Provisional translation

Press Conference by FSA Commissioner Takafumi Sato


June 29, 2009

[Question Items]

  1. Inaugural meeting of the Financial Stability Board (FSB)
  2. Enactment of the Act to Partially Amend the Act on Financial Institutions (,etc.)', Limits for Share, etc. Holdings
  3. Administrative actions against Mitsubishi UFJ Securities and Citibank
  4. Matters related to an insider trading case involving a certified public accountant
  5. Matters related to Ashikaga Bank
  6. Matters related to the FSB

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]


On June 26 and 27, the inaugural meeting of the Financial Stability Board (FSB) was held in Basel, Switzerland. This organization was established based on the Financial Stability Forum with an expanded membership. Could you tell us how the Japanese financial authorities will contribute to its management and debate concerning future financial regulation? Also, what do you expect the FSB will report to the G-20 summit (Summit on Financial Markets and the World Economy) scheduled for September?


The Financial Stability Board held its first general meeting in Basel, Switzerland on June 26 and 27. As you know, this was established as an expanded, upgraded version of the Financial Stability Forum (FSF).

With regard to its institutional structures, it was decided that a Steering Committee and three Steering Standing Committees will be set up. The three standing committees will be responsible for vulnerabilities assessment, supervisory and regulatory cooperation, and standards implementation.

As for the topics of the inaugural meeting, the global macroeconomic outlook was discussed and it was confirmed that despite the recent signs of improvement in the condition of the financial markets, it will be important to follow through in implementing policies to strengthen systemic resilience. In addition, I understand that progress in the implementation of agreements reached at the London Summit (the second Summit on Financial Markets and the World Economy) was reported.

Until now, the FSA (Financial Services Agency) has consistently participated in the FSF's working groups as the representative of Japan, making active contributions to the adoption of a landmark FSF report issued in April last year, debate about the establishment of a supervisory college, the drafting of proposals concerning procyclicality (the effect of amplifying economic cycles), and the adoption of international principles on crisis management. From now on, the FSB's Steering Committees that I mentioned are expected to function as the organization's working groups. As a member of these Steering Committees, the FSA intends to continue its active contributions to debate about international cooperation in financial regulation and supervision.

I cannot say anything definite about what will be reported by the FSB at the G-20 summit in September. However, I expect that the FSB will play the central role in overseeing the progress in the implementation of measures that have been agreed upon at summit meetings and on other occasions as measures that should be taken by international organizations and individual countries.

In any case, I believe it is important that in order to achieve the global goal of preventing a recurrence of the financial crisis and strengthening the financial system in line with the principles confirmed at summit meetings and on other occasions, individual countries cooperate with each other in steadily and effectively implementing agreements so far reached while maintaining international consistency.

The FSA intends to continue to actively participate in international debate about how to prevent a recurrence of the financial crisis and strengthen the financial system while maintaining cooperation with relevant authorities in Japan and abroad.


Last Friday, the Act to Partially Amend the Act on Financial Institutions (,etc.)', Limits for Share, etc. Holdings, which includes an expansion of the scope of items that may be purchased by Banks' Shareholdings Purchase Corporation, was passed by the House of Councillors and was thus enacted. What are you expecting from the enactment of this act? Also, could you tell us about your view, if any, on the specific standards for the purchase of listed real estate investment trusts, known as J-REIT?


The Act to Partially Amend the Act on Financial Institutions (,etc.)', Limits for Share, which was submitted as a bill sponsored by lawmakers, was enacted on June 26.

Following the enactment of this act, the FSA will put the share purchase scheme into practice quickly by adopting relevant Cabinet orders and ordinances.

This act expands the scope of items that may be purchased by Banks' Shareholdings Purchase Corporation, which resumed the purchase of stocks in March 2009, to include preferred stocks and securities, ETF (exchange-traded funds) and J-REIT so as to further strengthen the functions of the corporation in line with a supplementary resolution adopted by the House of Councillors' Committee on Financial Affairs.

I understand that the recent turmoil in the global financial markets has served as a reminder of the fact that banks' shareholdings involve the risk that rapid stock price changes could have a significant impact on their financial soundness. I believe it is important that individual banks take specific measures to ensure more appropriate management of the risk involved in securities holdings based on the experiences and lessons of the financial crisis.

The FSA hopes that the scheme for the purchase of securities by Banks' Shareholdings Purchase Corporation, whose functions have been further strengthened as a result of this legal amendment, will be actively utilized as part of voluntary efforts by banks to manage the risk involved in securities holdings.

The criteria for the purchase of J-REIT will be prescribed by a Cabinet Office ordinance in light of the supplementary resolution attached by the relevant committees of the House of Representatives and the House of Councillors to the bill for this legal amendment. For example, the criteria will include that an eligible J-REIT needs to have been held by a bank or other entity for more than six months, that the issuer needs a credit rating of triple-B minus (BBB−) or higher and that the issuer must stipulate under its internal rules that domestic real estate should be the main investment target.


I have a question concerning administrative actions taken against financial institutions. Last week, the FSA took a series of administrative actions against financial institutions, including Mitsubishi UFJ Securities and Citibank. Their offenses were serious deficiencies concerning their basic functions as financial institutions, such as checking money laundering and managing customer information. Could you tell us how you feel about these cases?


Last week, we issued an order for business improvement against UFJ Securities on June 25 and against Citibank on June 26.

Regarding Mitsubishi UFJ Securities – there may be some overlaps with what you mentioned – we examined a report submitted by the company based on an order for the submission of a report issued after the revelation of a case of customer information leakage and a report compiled by an investigative committee established by the company. As a result, it was found out that the company's system for internal control, including the management of information concerning individual customers, is not adequate. Consequently, we issued against the company an order for business improvement based on the Financial Instruments and Exchange Act and a recommendation based on the Act on the Protection of Personal Information.

As for Citibank, although we had already issued an order for business improvement in September 2004, it was confirmed that the bank had failed to develop an adequate system for properly performing the obligation for reporting suspicious transactions, including money laundering-related transactions. Consequently, we ordered the bank to suspend part of its sales operations of the division for personal finance for one month from July 15 and to take necessary improvement measures to drastically revise the existing governance and internal control systems.

In relation to these cases, a series of cases of inappropriate incidents related to information management, such as information leakage and employees' involvement in insider trading, have recently occurred in the securities and banking industries. In light of this situation, we issued a written request entitled “Regarding Thorough Management of Information Security” to these two industries on June 25.

Needless to say, financial institutions are entities with a highly public nature that perform the financial and market intermediary functions. Customer information constitutes the basis of financial transactions, so it is very important to manage such information properly from the viewpoint of protecting private information. It is also important to properly establish a legal compliance system from the viewpoint of preventing illegal use of accounts.

In both cases, we strongly hope that the companies that have received the order for business improvement will review their business operations and management systems so as to prevent a recurrence of their wrongdoings, and we would also like to ask other financial institutions to further strengthen their internal control systems under the leadership of their management teams in order to prevent similar wrongdoings.


In relation to information management, you recently imposed a fine on and issued a business suspension order against a certified public accountant involved in an insider trading case. At the same time, an employee of a major securities company who allegedly provided insider information to the accountant was dismissed by the company. Under Article 51 of the Financial Instruments and Exchange Act, the FSA may take an administrative action even in the absence of an illegal act if necessary to protect investors. Could you tell us what administrative action the FSA is planning to take against this major securities company?


On June 23, in relation to the insider trading case involving a certified public accountant, we decided to impose a fine on the accountant and ordered the accountant to suspend business operations for three months based on the Certified Public Accountants Act.

In this case, it has been recognized that a certified public accountant, whose role is to perform public functions to ensure the integrity and transparency of the market, engaged in insider trading and that an employee of a securities company, which performs public functions as a market intermediary, provided insider information. It is very regrettable that an incident like this has occurred.

As for what action to take against the major securities company concerned, namely Nomura Securities, another employee of the company was arrested and indicted in an insider trading case last year, as you know. In that case, the FSA ordered the company on July 3 last year to take business improvement measures to reform the internal control system, as some inadequacies, although not involving any illegality, arose with regard to the internal control system when the company was promoting the diversification and globalization of its business operations.

The insider trading that came to light this time took place around the same time as last year's case. Nomura Securities has been making efforts to improve its internal control system since it received the business improvement order. Therefore, the FSA required the company to submit a report on the status of those efforts to check whether the latest case is covered by the improvement. We will keep a careful watch on the status of the improvement of the internal control system that the company is making based on the business improvement order issued last year.

As I told you earlier, the FSA issued a written request on June 25 following the series of inappropriate incidents in the securities and banking industries.


I would like to ask you about the case of Citibank. A heavy punishment was imposed on Citibank when you were director-general of the Supervisory Department. Mr. Gomi, who was FSA commissioner at that time, said that there were problems related to corporate culture and governance and that Citibank had failed to do the minimum that it should have done. Nevertheless, Citibank has not made improvement, so this case is apparently different from other cases in terms of maliciousness and background factors. As an official who was in charge at that time, how do you feel about the latest administrative action?


My understanding is that a severe punishment commensurate with the seriousness of the case as recognized at that time was imposed.

I think that what became clear this time is that while Citibank made some improvement efforts following the punishment, drawing up an improvement plan and establishing a necessary institutional framework, the problem was that the plan and the framework were quite ineffective. I hope that Citibank will now take effective measures and make serious efforts to continue those measures by building a check-and-balance system, for example.


The improvement was in fact no more than the drafting of an ineffective plan, and the FSA approved the plan and overlooked its ineffectiveness. As a result, organized crime groups opened hundreds of accounts with the bank, and illegal transactions were probably made. In light of this, the FSA will have to bear responsibility for the failure of its surveillance and supervisory systems. What would you say to that?


As you know, our approach to financial administration is to first take an administrative action in accordance with the maliciousness, seriousness and graveness of the confirmed facts on a case-by-case basis and then require the formulation of a business improvement plan and follow up on the implementation of the plan for a certain period of time. Generally speaking, we allocate our very limited administrative resources to high-priority cases. It is regrettable that this approach proved to be ineffective in this case.


I will change the subject. It is nearly one year since Ashikaga Bank made a fresh start under the wing of the Nomura Securities group after the end of its nationalization. How do you view Ashikaga Bank's business rehabilitation efforts in the past year?

In relation to this, regional financial institutions, including regional and second-tier regional banks, shinkin banks and credit associations, face a difficult business environment as nonperforming loans are expected to increase. Could you tell me how you view the current situation of regional financial institutions?


As for the business condition of Ashikaga Bank since its privatization, we can say, generally speaking, that the condition is in line with expectations. We have not heard of any particular, serious problems.

As for the business environment for regional banks in general, I presume that generally speaking, there are factors that could increase credit costs, as you pointed out, given the deterioration of the real economy and the slump of regional economies, although the situation may vary from region to region. The important thing is that individual banks manage loans properly through such measures as the provision of management advice to borrower companies while conducting risk management appropriately. It is also important to act in a timely manner while looking forward. In this sense, as I always say, I hope that financial institutions will make efforts to strike the right balance between the need to manage risks and maintain financial soundness and their functions of taking risks, exercising the financial intermediary function and supporting the real economy.


Regarding the FSB, you mentioned the need for internationally consistent regulation. Although earnest international debate about financial regulation has started, the diversity of regulations among various countries and regions has become very clear, and the diversity is apparently being tolerated. For example, the United Kingdom strengthened regulations on banks' capital and liquidity, while the United States plans to place major financial institutions under the central control of the FRB (Federal Reserve Board) and review the capital adequacy requirement. While individual countries are introducing their own regulations, there has been little debate about the international effects of such moves. Some people say that something like financial protectionism — although this expression may sound unpleasant— is emerging. How do you view this situation?


The leaders' statement issued at the London summit in April mentioned that we should “not retreat into financial protectionism,” so I believe that it is an important matter of international consensus.

There is also a consensus on the broad recognition that it is essential to build robust financial systems and markets that will prevent a recurrence of the recent financial turmoil and crisis. Of course, Japan shares this recognition. However, the risk profile varies somewhat from bank to bank as well as from country to country, from region to region and from market to market. I believe it is important to establish a framework of financial regulation that has as much international consistency as possible and is effective in preventing a recurrence of the recent financial turmoil while paying attention to the diversity among individual financial institutions, markets and countries.

With a resolve to do so, Japan will continue to actively participate in international debate.


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