Press Conference by FSA Commissioner Takafumi Sato
April 27, 2009
[Opening Remarks by FSA Commissioner Sato]
I do not have any particular statements to make.
[Questions and Answers]
First, I would like to ask you about Shinsei Bank and Aozora Bank. According to media reports, the two banks, both of which received public funds, have started negotiations about a business integration plan. The government is a shareholder in each bank, while the FSA (Financial Services Agency) is responsible for strengthening and making more efficient the financial system and making judgment as a supervisory agency. Could you tell us, generally speaking, whether the FSA assesses business judgment made by individual companies from the standpoint of a shareholder or from the standpoint of a supervisory agency?
As for the case of Shinsei Bank and Aozora Bank, these banks announced that they had not made a decision. Business integration is a matter that concerns business judgment by individual financial institutions, so I would like to refrain from commenting on this matter.
Generally speaking, regarding the FSA’s involvement in banks into which public funds have been injected, the FSA is concurrently a shareholder and a supervisory agency, as you pointed out. However, since requirements generally demanded by shareholders, such as an improvement in profitability and an increase in the corporate value, contribute to stabilizing and strengthening the financial system, too, I believe that there are not many cases in which the FSA’s position as a supervisory agency and its position as a shareholder are in conflict with each other.
I would like to remind you that regarding the exercise of the government’s voting rights in banks — the scheme is so arranged that holders of preferred shares without voting rights are given the rights if dividend payments are suspended — the Deposit Insurance Corporation has published the “Basic Concept on the Exercise of Voting Rights,” which lists such viewpoints as whether proposals presented at a general shareholders’ meeting contribute to maintaining the soundness of the relevant bank’s management, whether they contribute to securing funds for the repayment of public funds, and whether they are in line with the purposes, such as facilitating financing, of the laws that form the basis of capital injection to strengthen the capital base. The basic concept is that the government will exercise the voting rights at a general shareholders’ meeting with these matters in mind from the viewpoint of protecting its interests as a shareholder.
My next question concerns the G-7 meeting (meeting of the Group of Seven Finance Ministers and Central Bank Governors) that was held last weekend. A statement issued at the G-7 meeting pointed out that the global economy is expected to recover later this year. On the other hand, the IMF (International Monetary Fund) last week released an estimate that losses to be incurred by financial institutions in Japan, the United States and Europe in 2007 to 2010 will total about 400 trillion yen. Stability of the financial system is essential for an economic recovery. How does the FSA view the G-7’s statement and the IMF’s estimate?
First, the IMF’s Global Financial Stability Report, which was released on April 21, estimated that losses totaling 4,054 billion dollars, or approximately 400 trillion yen, will arise in 2007 to 2010 in relation to loans and securities that originated in the United States, Europe and Japan.
According to the IMF estimate, which was calculated somewhat mechanically based on certain assumptions, losses on financial assets in the United States will total 2.7 trillion dollars, an increase of 500 billion dollars from the previous estimate in January of 2.2 trillion dollars, reflecting a rise in the ratio of loan loss write-offs resulting from the deterioration of the real economy. As for the estimates concerning Europe and Japan, which were provided for the first time, losses in Europe are estimated at approximately 1.2 trillion dollars and losses in Japan at 149 billion dollars.
Of the total losses of 4.05 trillion dollars, the United States accounts for 2.7 trillion dollars, or 67%, while Europe accounts for 1.2 trillion dollars, or 29%, and Japan accounts for 149 billion dollars, or 4%. As for the comparison between the ratio of outstanding assets and the ratio of losses, the ratio of U.S. assets to overall assets stands at 46% against the ratio of 67% for U.S. losses to overall losses. The ratio of European assets stands at 41% against the ratio of 29% for European losses and the ratio of Japanese assets in Japan at 13% against the ratio of 4% for Japanese losses.
Judging from these figures, we may expect that while major financial institutions in the United States and Europe have recognized and registered huge amounts in their account books, a substantial amount of losses are likely to continue arising in the future. In addition, these figures indicate that Japan’s financial sector is relatively sound, compared with the financial sectors of the United States and Europe. This is suggested by the estimated loss ratio as worked out by dividing the amount of outstanding assets with the estimated losses included in this report, which comes to 10.2% for the United States, 5.0% for Europe and 2.0% for Japan.
As for what measures are being taken around the world to cope with this situation, a matter related to the recent G-7 meeting, the U.S. authorities are, as you know, conducting stress tests with a view to the possibility of strengthening the capital base of individual banks and are implementing an asset purchase scheme to remove non-performing loans from the balance sheets of banks.
In Japan, meanwhile, although I said that Japan’s financial sector is relatively sound, compared with the financial sectors of the United States and Europe, major Japanese financial institutions are expected to suffer sharp profit declines, with many of them slipping into the red, in light of the recent developments related to the financial results for the fiscal year ended in March 2009. The two greatest factors behind this are an increase in the write-off of losses caused by stock price drops and a rise in credit costs associated with the deterioration of the real economy, so we need to keep a careful watch on the situation while maintaining a high level of vigilance.
I agree with the view you mentioned in your question that in order to improve the current global situation, it is necessary to seek to stabilize the financial system and improve the real economy at the same time. The G-7 statement also apparently reflects the perception of this need, as it mentions both fiscal measures to tackle macroeconomic problems and financial measures to restore lending, provide liquidity support and enhance the soundness of financial institutions.
As for the stability of the financial system, this statement recognizes the need for both short-term emergency measures to stabilize the current situation and medium- and long-term measures for the reform of financial regulation and oversight and for the rebuilding of a framework that prevents a recurrence of the current crisis. So, I understand that the G-7 members have expressed their commitment to both of these at the latest meeting.
Could you tell us how the FSA views the case of Shinsei Bank and Aozora Bank?
As I said earlier, these banks announced that they had not made a decision. As business integration is a matter that concerns business judgment by individual financial institutions, I think I should refrain from commenting on this matter for now.
Generally speaking, how would you view business integration in the current situation, although your view may vary case by case?
Strictly generally speaking, irrespective of the current situation, individual financial institutions may study business integration as a matter of business judgment if it comes up as an option after they have analyzed the present circumstances, identified challenges and considered how they should prepare for the future.
If financial institutions decide to go ahead with business integration, it is important for them to ensure that it leads to the enhancement of their financial functions and governance, an improvement in the quality of customer services and an increase in the corporate value. This is strictly generally speaking.
I would like to ask you about swine flu. As human-to-human infection has been confirmed, there is concern about a pandemic. I understand that following a meeting of relevant cabinet ministers held this morning, the FSA is trying to grasp the situation at domestic financial institutions. What actions is the FSA taking for the moment?
In light of the fact that the WHO (World Health Organization) has recognized that the current outbreak of swine flu constitutes a public health emergency with global implications, a meeting of cabinet ministers was held today to discuss measures to deal with swine flu, and an immediate government policy was decided.
The FSA has already been asking financial institutions to take measures to prepare for an outbreak of a new type of influenza. For example, the FSA’s guideline for supervision makes clear supervisory viewpoints regarding the development of a so-called BCP (business continuity plan) to deal with disasters, including outbreaks of infectious diseases. In February last year, the FSA asked financial institutions to draw up measures to take preliminary measures, such as information gathering and planning, to ensure the prevention of infection and the continuance of business operations in preparation for an outbreak of a new type of influenza.
As for the current outbreak, I understand that Japanese financial institutions that operate in the United States and Mexico are continuing operations without any particular disruptions. I hear that some financial institutions are considering such measures as restricting travel by employees to these countries, temporarily returning home employees who are stationed there and establishing a task force to deal with the outbreak.
The FSA will continue to collect information regarding measures taken by financial institutions and take appropriate actions based on the immediate government policy that was decided today as I mentioned earlier.
Among U.S. and European financial authorities, debate on banks’ capital has recently intensified. In the debate, the United States has made clear its stance of putting great emphasis on core capital. Could you tell us how you view the stance of putting emphasis on core capital as represented mainly by common shares? In terms of core capital, the capital adequacy ratio of Japanese banks, including megabanks, is said to be not very high by international standards. Do you expect that the emphasis on core capital will become an international trend of financial regulation? What do you think Japan should do if that happens?
As I mentioned earlier, under our medium-term agenda, we will seek to better ensure the financial soundness of banks in order to prevent a recurrence of the current global financial turmoil. In this process, various arguments related to the capital adequacy ratio requirement are being made, including an argument that the quality of capital, which is the numerator (of the calculation formula of the capital adequacy ratio), should be improved.
The important thing is that substantial international debate is held regardless of whether the subject be the capital adequacy ratio, the quality of capital, risk assets as the denominator (of the calculation formula of the capital adequacy ratio), the reliability of the comprehension of risks, or the mitigation or prevention of the procyclicality (the effect of amplifying economic cycles).
As for the quality of capital, there are risks in both assets on the balance sheet and assets off the balance sheet. The role of a bank’s capital is to absorb losses suffered by the bank when the risks materialize, thus enabling the bank to maintain financial soundness and enhancing the possibility of the bank’s business operations being continued. I expect that the quality of capital will be debated in light of this primary role of capital.
However, I doubt that it is appropriate to conclude that some forms of capital are all-important and other forms of equity are universally inferior. My understanding is that various forms of capital are approved under the Basel Accord and, with their different natures, play various roles.
The capital status of Japanese banks in terms of the so-called Tier I core capital (common shares and internal reserves are among basic items of capital deemed to be the Tier 1 core capital) probably varies significantly from bank to bank.
In relation to the announcement by Daisan Bank, a regional bank, that it will consider applying for public funds, could you tell us about the outlook on regional banks’ deliberations on this matter and about your view on a comment by the chairman of the Japanese Bankers Association that for the moment, megabanks are not in a situation requiring application for public funds?
I understand that Daisan Bank announced on April 22 that it will consider applying for public funds based on the Act on Special Measures for Strengthening Financial Functions. According to the bank’s announcement, the bank “judged, based on the concept of forward-looking management, that it is necessary to strengthen the capital base in order to deal with the prolonged financial and economic slump and the deterioration of the real economy and make genuine contributions to regional invigoration.” I welcome this kind of thinking and approach.
We will continue to promote the use of the Act on Special Measures for Strengthening Financial Functions, as we have been doing. While Japan’s financial sector is relatively sound, compared with the financial sectors of the United States and Europe, its real economy is deteriorating rapidly. Therefore, the role to be played by the financial sector in supporting the real economy is becoming more and more important. In this context, I hope that individual financial institutions will properly exercise their financial intermediary function.
We hope that banks will positively consider using this act if a capital increase comes up as an option based on a forward-looking management approach. We will explain the capital injection scheme and encourage and request financial institutions to take such measures as revising their articles of incorporation so as to facilitate quick decision-making at general shareholders’ meetings, for example, as the season of general shareholders’ meetings is now approaching.
As for your question concerning megabanks, whether or not a bank applies for public funds based on the Act on Special Measures for Strengthening Financial Functions is a business judgment that should be made by financial institutions, as I have been saying. Our policy goal is not to inject capital based on this act. The most important policy goal is to ensure that individual financial institutions properly exercise their financial intermediary function. So long as banks are managed in ways that are in line with this most important policy goal, the authorities should not intervene in relation to the use of the Act on Special Measures for Strengthening Financial Function.
The results of the examination of the state of U.S. banks are expected to be announced on May 4. Could you tell us about your view on the state of the U.S. financial sector and the examination being conducted by the U.S. authorities?
As I have been saying, the most important thing to do first in a financial crisis like this is to accurately grasp the actual state of nonperforming loans held by individual financial institutions. It is also important to estimate as accurately as possible how much loss will arise from nonperforming loans. This estimate will constitute the basis for deciding measures such as increasing capital. Therefore, stress tests being conducted in the United States, which involve recognizing losses and closely examining the condition of the assets, represent a significant step.
I would like to refrain from making any further direct comments, such as how I assess efforts being made by foreign authorities.
Sumitomo Mitsui Financial Group has already entered negotiations about the acquisition of Nikko Cordial Securities and Nikko Citigroup based on its preferential negotiating right. This would be the first time for a megabank and a major securities company to be integrated with each other so tightly. What is your view on the integration of a bank and a securities company?
A bank and a securities company were allowed to operate in the same financial group under a holding-company structure starting at a relatively point in the Heisei Era; before then, mutual entry by different types of financial institutions into each other’s business sectors was allowed through subsidiaries. By now, it has apparently become very common that a bank and a securities company operate in the same financial group.
It may be possible to regard this deal as a new movement in that it will put a major bank and a major securities company in the same group. However, from our standpoint as a financial supervisor and regulator, the important thing is that risk management is conducted properly and the legal compliance functions properly after the bank and the securities company start operating in the same group so that governance is exercised in their management and high-quality services are provided to customers. We will check the state of their management from this viewpoint.
Of course, one merit of a major bank and a major securities company, or any bank and any securities company for that matter, operating in the same group would be that comprehensive financial services extending across the banking and securities industries can be provided. Customers would also enjoy benefits if high-quality services are provided. On the other hand, conflicts of interests could arise, so it is important to properly manage conflicts of interests. On June 1, the firewall regulation will be relaxed. Under our approach of principles-based regulation, we have developed a framework that requires individual financial institutions to manage conflicts of interests in ways that are most suited to their own circumstances. So, the management of conflicts of interests is also likely to become one of the critical themes. This is an example of supervisory viewpoints.
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