Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

May 11, 2009

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make. Please ask me questions.

[Questions and Answers]

Q.

First, I would like to ask you how you view the results of the stress tests conducted on major U.S. financial institutions, an issue which was mentioned at Minister Yosano's press conference last Friday. While Minister Yosano provided a positive assessment, a close look at the results shows several problems, such as that the assumptions used in the tests are too optimistic and that the estimated losses are considerably smaller than losses projected by the IMF (International Monetary Fund). Could you tell us how you view the results?

I understand that you have been arguing that rigorous assessment of assets is necessary in order to restore the assets to the normal status. Do you think that there was no flaw in the process of the stress tests, and aren't you worried that there are still risks?

A.

First, I would like to sum up my thinking concerning this matter. At this time, the U.S. authorities checked the soundness of the U.S. financial sector by applying common standards to individual banks, so I believe this will contribute to the enhancement of the transparency of the entire financial system. Second, as this encourages financial institutions to raise capital with an eye on the future, I would say that it also plays a part in improving the environment for enhancing the soundness of the entire financial system. Third, in light of Japan's experiences, in order to stabilize the financial system, it is very important to accurately recognize losses and the sources of the losses, remove non-performing loans and assets from the balance sheets to the maximum possible extent, and quickly cover a capital shortfall if any such shortfall is recognized as a result of these processes. I believe the action taken by the U.S. authorities at this time is an important step toward stabilizing the entire financial sector.

As for points of attention, we will need to keep a close watch on how the U.S. economic conditions will develop in relation to the macro-economic indicators that were used for the assumptions of stress case scenarios, how much confidence in the overall market will be restored, how quickly banks will raise capital and how the state of lending by banks will play out following the capital-raising.

In any case, we will closely watch future developments while hoping that the U.S. action will contribute to the stability of the global financial markets.

Q.

This week, a succession of regional banks and major banks will announce their financial results for the fiscal year ended in March. Most banks already announced downward revisions of their earnings estimates. How do you view the operating environment surrounding banks?

Also, one major factor behind the banks' losses is the booking of appraisal losses on stocks and other securities holdings, which is significantly affecting banks' management. While the FSA is hedging risks, so to speak, by establishing a scheme for purchases of shares held by banks, do you have a plan to strengthen restrictions again on banks' shareholdings?

A.

Many major banks and regional banks have announced that they expect to register losses for the fiscal year ended in March 2009. Increases in credit costs and in the write-downs of shareholdings have been cited as common factors behind many banks' profit declines, or I should say, losses. The FSA will have to continue to carefully watch the operating environment surrounding banks.

As for banks' shareholdings, as you know, the Act on Financial Institutions (,etc.)', Limits for Share, etc. Holdings, which was established in 2001, stipulates that the amount of a bank's shareholdings should be kept smaller than the amount of its Tier 1 core capital. I understand that recently, the amount of banks' shareholdings have generally been about half the amount of their Tier I core capital.

Under this regulatory framework, it may be acceptable that banks hold a certain amount of stocks and other securities as part of their business model based on their own business judgment. However, I also understand that many bank managers have learned important lessons regarding risks involved in shareholdings. In this sense, I believe that individual banks should conduct risk management regarding shareholdings in a more appropriate manner. On this premise, we are hoping that individual banks will make voluntary efforts, and we will keep a close watch on their efforts.

Q.

A media report said that Shinsei Bank and Aozora Bank have broadly agreed on a business integration plan. Could you tell us what the FSA knows about this matter?

In relation to this integration plan, there has been speculation about the possibility that those banks may apply for public funds based on the Act on Special Measures for Strengthening Financial Functions. Although you may have received the same question two weeks ago, could you tell us whether this act is applicable to banks like them, which have already received public funds and have no clear prospect of repaying the funds, and which apparently do not place priority for the moment on providing loans to local small and medium-size enterprises, if they plan to change their business policies?

A.

Although I am aware of the media report that you mentioned, I would like to refrain from making direct comments from the standpoint of the FSA, as this is a matter concerning individual financial institutions' business judgment. As for your question concerning the injection of additional public funds, I would also like to refrain from commenting on that, as it is a hypothetical question.

Generally speaking, we will screen an application made by any bank based on the Act on Special Measures for Strengthening Financial Functions with due consideration of the viewpoint of whether it will contribute to the national economy and the financial system through the enhancement of the financial functions and in accordance with the criteria prescribed in laws and regulations.

Q.

Shinsei Bank and Aozora Bank, which have not yet completed the repayment of public funds, expect to report losses, and they will be subject to the so-called 30% rule. What do you think of the fact that they continue to incur losses while failing to have a clear prospect of repaying public funds?

A.

If you were framing this question in general terms, I might have given you an answer. However, as your question concerns a specific case, I cannot make any reply.

In any case, regardless of how this case should be handled, we will screen applications in line with the purpose of the relevant laws and regulations and in accordance with their provisions.

Q.

I will ask the question from a different angle. Apparently, there are several banks, including regional banks and major banks, that have received public funds and that are unable to implement their management rehabilitation plans as scheduled or do not have a clear prospect of repaying the public funds because they have unexpectedly slipped into the red as a result of the subprime mortgage crisis. How do you view their current conditions?

A.

As you know well, the purpose of the injection of public funds is to stabilize Japan's financial system and ensure that individual financial institutions actively exercise their financial intermediary function on solid capital bases. As the injection of public funds is made for that purpose, it means that the authorities use taxpayers' funds for risk-involving investments, so it is natural to take care in various ways to properly recover those funds. Therefore, a variety of rules have been set concerning banks that receive the injection of public funds. It is important to recover taxpayers' funds on the most favorable terms while achieving the broad goal of the injection of public funds as much as possible, so the FSA has taken various measures with that in mind.

While the injection of public funds based on the Act concerning Emergency Measures for Early Strengthening of Financial Functions has cost the most, 80% to 90% of the injected funds has so far been recovered, with substantial capital gains generated as a result. Although earning capital gains is not the only goal, we will continue efforts to concurrently achieve the purpose of the injection of public funds that I mentioned earlier and our goal of recovering taxpayers' funds on the most favorable terms and without fail.

Q.

In relation to the same matter, there are banks in which the government holds shares as a shareholder. Am I correct in understanding that if such banks are to increase their capital, albeit not through the issuance of common shares, by using a scheme like the Act on Special Measures for Strengthening Financial Functions, the government will not necessarily deter them from doing so? May I understand that the injection of additional public funds would not be viewed as a negative factor in light of the various circumstances?

A.

Are you talking about banks that have already received capital injection?

Q.

That is correct.

A.

Although your question is framed in general terms, you are apparently asking it with a specific case in mind. As I said earlier, we will screen an application from the viewpoint of whether capital injection in the relevant case is highly necessary for Japan's financial system and economy as part of the government's entire policy in light of the purpose of the laws and regulations that constitute the basis of the capital injection and the broad goal of the policy.

Q.

Since the second half of last year, the government, led by the FSA, has been implementing a variety of measures to facilitate financing. However, the number of corporate bankruptcies has not decreased. The number increased 14% in March for the 10th consecutive year-on-year rise. Could you tell us what you think of the fact that the number of corporate bankruptcies has not decreased despite the implementation of measures to facilitate financing?

A.

My understanding is that the fact that the number of corporate bankruptcies has stayed high should be viewed in relation to how we should ensure that the financial sector exercises the financial intermediary function in the overall economic situation, rather than to whether or not measures taken in the financial sector alone can significantly improve the situation.

As you know, Japan's economy has suffered an extremely sharp fall in exports because of its significant dependence on external demand, so manufacturers and other companies have seen an extremely steep decline in demand. While I would say that is the greatest factor, I believe that in any case, it is very important to provide financial-sector support so as to minimize the adverse impact on the real economy. The authorities are working as one to implement a variety of measures, including measures related not only to the private financial sector but also to policy-based financing and measures taken by the Bank of Japan.

We will need to keep a close watch on future developments and continue our efforts so as to ensure, at a minimum, that the financial sector does not drag down the real economy.

Q.

Don't you think that the financial sector is dragging down the real economy? For example, there is speculation that some megabanks are sharply curbing new loans and forcibly collecting outstanding loans, so the concern remains that the financial sector is dragging down….

A.

As it is not easy to judge whether or not the financial sector is dragging down the real economy, I would like to refrain from replying to your question for now. In any case, it is important for the FSA to take care to prevent such a situation.

As for the curb on new loans that you mentioned, the FSA has been taking various measures to improve the environment for the exercising of the financial intermediary function. Recently, for example, the FSA has been conducting intensive inspection focusing on the curb on new loans. First of all, the FSA should quickly do what it can in its capacity as a financial authority.

Q.

In relation to the stress tests conducted in the United States, the quality of capital has attracted attention. In particular, the policy for dealing with the situation after the announcement of the results of the stress tests referred to new benchmarks, such as the Tier I risk-based ratio and the risk ratio adjusted for common shares. Although these benchmarks were apparently adopted as a short-term measure, Japanese banks seem to be worried about the possible consequences if this affects medium to long-term reforms related to the quality of capital. Could you tell us what approach the FSA will take to the improvement of capital, mainly common share equity capital, and how you view this matter?

A.

Broadly speaking, I understand that banks' capital as required under regulation acts as a buffer to absorb future losses so as to enable them to enhance the sustainability of their banking business. I presume that what kind of loss-absorbing buffer banks should have may vary according the market condition at the time and the banks' own risk profiles. There are various options, including common shares, preferred shares, preferred securities, subordinated debts and valuation profits on securities holdings. From the viewpoint of the quality of loss-absorbing buffers, there are several elements, such as stability, simplicity - simplicity also means visibility - and clarity. On the other hand, it is important how flexibly the loss-absorbing buffer can be acquired. In addition, the capital-raising cost and the cost of capital must be taken into consideration. The dividend payout ratio is an example of the yardstick to measure those costs. Individual banks need to pursue the capital policy most suited to their own circumstances after carefully taking account of those various elements in a comprehensive manner.

There is a globally common bottom line consensus on the capital adequacy ratio requirement. So, if international debate on this common standard is held, the FSA will actively participate in it.

Q.

Before the Golden Week holidays, there was a media report that SMBC (Sumitomo Mitsui Banking Corp.) has agreed to integrate Nikko Citigroup. How do you feel about this? Also, could you tell us about your view on the concern that the integration of the banking and securities industries may cause problems related to the regulatory firewall between the banking and securities industries and lead to the abuse of a superior position?

A.

I think I should refrain from making direct comments on this case, as it concerns business judgment.

Generally speaking, in other countries, there are also moves toward consolidation and realignment amid the ongoing financial market turmoil. The FSA believes that when there are such moves among Japanese financial institutions, it is important that the relevant financial institutions make appropriate judgment while properly conducting governance and risk management and paying attention to the safety and convenience of customers. Basically, the FSA is hoping that as a result of the business judgment thus made, high-quality services that are internationally competitive and superior in terms of customer convenience will be provided.

In the case of a realignment that would place a major bank and a major securities company in the same group, which I think was mentioned in the previous press conference, it is very important that governance and risk management are properly conducted so as to prevent the conflict of interests and the abuse of a superior position. On the other hand, if governance and risk management are properly conducted, we can expect that it will help to enhance convenience for users by making it easier to provide comprehensive financial services that extend across the banking and securities industries.

On June 1, a new framework for the firewall regulation will be introduced. While we will allow the sharing of information between a bank and a securities company in order to manage the conflict of interests, we will also ask financial institutions and financial groups to improve their systems for managing the conflict of interests. Of course, the FSA will pay attention to whether financial institutions are properly managed in ways that are in line with the broad purpose of this framework.

(End)