Press Conference by FSA Commissioner Takafumi Sato
April 13, 2009
[Opening Remarks by FSA Commissioner Sato]
I do not have any particular statements to make. Please ask me questions.
[Questions and Answers]
I would like to ask you about an additional economic stimulus package announced by the government and the ruling parties last week. In relation to the financial sector, this package includes an expansion of the scope of items that may be purchased by the Banks’ Shareholdings Purchase Corporation and, as a temporary extraordinary measure, the provision of 50 trillion yen in government guarantee for a scheme under which a new government agency will purchase stocks directly from the market. Could you tell us how you view these economic measures related to the financial sector and what kind of cases the FSA (Financial Services Agency) thinks that “a situation in which the market’s price-discovery function is seriously undermined” refers to?
As you know, the “Policy Package to Address Economic Crisis” was adopted at a joint meeting of the government, the ruling parties and economic ministers on April 10. One of the financial-sector measures under the FSA’s jurisdiction that are included in this package is to hold special hearings, conduct intensive inspections and promote the utilization of the Act on Special Measures for Strengthening Financial Functions, in order to facilitate financing and ensure the exercise of the financial intermediary function in the private financial sector. Among the measures related to listed companies and the market is improvement of the use of notes regarding the going-concern assumption. Some of these measures are already being implemented, and we will continue to steadily implement them.
Regarding the second pillar, namely the measures related to the market, which were deliberated by the ruling parties, the policy package includes an expansion of the scope of assets that may be purchased from financial institutions by the Banks’ Shareholdings Purchase Corporation and a temporary extraordinary measure to support the stock market.
The scope of assets that may be purchased by Banks’ Shareholdings Purchase Corporation will be expanded to include preferred shares, preferred investment securities, J-REITs (Japanese Real Estate Investment Trusts) and ETFs (Exchange-Traded Funds) held by banks, and preferred shares and preferred investment securities issued by banks and held by industrial corporations. I understand that this measure is in line with the original purpose of the establishment of the Banks’ Shareholdings Purchase Corporation, which is to prevent banks’ shareholdings from affecting the soundness of the banks and leading to an excessive credit crunch, and the purpose of a supplementary resolution adopted by the House of Councillors’ Financial Affairs Committee at the time of the recent legal amendment, which stated that the purchase of assets will be considered as a way to mitigate the vulnerability and instability of the financial system.
As for the purchase of shares from the market, a scheme under which a relevant government agency purchases shares from the market will be established as a temporary extraordinary measure in anticipation of an exceptional case in which the market’s price-discovery function continues to be seriously undermined, and the ruling parties will deliberate a legal amendment for this purpose.
Regarding the “exceptional case in which the market’s price discovery function continues to be seriously undermined,” which you asked me about, I believe that stock prices are fundamentally determined by the corporate value of the issuing banks and this is a process in which the prices are discovered through transactions made by various investors with diverse views. In this sense, the formation of stock prices should be primarily left to the market. On the other hand, we cannot rule out the possibility that under the very unstable economic and financial conditions we have faced recently, a situation that I will describe to you will occur. Namely, there is a recognition that we cannot deny the possibility that we will face a situation in which the level of stock prices remains significantly divergent from the fundamentals of companies for a long time, with massive sacrifice selling by investment funds destabilizing the supply-demand balance. This is an example of the “exceptional case” that we have in mind. The ruling parties will continue to deliberate the specific criteria for the exceptional case, so I would like to refrain from making comments for now from the standpoint of the government.
In any case, as this is a very exceptional, temporary, extraordinary measure, I understand that strict criteria and procedures will be established.
Last week, Sumitomo Mitsui Financial Group announced a downward revision of the estimated consolidated financial results and a plan to increase its capital by publicly offering common shares totaling up to 800 billion yen in order to strengthen its financial base. In light of the facts that the FSA’s Act on Special Measures for Strengthening Financial Functions does not exclude major banks as applicants (for capital injection) and that the quality of banks’ capital is being questioned globally, how do you view this major bank’s decision to increase its capital through public offering of shares?
Last Thursday, on April 9, Sumitomo Mitsui Financial Group announced a revision of the estimate of the financial results for the fiscal year ended in March 2009. Specifically, the bank revised its estimate of 180 billion yen in recurring profit to 390 billion yen in recurring loss on a consolidated basis. At the same time, it announced a shelf registration regarding the issuance of new common shares.
I would like to refrain from directly commenting on this case, as it concerns an individual bank’s capital policy.
Generally speaking, maintaining financial soundness and exercising the financial intermediary function is a mission that banks must perform for the sake of society. On this premise and in light of the current global economic and financial conditions, it is important to increase capital in order to strengthen the financial base based on “forward-looking management,” which means business judgment that properly takes into consideration various future operating environment factors, so I think this should be welcome. At the recent G-20 summit (Summit on the World Economy and the Financial Markets), priority was placed on the enhancement of financial institutions’ capital, and I believe that financial institutions’ active capital policy is in line with the global trend.
In relation to what you mentioned now, the downward revision of the estimate of the financial results, on which the capital increase is predicated, is apparently attributable in large part to an increase in credit costs. Ahead of the earnings reporting season, could you tell us how you view the operating environment for banks, particularly from the viewpoint of non-performing loans?
Broadly speaking, there are two major risk factors — a significant part of which can be said to have already materialized — related to the operating environment for Japan’s banking sector. One is the possibility that banks’ shareholdings will affect their financial soundness through fluctuations in asset valuations due to the high volatility of the market. The other risk factor, which derives from the real economy, is change in the classification of debtors and a buildup of additional loan loss reserves caused by a deterioration of the business conditions of borrower companies.
In this environment, individual financial institutions are required to actively take measures to maintain their financial soundness and exercise the financial intermediary function based on those measures while keeping in mind various risk scenarios for the future, as I said earlier when speaking in general terms.
As for Sumitomo Mitsui Financial Group’s downward revision of the estimate of the financial results, the bank made clear its basic stance of minimizing future risk factors, if I remember correctly. So, judging from the bank’s own announcement, I have the impression that the bank is making efforts in line with the “forward-looking management” that I mentioned earlier.
In relation to the high volatility of stock asset valuations, the ruling parties announced a policy package to support the financial and securities markets at the end of March, which apparently formed part of the basis of the government’s additional economic policy package. Item 1 of this package, “Accounting Standards,” stipulates that the criteria for the application of the asset impairment write-down rule should not be too strict and that auditing firms, which should make independent judgment concerning this, should avoid becoming overly conservative in making the judgment and give increased consideration to rationality. Specifically, I understand that this is a request for auditing firms to be more flexible with regard to the criteria for recognizing asset impairment. What is the FSA’s view, if any, on this?
I understand that an interim report on such financial measures was recently adopted and announced by the ruling parties. Regarding the asset impairment write-down, which is a form of financial accounting treatment, that report included an item which stated that it was desirable to treat it in tax accounting in a consistent manner when the asset impairment write-down is made, if I remember correctly. Was this included in the final version of the report?
What you mentioned now concerns Item (3). Could you tell us what is the FSA’s view on Item (1) and whether it will take various actions in relation to auditing firms and the Japanese Institute of Public Certified Accountants?
Regarding this, the interim report included a sentence that made it clear that ultimately, auditing firms should make independent judgment.
Basically, assessment of the possibility of a recovery in asset valuations and business conditions is very important, so it is desirable that listed companies that compile financial results should make their case after careful examination and form a consensus with external auditors through adequate communications.
Last week, a list of about 1.5 million customers was leaked from Mitsubishi UFJ Securities, and the huge number apparently makes this an unprecedented case. What do you think of the fact that such an incident has occurred at a securities company, which is required to manage customer information rigorously?
It is quite regrettable that a large-scale leak of customer information like this has occurred at a securities company acting as a broker for transactions made by numerous customers.
Primarily, customer information forms the basis of financial product transactions, and financial institutions are also required to manage customer information properly from the viewpoint of protecting private information.
I would like to refrain from commenting on future administrative actions concerning this specific case for now. However, generally speaking, securities companies should take necessary and appropriate measures concerning information security management and employee supervision in daily operations in order to prevent leakage of private information, and they should establish a system that enables the implementation of quick and appropriate actions from the viewpoint of preventing secondary damage when leakage of private information has occurred.
The FSA is keeping a close watch on what actions the relevant parties are taking.
Last week, the (insurance and pension benefit) reduction rate for policyholders of failed Yamato Life Insurance was decided, and the reduction rate is the worst on record. What do you think of this? Policyholders may be thinking that if the FSA had taken supervisory actions or conducted inspections more quickly, the reduction ratio would not have been so sharp. Do you think there was anything insufficient with regard to inspections and supervisory actions?
As for the rehabilitation procedures for Yamato Life Insurance, which failed last autumn, I understand that the rehabilitation administrator submitted a draft rehabilitation plan to the Tokyo District Court and announced it on March 23, and the summary of the draft rehabilitation plan, including the descriptions of model cases of insurance and pension benefit payments after the revision of contract terms, was sent to policyholders on April 11.
Under the draft rehabilitation plan, 90% of policy reserves would be covered based on financial support provided by the Life Insurance Policyholders Protection Corporation of Japan, which would mean a 10% reduction, and the guaranteed yield will be reduced by 1.0%. These revisions of contract terms are described in the draft rehabilitation plan, and the amount of insurance and pension benefits to be received by policyholders in the future will be determined according to the terms of individual contracts. While it is true that some model cases indicate substantial reduction in insurance and pension benefits, policyholders of contracts that initially guaranteed high yields, featured long investment periods and were similar in nature to savings apparently tend to suffer sharp reduction.
In any case, I understand that the court will decide whether to approve the draft rehabilitation plan, including the revisions of contract terms, upon the consent of the company’s policyholders.
For the moment, the FSA believes it is important that an appropriate rehabilitation plan will be adopted at an early date from the viewpoint of protecting policyholders, so we will take appropriate actions according to the progress in the rehabilitation procedures in light of the purpose of the Insurance Business Act and from the viewpoint of protecting policyholders.
The other question was whether the FSA’s inspection and supervision in the past or during the period leading to the failure were sufficient. Generally speaking, the FSA conducts daily inspection and supervision of private companies engaging in the financial business with due consideration of the possibility that the credit system may be undermined or that a problem may arise from the viewpoint of protecting customers and users while respecting the independence of the private companies. I believe the FSA has been checking the financial conditions and the legal compliance status through supervisory monitoring based on submitted reports and hearings and on-site inspections with a frequency suited to the circumstances.
One notable feature of Yamato Life Insurance was that because of the insufficient profit-generating power of its core business, the company leaned excessively toward relatively high-risk asset investment so as to earn high returns. With that in mind, the FSA occasionally communicated with the company about how to correct such a problem.
In any case, it is quite regrettable that Yamato Life Insurance failed, and I feel sorry for policyholders who will suffer significant financial damage. For the moment, we will strive to secure the protection of users by ensuring that an appropriate rehabilitation plan is approved by the court and properly implemented.
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