Yesterday, North Korea launched a ballistic missile or a rocket that was supposed to be loaded with a satellite. Could you tell us whether this had any impact on Japan’s markets and financial institutions? Also, there are calls from the ruling parties for the strengthening of economic sanctions against North Korea. Could you tell us about the FSA’s role and actions in relation to existing sanctions and what measures can be taken if the government decides to strengthen the sanctions?
So far, we have not received reports of any particular damage suffered by financial institutions. I also understand that there was no particular impact on the market.
As for the FSA’s actions in relation to North Korea, after the country’s launch of a ballistic missile in July 2006, the government suspended remittances to 15 organizations and one individual involved in North Korea’s plans to develop missiles and weapons of mass destruction, and the FSA accordingly requested relevant financial institutions in September 2006 to make sure to fulfill the obligations for customer identification and report suspicious transactions.
As for future actions, the Chief Cabinet Secretary has already made statements to the effect that the government will quickly decide what measures Japan should take against North Korea in light of the response of the international community and other factors and that in any case, final policy coordination is ongoing with a view to extending for one year the bans on entry (of North Korean ships) into Japanese ports and on imports from North Korea, which are scheduled to expire on April 13. For now, I would like to refrain from making any further comments on future actions.
Regarding procyclicality, what measures are expected to be taken in relation to the supervision of domestic banks? For example, as some parts of capital may be drawn down, will the 8% minimum required capital ratio be temporarily lowered, or will regulation be reformed so as to require additional buildup of capital in the economic recovery phase? What do you foresee in this respect?
What I mentioned earlier is a basic concept of how to deal with procyclicality, or a concept internationally shared for now.
The most basic underlying premise is that individual banks, which play the financial intermediary role, and the financial system, which is comprised of many banks, perform their intermediary function while maintaining financial soundness. Therefore, I think the aforesaid recommendation that the quality and level of capital in the banking system should be increased during periods of strong economic conditions so that it can be drawn down during periods of economic and financial stress is based on the assumption that banks meet the minimum capital requirement and build more buffers during periods of strong economic conditions so as to ensure that their capital does not decrease below the minimum required level.
While it is debatable when is the best time to introduce the measures to deal with procyclicality, further discussions will be held on the details. So, we should apparently wait for progress in international discussions, an international agreement based on the outcome of the discussions and the establishment of an internationally common framework.
Therefore, you may understand that for the moment, Japan will not take a go-it-alone approach and revise the basic standards regarding banks subject to international standards in particular.
Another thing I would like to point out is that behind the international discussions is a resolve to prepare to require buildup of a large cushion, or a buffer, in the future when the economic conditions turn better, rather than focusing on what to do now.
In relation to the matter mentioned just now, am I correct in understanding that you think in a similar way with regard to banks subject to domestic standards?
If banks are to perform their most basic function, namely, the financial intermediary function, an element of risk-taking becomes necessary. So, to prepare for losses that may arise from risk-taking, banks have capital as a buffer, and they should perform the financial intermediary function while maintaining their buffer and financial soundness. This should apply equally to banks subject to international standards and to those subject to domestic standards.
Therefore, although the minimum required capital ratios are different - 8% and 4%, respectively - our basic stance is the same.
Last week, the ruling parties’ project team on the global financial crisis proposed the establishment of a framework for the purchase of stocks in the market. You have indicated that negative side effects of stock price-supporting measures should also be taken into consideration. How do you view the project team’s proposal?
Among the measures included in an interim package drawn up by the project team on the global financial crisis is the establishment of a scheme for purchasing stocks in the market as an extraordinary measure.
I have been saying that regarding policy measures, it is necessary to sufficiently consider the reasonableness of their purpose, their possible negative effects and whether they are effective for the achievement of their purpose, and my own basic thinking regarding these points remains unchanged.
I understand that the scheme proposed by this project team is intended as an extraordinary measure that should be taken in an abnormal situation in which the stock market has lost its primary role of discovering the price that reflects corporate value, namely the price discovery function.
In any case, as the ruling parties’ deliberations on the specifics of the scheme are ongoing, I should refrain from making any further comments on the details for now. The important thing is that the purpose of this policy measure is restoring the stock market’s price discovery function.
Around the time when the London Summit was held, revisions of accounting standards were announced in the United States. Could you tell me how you view these revisions and whether it is possible that this will become a global trend and that Japan will also make additional revisions following the ones made since the autumn of last year?
As you mentioned, the FASB, or Financial Accounting Standards Board of the United States, made decisions at a board meeting on April 2 on two matters, one of which was the measurement of fair value in cases where the market is inactive and the other was the adoption of an additional application guideline regarding other-than-temporary impairments. More specifically, regarding fair value measurement — this is the so-called mark-to-market accounting — the theoretical valuation is used for measurement in some cases and the market price is used in others, and the FASB provided guidance on the determination of cases in which the use of the theoretical valuation is appropriate, namely cases where “the market is not active” and cases where “a transaction was not orderly.” In addition, although an other-than-temporary impairment of a debt security has until now been fully reflected in net earnings, the FSAB decided to adopt a guideline stipulating that only the portion of the debt that corresponds to the credit risk should be reflected.
Generally speaking, it is important for us to recognize, as a basic principle, that a revision of accounting standards does not change the actual financial condition of a company. Accounting standards serve as an important yardstick to measure the financial condition of companies. Therefore, it is important to ensure the transparency, consistency and credibility of the standards, including from the viewpoint of investors, and I believe doing so will help to ensure trust in the financial statements of listed companies in particular. Of course, it is very important to enable accurate assessment of the financial condition when the actual state of corporate activities has considerably changed with the passage of time, so it is necessary to advance accounting standards in line with changes in the actual circumstances so as to enable such assessment. However, I think it is not appropriate to revise accounting standards in ways that make the actual condition of companies unclear in the eyes of investors.
In any case, our basic stance is to strive to take appropriate action in light of the broad role of accounting standards, and while paying attention to international developments.
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