Press Conference by FSA Commissioner Takafumi Sato
July 6, 2009
- Merger between Shinsei Bank and Aozora Bank
- Appointments of senior FSA officials and the “no-return rule”
- Regulation intended to promote unwinding of cross shareholdings
- Opinions on the strengthening of the capital adequacy ratio requirement
- Response to disputes related to foreign exchange margin trading
[Opening Remarks by FSA Commissioner Sato]
I do not have any particular statements to make. Please feel free to ask me questions.
[Questions and Answers]
Shinsei Bank and Aozora Bank announced a plan to integrate their business operations in October next year. Mr. Ikeda, a former president of Ashikaga Bank, will become president of the merged entity, according to the announcement. Could you tell us what the FSA (Financial Services Agency) expects of the business integration?
Also, could you tell us about the FSA's thinking concerning the conditions and criteria regarding the injection of public funds into these banks under the amended Act on Special Measures for Strengthening Financial Functions, a measure which I understand is under consideration?
On July 1, Shinsei Bank and Aozora Bank announced a merger plan.
As you know, a merger is a matter concerning the management judgment of individual financial institutions, so I should refrain from making any specific comment. Generally speaking, it is important that financial institutions strengthen their financial functions and governance and increase their corporate value by developing forward-looking business strategies and making earnest efforts to enhance their business foundation.
When the two banks announced their merger plan, they indicated their intention to secure management stability through the merger and to enhance their areas of strength while paying attention to risk management, thereby gaining the trust of customers and society and contributing to their prosperity. Therefore, I expect that they will make forward-looking business judgments and necessary efforts.
As for the use of public funds, I should refrain from making comments from the standpoint of the FSA, as the banks said they will consider whether it is necessary to ask for the injection of public funds. Generally speaking, if an application for the injection of public funds is made, it will be screened in accordance with relevant laws and regulations.
I would like to ask you about the appointments of new personnel for senior posts, including the post of FSA Commissioner, which will take effect on July 14. Minister Yosano said that the right people were appointed to the right positions. The appointments apparently indicate that the so-called “no-return rule” concerning personnel exchanges between the Ministry of Finance and the FSA has been removed. How do you view the appointments?
Regarding the basic concept of the appointments, as Minister Yosano mentioned on July 3, the right people have been appointed to the right positions so that, despite signs of the global financial markets regaining stability, we can meet the need to continue ensuring thorough efforts to deal with various challenges, including stabilizing the financial system and securing the exercise of the financial intermediary function. I hope that the new FSA leadership team will do its best to tackle various challenges related to financial administration.
As for the so-called “no-return rule,” in June 1998, when the Financial Supervisory Agency (the predecessor of the FSA) was established, then Chief Cabinet Secretary Muraoka made a statement to the effect that senior officials of the agency should devote themselves to financial administration with a resolve to spend the rest of their career at the agency (instead of returning to the Ministry of Finance). The appointments announced at this time do not have any particular inconsistency with the purpose of that statement.
As you know, the FSA is working hard to promote the Better Regulation (improvement in the quality of financial regulation) initiative. The first pillar of the Better Regulation initiative is “optimal combination of rules-based and principles-based supervisory approaches.”
As I understand that you news reporters are familiar with this concept, I would like to make supplementary explanations by elaborating on it. The relationship between the “no-return rule” and the rules-based approach is as I explained just now.
On the other hand, as for why the “no-return rule” was announced as part of the principles-based approach, I think that the purpose was to ensure that senior officials of the Financial Supervisory Agency and the Financial Services Agency devote themselves to financial administration since financial administration must be conducted with a high level of professionalism as well as neutrality and independence.
If we look at the current state of the conduct of financial administration by the FSA after considering the respective roles of the rules- and principles-based approaches, we recognize that as Minister Yosano said, the positions of the FSA and the Ministry of Finance as separate administrative organs have become clear, both in name and in substance, now that the FSA has more than 10 years of experience of financial administration in its legal capacity as an agency separate from the ministry and based on the exclusive authority over financial administration delegated to it.
As you know, the FSA as a whole is operating with a high level of professionalism while bearing in mind the three major objectives of its financial administration, namely, stabilizing the financial system, protecting users and ensuring the transparency and fairness of the market. In this sense, I understand that the risk of financial administration being distorted by external circumstances has been reduced significantly.
Therefore, the “no-return rule” continues to be important as a principle and it is necessary to continue paying attention to this point in the future.
My question concerns the purchase of shares held by banks. The purchase of shares by Banks' Shareholdings Purchase Corporation and the BOJ (Bank of Japan) went fairly well in June. While this is probably attributable in part to the firmness of the stock market, it also appears to indicate that banks are making progress in their voluntary efforts to unwind their cross shareholdings with industrial corporations. Are you planning any additional regulatory measures or rules to promote the unwinding of cross shareholdings, such as making it obligatory to make information disclosure?
I would like to thank you for providing a positive assessment of the recent developments related to banks' shareholdings. I think that it may be possible to interpret the recent developments in a positive way like that.
As for regulation, we remain cautious at the moment about the idea of imposing additional restrictions on banks' shareholdings through regulation. As I explained before, this is because, for one thing, shareholdings may become a tool for banks to provide equity as part of their financial intermediary function in some cases. In addition, we are concerned that suddenly strengthening restrictions on shareholdings through regulation could undermine the recovery of the financial markets and the economy as the impact of the global financial market turmoil is lingering and the real economy is continuing to deteriorate.
On the other hand, as you suggested in your question, managers of Japanese banks have probably learned from their experiences that shareholdings could pose a significant risk: a stock price drop could undermine their own financial soundness. While providing safety net measures such as the purchase of shares by Banks' Shareholdings Purchase Corporation, we are encouraging banks to make voluntary efforts, including strengthening risk management concerning shareholdings, which usually means reducing their shareholdings. For a while, we will keep watching their voluntary efforts and continue to check whether risk management is conducted properly.
Meanwhile, generally speaking, information concerning shareholdings is regarded as important for investment decisions irrespective of debate about the relationship between banks' shareholdings and their financial soundness. In this regard, a report recently issued by the Financial System Council's Study Group on the Internationalization of Japanese Financial and Capital Markets, entitled “Toward Stronger Corporate Governance of Publicly Listed Companies,” recommends that information disclosure concerning the status of shareholdings should be institutionalized, as such information is important for investment decisions.
Based on the proposal, the FSA plans to consider this matter with a view to requiring information disclosure concerning shareholdings through annual securities reports, for example, while exchanging opinions with market participants.
The other day, in an opinion article contributed to the Financial Times, you made remarks apparently intended to warn against excessive regulation in relation to moves in the United States and the United Kingdom to strengthen the capital adequacy ratio requirement. Could you explain the FSA's stance on this issue once again?
As you mentioned, I contributed an article headlined “Tightening capital rules could increase risk-taking” to the Financial Times on July 1.
As you know, international debate is ongoing about strengthening regulation on banks' capital. While recognizing the importance of regulation as a prerequisite, my article provided a reminder of the risk that introducing excessive regulation uniformly could unintentionally destabilize the financial system.
Although this article included some personal opinions of my own, there is a consensus within the FSA, for example on the idea that it is necessary to remain cautious about the argument that the required capital adequacy level should be raised universally without accurately identifying the differences in business models and risk profiles between individual financial institutions or paying adequate attention to an appropriate assessment of asset value, namely without putting sufficient emphasis on the accuracy of the risk asset amount, which constitutes the denominator of the calculation formula of the capital adequacy ratio. This is what the FSA has been arguing at international meetings, and I believe that regarding the review of the capital adequacy requirement, a well-balanced debate that takes this into consideration is important.
In any case, as the authorities of individual countries have presented various ideas concerning the rebuilding of the framework of financial regulation, it is important for Japan to make active contributions to international debate.
I would like to ask you about Shinsei Bank and Aozora Bank. These banks have not repaid a fairly large portion of the public funds they received in the past. Am I correct in understanding that the specific conditions for the repayment that the FSA has indicated in the Diet remain unchanged?
We have explained our thinking regarding the repayment as necessary by citing the three principles set forth by the Deposit Insurance Corporation. The three principles are: that the financial soundness of a bank into which public funds have been injected should be maintained, that the repayment should not disrupt the market and that the burden on taxpayers should be minimized or profits for taxpayers should be maximized under certain conditions. Following the business integration of the two banks, these principles are unlikely to be altered.
I would like to make sure of one thing in relation to the “no-return rule.” Is it your understanding that the return of the person serving as Deputy Commissioner for Policy Coordination to the Ministry of Finance does not violate that rule because the post of the Deputy Commissioner for Policy Coordination is equivalent in seniority to a director-general but is not exactly the same as a director general?
I understand that when we consider this matter from the viewpoint of the rules-based approach, that rule is now applicable to the director-general and higher posts at the FSA in light of past statements made by then Chief Cabinet Secretary Muraoka and then FSA (Financial Supervisory Agency) Commissioner Hino. In this sense, my understanding is that this appointment does not have any particular inconsistency from the viewpoint of the rules-based approach.
I would like to have this matter cleared up, as this is the first time in 10 years that a personnel appointment like this will be made. If this was a political decision made by Minister Yosano on the grounds that the “no-return rule” has outlived its usefulness and should be dropped, I could understand it. However, you argue that this appointment does not violate the rule on the ground that the person who is returning to the Ministry of Finance is not a director-general or higher-rank official and that the rule will remain in effect. This argument does not fully satisfy me. I would like you to make it clear whether you think that an official with the rank of director-general or a higher rank should continue to be prohibited from returning to the Ministry of Finance?
As I explained in detail earlier, the “no-return rule” is not a rule explicitly prescribed by any law or regulation. If we treat it as a rule of some kind, the important thing is to check whether the ultimate purpose of the rule is observed based on the principles-based approach, rather than discussing the letter of the rule.
In short, financial administration requires a very high level of professionalism. Neutrality and independence are also important. I understand that this rule is intended to help to maintain those elements in terms of personnel appointments.
Therefore, I believe that it is more important to consider the significance of the rule from the viewpoints of both the rules-based and principles-based approaches than to look at it in detail exclusively from the viewpoint of the rules-based approach. What Minister Yosano said, as I understand it, is that as the FSA is already capable of conducting financial administration with a high degree of neutrality and professionalism as an independent administrative organ in light of its current position and past achievements, the risk of the broad purpose of the “no-return” rule being violated has been reduced. This is only my conjecture, as I have not directly talked with him about this matter, but my understanding is that he meant to say that the importance of mechanically applying the “no-return rule” through the rules-based approach has declined in light of the broad purpose of the rule.
However, from the perspective of the general public, there was a principle that senior FSA officials should not return to the Ministry of Finance. If there is not a principle that officials with the rank of director-general or an equivalent rank should not return to the Ministry of Finance and if the bureaucracy, rather than politicians, begins to control appointments, there will be no checks. Who will judge whether appropriate checks are being maintained?
Banning exchanges of senior personnel is not the ultimate goal. As I already said, the “no-return rule” is a means to ensure that financial administration is flexibly conducted with a high level of professionalism and in line with its objectives. Therefore, it is important to take into consideration other factors that contribute to those objectives as well. I believe that the independence, neutrality and professionalism of financial administration are important elements that should never be ignored, so I think that measures that help to maintain these elements should be actively adopted. This is what I meant when I said earlier that the “no-return rule” will remain important, and attention should continue to be paid to that point.
A dispute has arisen between an FX (foreign exchange margin trading) business operator and investors, and a lawsuit involving around 400 people may be filed soon. Could you tell us how the FSA views disputes related to FX transactions and what actions, if any, it is planning to take?
I am aware of media reports about the case you mentioned. However, as this case may develop into a civil lawsuit, I should refrain from making any comments from the standpoint of the FSA.
I would like to remind you that under the Financial Instruments and Exchange Act, a business operator acting as an intermediary for foreign exchange margin transactions or investing assets provided by investors in such transactions must be registered as a “financial instruments business operator” as specified by this act. I understand that the business operator mentioned in the media reports is not registered as a financial instruments business operator.
Generally speaking, when the presence of a person engaging in a financial instruments business without registration has been found as a result of complaints from investors, for example, the FSA and the Local Finance Bureaus take actions, including cooperating with police and issuing a warning to the person. We also issue an alert on our website for general investors with regard to financial instruments transactions.
In any case, the basic policy of the FSA and the Local Finance Bureaus is to take necessary actions from the viewpoint of protecting investors.
In relation to the injection of public funds into Shinsei Bank and Aozora Bank, I have a technical question. The two banks hold public funds totaling 400 billion yen on a book-value basis. According to questions and answers made in the Diet about 10 years ago, in addition to the three principles set forth by the Deposit Insurance Corporation, a condition was imposed whereby the two banks should repay an additional amount of funds. Probably, the repayment amount will be around 580 billion yen compared with the book value of 400 billion. Unless their stock prices, which are slumping at low levels now, rise to fairly high levels, repayment will be difficult. Am I correct in understanding that there is not any change in the financial conditions for the repayment?
Now, I got the meaning of the question you asked me earlier.
It is true that banks which undergo the process of special public management face an additional condition beyond the three principles set forth by the Deposit Insurance Corporation according to questions and answers made in the Diet. For the moment, I do not think that there is any particular circumstance that requires a change in that condition. I presume that experts will consider how much should be repaid following the business integration of the two banks based on an appropriate calculation method.
In any case, in order to make the repayment, the new bank to be created through the business integration will first need to gain the trust of customers and society by building a robust business model, making an appropriate business performance and increasing its corporate value through a steady increase in profits. In this sense, efforts to increase the corporate value are essential.
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