Press Conference by FSA Commissioner Takafumi Sato
June 1, 2009
[Opening Remarks by FSA Commissioner Sato]
I do not have any statements to make.
[Questions and Answers]
The U.S. government formally announced that GM would file for Chapter 11 bankruptcy proceedings under the U.S. Federal Bankruptcy Code on June 1. What impact does the FSA (Financial Services Agency) expect this will have on Japanese financial institutions?
I am aware of media reports that General Motors (GM) will file for Chapter 11 bankruptcy proceedings on Monday, June 1. While it would not be appropriate to comment on the impact of an individual company's movements on Japanese financial institutions, I have not so far received information that indicate Japan's financial system or financial sector could be seriously affected.
We still face a global recession as, generally speaking, the turmoil in the global financial markets and the credit crunch are continuing and the real economy is deteriorating. It is important that in light of this situation, Japanese individual financial institutions strive to manage risk properly. For its part, the FSA will also keep a careful watch on the situation while maintaining a high level of alertness.
Last Friday, Shinkumi Federation Bank, which is the central organization for credit cooperatives, announced that it would consider applying for the injection of public funds. Shinkumi Federation Bank explained that it would use the public funds to provide support to Yamanashikenmin Shinyoukumiai. Yamanashikenmin Shinyoukumiai is a major credit cooperative - the fifth largest in terms of the amount of deposits held - and reported losses in the fiscal year ended in March 2009 for the fifth consecutive year. Its capital adequacy ratio has fallen close to the regulatory limit of 4%, and this credit cooperative has already received capital support from Shinkumi Federation Bank twice. The injection of public funds into it this time would have a strong element of bailing out an individual credit cooperative. Could you tell us how you recognize this credit cooperative's business condition and the business condition of cooperative type financial institutions as a whole amid the recession?
Last Friday, May 29, Yamanashikenmin Shinyoukumiai asked Shinkumi Federation Bank for capital support, and Shinkumi Federation Bank announced its intention of providing full support after considering what to do, including the possibility of applying for the Act on Special Measures for Strengthening Financial Functions.
The FSA welcomes a move like this by Shinkumi Federation Bank, which is the central organization for credit cooperatives, to enable them to properly and actively exercise their financial intermediary function.
As necessary procedures have yet to be implemented, it would be inappropriate to comment on details at this time. However, generally speaking, an application for the injection of public funds will be screened in light of the purpose of the Act on Special Measures for Strengthening Financial Functions and the requirements prescribed by laws and regulations.
As for Shinkumi Federation Bank's policy concerning the request for capital support, I presume that the bank has decided to provide full support, as it has done until now, in light of the fact that this credit cooperative is an important financial institution that provides funds to local small and medium-size enterprises. I understand that Shinkumi Federation Bank announced its intention to consider applying for the Act on Special Measures for Strengthening Financial Functions in light of how support has been so far provided in the credit cooperative industry and on the assumption that support to Yamanashikenmin Shinyoukumiai would be in line with the purpose of this act, which is to maintain and strengthen the financial intermediary functions.
From a broad perspective, although Japan's financial system is stable compared with the systems of the United States and Europe as I have been saying, the condition of the real economy is very difficult. So, there are stronger hopes than before that Japan's financial system will support the real economy by exercising the financial intermediary function. In this sense, I presume that this decision was based on the recognition of the current situation of Japan as seen from a broad perspective.
On the other hand - this is strictly generally speaking - it is of course important to take care to avoid keeping afloat a poorly-managed financial institution with no future prospects.
At this credit cooperative, I understand that a management reshuffle was carried out last year and that management improvement efforts are under way to reform the mindset of employees through the implementation of restructuring, and to improve the business condition through the disposal of non-performing loans.
Also, last Friday, it was formally announced that a restriction will be introduced on the leverage of foreign exchange margin transactions (FX transactions), with the maximum allowable leverage to be reduced over a two-year period, first to 50 times and then to 25 times. Could you explain the purpose of this restriction? In the industry, there are complaints that the FSA is acting a little too hastily. You have been advocating the concept of “better regulation” (improvement in the quality of financial regulation), proposing to improve the predictability of regulation and enhance dialogue with financial institutions, for example. Could you tell us whether or not you think that this restriction is in conflict with the purpose of the concept of better regulation given that there are such complaints?
First, I will explain the purpose of this restriction. As you know, foreign exchange margin transactions, or FX transactions, have become highly leveraged both in over-the-counter trading and exchange-based trading because of the recent narrowing of the difference between interest rates in Japan and abroad.
Regarding highly-leveraged FX transactions, there are three problems, namely a problem related to the protection of customers, a problem related to risk management by business operators and the problem of excessive speculation. A typical example of the problem related to the protection of customers is the risk that customers will incur unexpected losses that significantly exceed the amount of margin deposits, as a result of the failure of the loss-cut rule (forcible settlements intended to limit the amount of losses to less than the prescribed level) to function adequately. The problem related to risk management by intermediary business operators refers to the risk that the financial soundness of a business operator will be affected as a result of the amount of losses incurred by customers significantly exceeding the amount of margin deposits. And then there is the risk that FX transactions will provide an opportunity for excessive speculation.
Regarding this matter, as you know, the Securities and Exchange Surveillance Commission made a recommendation to the FSA on April 24. The recommendation noted that the deposit of a margin in an amount that takes into consideration the volatility of foreign exchange rates should be made obligatory in relation to the regulation of margins. This regulation will take effect roughly one year after its promulgation so as to give business operators time to make preparations, such as modifying their computer systems, and business operators will be required to levy a 4% margin in principle with regard to both over-the-counter trading and exchange-based trading. For about two years from the promulgation of the new regulation, the margin ratio will be set at 2%, rather than 4%, as a transitional measure to grant a grace period for users to change their investment behavior. These proposals, included in a draft Cabinet Office ordinance, have been disclosed for public comments over a one-month period from May 29. The proposals allow a preparatory period by adopting the phased implementation.
As for the relationship between the new regulation and the better regulation initiative, they are related to each other in several points. For one thing, the better regulation initiative calls for enhancement of transparency and predictability concerning regulatory actions. An unspecified number of customers are participating in FX transactions, while business operators who act as mediators for customers' transactions, unlike banks and insurance companies, for example, operate under the registration system and are subject to relatively easy regulation. In this regard, the increasing leverage poses a problem from the viewpoint of customer protection as I mentioned earlier, and it will become inevitable in some cases to apply rules-based regulation universally to an unspecified number of market participants. However, we pay some consideration to the predictability of the rules-based regulation by drafting proposals for the regulation based on various opinions and soliciting public comments on the proposals. Although it is of course important that business operators act on the principle of providing adequate explanations to customers, it is necessary to some extent to apply rules-based regulation in an industry like this, and before doing so, we solicit public comments so as to make our proposals known as widely as possible.
Before soliciting public comments on this proposal, we exchanged various opinions with business operators. Thus, while we are strongly aware of the need to apply rules-based regulation, we are giving consideration to the broad purpose of the better regulation initiative.
Last week, all major life insurance companies announced their financial results, which turned out to be poor, partly because of the stock market decline. We are witnessing an extraordinary situation in which major life insurance companies are unable to pay taxes because of their financing conditions. Could you tell us about your view on life insurance companies' financial results?
On May 29, all major life insurance companies announced their financial results for the fiscal year ended in March 2009.
The combined basic profits, or profits from core businesses, of the 11 major life insurance companies, amounted to 1.6 trillion yen, down from 2.3 trillion yen in the previous year. Major factors behind the profit drop include the decline in insurance premium revenues that has continued for recent years, a drop in interest and dividend receipts due to the deterioration of corporate earnings, and an increase in reserves related to variable annuity contracts with a provision for the guarantee of a minimum payout.
Furthermore, as a result of the financial market turmoil, including the slump in the domestic stock market, the companies booked a large amount of losses - totaling around 2.8 trillion yen - related to the write-off of securities and losses from the sale of securities. They also tapped into reserves set aside to guard against the price volatility of securities, and as a result, they posted combined net losses of 58 billion yen. In light of this, it is true that Japanese life insurance companies face a very difficult business environment.
On the other hand, their solvency margin ratio, which is a yardstick of financial soundness, is well above the supervisory standard of 200%. Their average ratio is 865%.
In any case, the FSA will keep a close watch on the financial conditions and risk management systems of the insurance companies with a high level of vigilance.
In relation to the financial results of insurance companies, Meiji Yasuda Life Insurance, which has received an order for business suspension twice in the past, announced that it will pay retirement allowances to executives who resigned to take responsibility. Although this is a matter concerning an individual company, what is your view on retirement allowances and remuneration for executives who resign to take responsibility for a serious problem like this?
The FSA has been taking strict actions in cases where there is an important problem with an insurance company's business execution system or legal compliance system from the viewpoint of the protection of users and policyholders. Usually, while the FSA takes such actions, the company concerned identifies where the responsibility lies and takes an appropriate disciplinary action based on their business judgment. In cases like this, I understand that executives who bear serious responsibility in particular mostly receive some social punishment following an administrative action taken by the FSA.
While I would like to refrain from commenting on a case concerning an individual company, I think that if the company concerned is to take such action after a certain period of time, it is important for it to make responsible business judgment and perform the accountability obligation to the public and society, and to policyholders and users as necessary on a voluntary basis.
According to the summary of the financial results of regional banks announced last weekend by the FSA, the non-performing loan ratio has declined across the board. In light of the current economic condition, this seems somewhat strange. Although there are effects of the relaxation of rules related to restructured loans and the calculation of the capital adequacy ratio, this may seem strange to ordinary people. How do you view these figures?
As you know, the overall financial results are very severe, with many banks incurring losses. The major factor is, as I have mentioned over and over again, the cost of disposing of nonperforming loans. This cost arises as a result of an increase in the credit cost caused by the deterioration of the business conditions of borrower companies, and the financial results reflect this situation.
As for your suggestion that the total amount of non-performing loans does not indicate this trend clearly, the credit cost has risen fairly high as I mentioned earlier. As there are various levels of nonperforming loans, I understand that the financial results reflect an increase in the credit cost.
Regarding restructured loans, a measure called “an expansion of criteria for treating loans as not equivalent to restructured loans” was announced on November 7 last year. This was adopted as a permanent measure to enable financial institutions to relax the lending terms for small and medium-size enterprises in order to improve their fund-raising and business conditions. This measure was taken so that financial institutions could support corporate activity amid the deterioration of Japan's real economy. While it is true that the financial results are based on the implementation of measures adopted for this purpose, I think that it is important to carefully watch the financial conditions of financial institutions, including the total credit costs.
Last weekend, the U.S. Federal Deposit Insurance Corp. (FDIC) announced that it will prevent financial institutions with questionable financial soundness from soliciting deposits at high interest rates, starting in January 2010. Could you tell us how you view the idea of restricting fund-raising by troubled financial institutions at high interest rates and whether Japan, which may face a similar situation, may consider introducing such a restriction?
Regardless of whether Japan will consider taking such a measure, the FDIC is responsible for managing the federal deposit insurance system and covers the cost of protecting depositors in the case of a bankruptcy of a financial institution with the insurance premiums it collects, hence, the financial burden on FDIC would increase if a financial institution facing a deteriorating management condition, which theoretically means an increasing probability of bankruptcy, solicits deposits at high interest rates and eventually goes bankrupt. As this will impose a burden on other financial institutions that pay insurance premiums, a situation of moral hazard will arise. I presume that with this point in mind, FDIC has presented an idea that would restrict such behavior.
Forgive me for asking you about a rather old story. Major U.S. banks booked valuation profits in the financial results for the January-March quarter by applying fair-value assessment to debts. I understand that this was based on international accounting standards. Will Japan adopt fair-value assessment regarding debts in the near future as part of its move to fully introduce international accounting standards? While it has been pointed out that there are problems from the viewpoint of the soundness of financial institutions, could you tell us about your opinion on this?
I understand that your question concerns the so-called fair value option. Under international and U.S. accounting standards, authors of financial statements are allowed to choose this option, as I understand it.
On the other hand, this is not allowed under Japanese accounting standards.
Therefore, I would like to refrain from making specific comments on foreign accounting standards, including on the impact of the evaluation of the soundness of financial institutions. However, as the accounting standards of Japan, the United States and Europe are in the process of gradually converging with each other, the FSA is keeping watch on this matter.
Forgive me for citing a general principle that I always mention, but accounting standards serve as an important universal yardstick for measuring the financial conditions of companies. In the case of listed companies in particular, it is important to give consideration to the perspective of users, including investors investing in the companies. In this sense, it is very important to ensure the transparency, reliability and consistency of accounting standards, and doing so will contribute to securing trust in financial statements published by the companies.
As the state of corporate activities and the market condition are changing every day, it is of course important that accounting standards keep up with such changes. However, generally speaking, I do not think it is desirable to apply accounting treatment that would make it difficult to examine the actual condition of companies.
I know that there are some criticisms of the fair value option. One criticism concerns the fact that the fair value option allows a company to value its debts at a low level when its own credit risk grows. This probably reflects the concept that the company can repurchase its own debts, or securities issued by itself, any time in the market. If debts can really be repurchased, this approach would be rational because the value of debts is less than the balance sheet value. However, doubt has been expressed as to whether there will be sufficient liquidity to enable repurchase of securities when the issuer's own credit risk is growing. In addition, it has been pointed out that the idea that profits are generated as a result of an increase in the credit risk due to the deterioration of financial conditions runs counter to our intuition, and that financial statements will become difficult for users to understand. Moreover, it has also been noted that there may be a problem of asymmetry as a company's own credit risk is reflected on the debt side of the financial statement but not on the asset aside.
As for your question assuming the adoption of international accounting standards in Japan, the Business Accounting Council's Planning and Coordination Committee is now discussing how to treat and apply those standards, and so I would like to refrain from making comments based on the assumption of the application of those standards.
In any case, I understand that the Accounting Standards Board of Japan, an independent, private-sector organization, will conduct an appropriate study regarding Japan's accounting standards.
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