Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Friday, September 14, 2010, from 11:40 a.m. to 12:38 p.m.)

[Questions & Answers]

Q.

The Deposit Insurance Corporation of Japan (DICJ) announced that no major turmoil arose yesterday in commencing the procedures to pay back deposits of the Incubator Bank of Japan (Nihon Shinko Ginko), which the other day became subject to limited deposit protection under the so-called “pay-off” scheme.  What is your understanding of the issues in carrying out the bankruptcy proceedings in the future?  What is the approach to be taken by the Financial Services Agency (FSA) to resolve such issues?  Please elaborate on these two points.

A.

There were some news articles describing that the implementation of the “pay-off” scheme to the Incubator Bank of Japan last week was “unprecedented since the end of Second World War”.  As the head of an executive branch of government, I would like to express my heartfelt gratitude to everyone for cooperating with us in an extremely calm manner and enabling us to steadily implement the “pay-off” scheme in an orderly fashion.

Now let me answer your question about the situation.  As reported in the news, the grouping of deposits held by the same person was completed by DICJ over the weekend and operations were resumed at 9:00 am yesterday (September 13th) at 16 establishments, namely, the head office and 15 major branches.

As you may know, no major turmoil has arisen, and I have been told that business operations including cancellation procedures are, thankfully, being carried out smoothly.  On the whole, everything is going extremely smoothly.  I believe once things have settled down, we would have to verify this situation in an appropriate manner.  In any case, up to 10 million yen in principal per depositor and the interest on such principal will be protected regardless of the repayment period, and any amount in excess of 10 million yen in principal and the interest on such principal will be reimbursed according to civil rehabilitation proceedings, so I would like to further request depositors to respond in a calm fashion.

Q.

What is your view on future issues?

A.

As I explained last week, I believe Japan has the world's most developed legal system against the failure of financial institutions, based on its extremely bitter experience of the financial shockwave more than a decade ago.  In accordance with such system, the procedures are being steadily executed in an orderly manner at the moment with the understanding of people in various fields, thanks especially to depositors for their calm response.

Q.

May I also ask your assessment of the new capital adequacy requirements compiled by the Basel Committee on Banking Supervision on September 12th, and what domestic banks' challenges are in fulfilling the requirements?

A.

I understand that this is a timely, extremely important question.  On September 12, a meeting was held in Basel, Switzerland to examine global minimum capital standards and its phased implementation.  From Japan, the FSA Commissioner attended the meeting.

The meeting was followed by a press release as reported in the news.  The new minimum standard is 8 percent of total equity capital.   Tier 1 capital such as common shares and the ratio of Tier 1 capital on the whole shall be increased.  Separately to the minimum standard, a buffer to equity capital that can be used in the event of economic downturn may be accumulated.  Furthermore, an agreement was reached on the timing of transition, transitional measures and other matters such as the new rules being phased in from 2013 and the capital requirements on the whole including the capital conservation buffer taking full effect in 2019.

As you may know, I believe Basel III substantially reflects Japan's arguments, as I have been stating since before the agreement was reached.  My evaluation is that it is a well-balanced outcome to enhance the financial system, as it seeks to enhance capital in the medium and long run, while incorporating considerable measures heeding the impact of its rapid implementation on the real economy.

As I have mentioned previously, the extremely harsh financial shockwave we experienced a decade ago revealed that a higher capital adequacy ratio is not necessarily desirable.  A higher capital adequacy ratio does lead to greater stability, but it caused credit crunch and credit withdrawal back then, resulting in socioeconomic contraction and the failure of banks.  That is why I have repeatedly stated that stable and robust financial institutions are required for the sustainable progress of sound companies and a sound economy considering the consequences of the financial crisis we experienced a decade ago.  In that sense, I believe our opinions have basically been incorporated into Basel III.

Agreement on the framework of Basel III will be reported at the Seoul Summit to be held in November 2010, and the detailed provisions will be put together by the Basel Committee on Banking Supervision.  This specifically translates into Cabinet Orders and Ministerial Ordinances.  The FSA will continue to make contributions proactively, based on the view that the new rules will help improve the soundness of the financial system in the medium and long run, and that it is important to give due consideration to the real economy.

Now let me move on to the second question, as to how Japanese banks will be affected.  It is difficult to make a blanket statement on the impact of Basel III on Japanese banks.  Nevertheless, Basel III is well-balanced in that it gives consideration to both the need to enhance capital in the medium and long run and the impact on the real economy, so I believe Japanese banks will be able to fulfill the requirements within the scope of management efforts without having a major impact on the real economy.

Q.

I am Oshima from Kinyu Times.  The management status of the Incubator Bank of Japan does not appear to be so bad, judging from the figures as at the end of March 2010.  It seems a bit far-fetched to hold the depositors themselves responsible.  What are your thoughts on this?

A.

As I explained the other day, the Incubator Bank of Japan has been inspected about three times in the past.  In the course of inspecting large depositors in relation to the business improvement plan published on June 28, 2010, the Bank was requested to prepare financial data and other materials for properly identifying the credit status of the debtors and revise its self-assessment manual.

In the meantime, the top management had changed, and especially between autumn 2008 and 2009, its business activities were expanded based on major loans to companies with which it had a close relationship and through purchasing of loan claims from, among others, the former Shoko Fund as I stated last week.  The Bank was inspected for the third time in May 2009, and if you take a look at the inspection results alone, it may indeed on the surface appear the way you just mentioned, but in fact the Bank was ordered to repeat its self-assessment accurately.  In hindsight, it was, in a nutshell, similar to window-dressing.  The revelation of this fact and the severe obstruction of inspections that took place are as you already know.  In the second and third inspections, when the inspector arrived the Bank hardly responded, or Takeshi Kimura himself came forward-although this does not constitute an infringement of law, it is inconceivable for an ordinary financial institution to take such an attitude towards inspections.  In this context, the third inspection took the same inspector as long as nine months, as I mentioned before; normally, an inspection of a financial institution takes 3 months, or 6 months at most.  Then, as you know, the Bank's evasion of inspections came to light, and at the same time, its self-assessment had to be redone, so the FSA issued a business improvement order.

The result is the figure of 187 billion yen in excess liabilities.  I hope you understand the situation in this context.

Q.

I am Kiyotaka Takahashi, a freelance reporter.

On the topic of the Incubator Bank of Japan, it may have been possible to hold the top management responsible to a greater extent for their irresponsible financing if the “payoff” scheme was not implemented. How did you make the decision?

I have another question, as some events pertaining to the establishment of the Bank are unclear. The Bank was permitted to launch business exceptionally quickly given that new financial businesses had not been given permission at all under then-Minister for Financial Services Heizo Takenaka. Do you intend to investigate this?

A.

As for the first question, the general rule of the financial bankruptcy processing system is actually fixed-amount protection, as I explained last week.  Exceptions to this rule are cases in which there is a possibility of systemic risk arising, as you know.  The examples I brought up the other day were the Incubator Bank of Japan and Ashikaga Bank: the Incubator Bank of Japan had about 400 billion yen in loans, and Ashikaga Bank had 4 trillion yen in loans.  In particular, Ashikaga Bank is a financial institution designated by the Tochigi Prefectural Government, and its share in the regional community was extremely high, so as an exception, we convened the Financial Crisis Response Council for Ashikaga Bank.  The Council is chaired by the Prime Minister, and its members include the Minister for Financial Services, the Chief Cabinet Secretary, FSA Commissioner, the Minister of Finance, and the Governor of the Bank of Japan.  Exceptions are cases in which a systemic risk exists.  In the present case, we determined that there is no such systemic risk.  As I explained last week, the Bank only dealt in fixed-term deposits, meaning that there was no settlement system in its business model in the first place.  We determined that the impact in the event of bankruptcy would not be broad because of the lack of transfers and the products being limited to fixed-term deposits.  In that sense, we abided by the general rule and applied fixed-amount protection.

As for responsibility, protection of deposits (fixed-amount protection) and assignment of responsibility are basically unrelated.  Nevertheless, as I stated last week, Mr. Kimura became a consultant to FSA when Mr. Takenaka served as Minister for Financial Services and filed an application form for the Incubator Bank of Japan after he resigned from the post and established the Bank while Mr. Takenaka was in office.  Given that banking businesses are licensed businesses, and financial businesses are highly public in nature, this is an extremely serious matter as a nation.  Sound and robust financial businesses are necessary for sound companies as well as for sound management and economy.  As financial businesses are licensed businesses that are not to be taken lightly, it is extremely regrettable that it failed in about six and a half years.  As I stated before, now that the DICJ has full control of the Bank, we intend to pursue its criminal and/or civil liability in an appropriate manner according to law.

However, banks based on unconventional business models such as Seven Bank and Sony Bank were founded at the same time as the establishment of the Incubator Bank of Japan, and I have received a report from the administrative authority that it was not particularly premature to provide them with a license given that Seven Bank and Sony Bank are still functioning properly to this day.  That said, Mr. Takenaka was Minister of State and a Diet member at the time; given that Mr. Kimura served as a consultant to FSA and issued a license while Mr. Takenaka served as Minister, he cannot evade moral responsibility, as I stated last week.  As the Chief Cabinet Secretary had mentioned that further inquiries should be conducted by the Minister, Senior Vice Minister, and Parliamentary Secretary of the FSA, we will heed this very seriously and tackle this issue accordingly.

Q.

I have a question about your decision to implement the “pay-off” scheme.  You mentioned that “the general rule is pay-off,” that is, fixed-amount protection, but on the other hand, you have strongly highlighted the peculiarity of the Bank in taking this measure.  There seem to be some inconsistencies in this logic.  What are your thoughts on this?

A.

I do not think there are any inconsistencies in the logic.  If my memory serves me correctly, the “pay-off” scheme was established around 1971-back then, many banks went bankrupt.  In my personal experience, while I served as Minister in the Second Hashimoto Cabinet from 1997 to 1998, Hokkaido Takushoku Bank went bankrupt, Yamaichi Securities collapsed, and dozens of financial institutions failed in Japan at the time.  As depositors were extremely anxious back then due to the collapse of many financial institutions, the government decided not to implement the “pay-off” scheme between 1996 and March 2002 despite the existence of legal provisions.  Today, financial conditions have somewhat settled since the collapse of Ashikaga Bank, and Japan's financial climate is calm on the whole, notwithstanding the Lehman Brothers shockwave on a global scale.  At the end of the day, I believe depositors need to choose banks based on the principle of self-responsibility.  At the same time, there is one thing I would like to emphasize especially to top management executives-the borrowers.  They should feel very sorry to depositors if the “pay-off” scheme is implemented.  Individuals with 10 million yen in deposits plus interest who are entitled to receive provisional payback under the Deposit Insurance Act will ultimately have the amount reduced to a certain extent, thereby causing substantial trouble to depositors.  In that sense, all top management executives and others involved in the management of Japanese financial institutions should re-acknowledge the gravity of their management responsibility for financial business.

Furthermore, given that up to 10 million yen in deposits plus interest will be protected by the government under law but no amount above that will be protected, people who are depositing their funds should choose financial institutions.  This is an extremely tough call, but I would appreciate it if you could understand such nature of financial businesses.  In the present case, I am truly sorry as the Minister in charge for the trouble experienced by depositors of the Incubator Bank of Japan, and at the same time, grateful to them for responding extremely calmly.

Q.

This may be obvious, but does it mean that you may make the same decision in the future even for a bank that is not as peculiar as the Incubator Bank of Japan?

A.

The decision should be made by the Minister for Financial Services at the time on a case-by-case basis.  It is not a matter that can be generalized.  Nevertheless, we do have a legal system for bankruptcy, so there may be circumstances in which the law is enforced under the legal system, as a matter of course.

Q.

I am Inoshita from Toyo Keizai.

The results of the third inspection of the Incubator Bank of Japan were terrible. Is it your understanding that the first and second inspections were properly conducted under the current inspection and supervision systems? Or was there any fault in the inspection system or supervision system on the part of the FSA against the Bank? Please share your views with us on this matter.

A.

According to what I have heard from the administrative staff, the Incubator Bank of Japan was inspected twice before the latest inspection for the fiscal year ended March 31, 2009, as I just mentioned: the previous inspection was for the fiscal year ended March 31, 2007 and the one before that was for the fiscal year ended March 31, 2005.  My understanding is that as at the end of the fiscal year subject to each of the previous two inspections, the Bank's financial position was assets in excess of liabilities according to the results of these inspections.  Also, my understanding is that there were no material violations of laws and regulations, inadequacies in systems or other such problems in its business operations that would lead to administrative actions as found in the latest inspection.  As I have repeatedly stated, at the time of the first inspection, the Bank engaged in operations allegedly based on a new business model targeted at small and medium-sized enterprises (SMEs).  The Lehman Brothers shockwave that struck at the time may have been one of the factors.  That said, then-Chairman Takeshi Kimura is an extremely capable person, who, according to what I have been told, had an authoritarian management style, so I suspect overambitious business expansions gave rise to the present outcome.

Q.

If that is the case, do you think it will be necessary to review, in particular, the supervision and inspection systems in the future?

A.

As I explained earlier, I believe the Incubator Bank of Japan had ultimately been screened properly according to laws and regulations when its license was issued.  While I stated that Mr. Takenaka, former Minister for Financial Services, cannot evade moral responsibility due to this outcome, my understanding is that screening was conducted properly as an executive branch of government.

Furthermore, in the inspection and supervision of financial institutions, we take action in a stringent manner as necessary based on the confirmed facts pursuant to laws and regulations if violations of laws and regulations or problems in user protection are found as a result of on-site inspections, day-to-day supervision and other such activities.  Likewise, we have endeavored to inspect and supervise the Incubator Bank of Japan in a stringent manner.  The FSA had to properly conduct the first inspection and, in particular, the second inspection, according to law as an executive branch of government.  Unless there is an obvious violation of law, an executive branch of government cannot take any arbitrary action.  The third inspection, however, clearly revealed a violation of law as you know-what I am trying to tell you is that our action must be based on laws and facts.  That is how an executive branch of government works.  In that sense, although I can see at the emotional level why we are being criticized for not taking action earlier from the start, I believe as the head of an executive branch of government that regulation and supervision involves giving guidance based on objective facts in accordance with law, and should have as little room as possible for demands based on likelihood and arbitrariness.  I believe this is an important quality for a person in charge of regulation and supervision based on laws and facts.  Nevertheless, given that the Bank consequently failed, the FSA shall learn a lesson from this and continue to endeavor to stabilize the financial system.

The Bank's expansion of business involved so-called “networking business”: it provided almost 80 percent of its loans to approximately 120 companies with which it had a close relationship and provided loans to borrowers totaling about 29,000 companies.  While honest and sincere borrowers of the loans will of course be protected by law, the fact that almost 80 percent of loans are concentrated on 120 companies shows the Bank's lack of balance even from my point of view.  Such expansion of business happened from 2008 to 2009, and these facts came to light in the third inspection from May 2009 onwards.

Q.

Since the previous press conference, you have consistently stated that “Mr. Takenaka cannot evade moral responsibility”.  Neither Mr. Takenaka nor any other senior official of the financial authority at the time have responded to interviews regarding the Incubator Bank of Japan.  Mr. Takenaka is apparently on an overseas business trip at present.  If he cannot evade accountability or some kind of moral responsibility, what do you think should be done?

A.

That is a very good question.  He is overseas at the moment, is he?  I did read in the newspaper that he has not responded to any interviews.  I believe that after all, he cannot evade moral responsibility as a person who held a public position, was a member of the Diet and served as Minister for Financial Services in charge of financial regulation and supervision for nearly two years in Japan, given that (former Prime Minister) Mr. Koizumi and Mr. Takenaka were extremely high-profile political figures at the time.

Q.

Are you considering making him explain the circumstances back then, such as conducting an investigation?

A.

As I explained a moment ago, the Chief Cabinet Secretary had mentioned that an inquiry should be conducted by the Minister, Senior Vice Minister, and Parliamentary Secretary.  We are taking this seriously, so we will heed this and do whatever is necessary.

Q.

Excuse me for changing the subject; tomorrow is the second anniversary of the Lehman Brothers shockwave.  This may be a slightly broad question, but could you please share your opinion with us on the past two years, including the recent developments such as the Incubator Bank of Japan and Basel III, and looking at the yen appreciating to a 15-year high at around 83.10 yen today, as well as the future vision of Japan's financial sector?

A.

That is a question with a grand scope.  The financial sector has undergone significant progress especially since the days of (former British Prime Minister) Margaret Thatcher and (former US President) Ronald Reagan, under so-called neo-conservatism: in particular, investment banks in the United States have come to generate huge profits by taking advantage of financial engineering, which evolved especially with the advance of information technology.  Apparently, stocks are purchased and sold in 2 milliseconds at the Tokyo Stock Exchange.  Stocks are purchased and sold in 1 or 2 milliseconds at the Hong Kong Stock Exchange, which I visited the other day.  This is the kind of world we are talking about.

I believe the financial regulatory reform legislation passed by President Barack Obama in the United States is indeed a turnaround comparable to the Copernican Revolution since 1929.  With the establishment of the Volcker rule, investment banks and conventional American banks, especially Western banks centering on the United States can no longer perform high-risk, high-return trades on their own accounts except when requested to perform such trades by customers.  Relatively speaking, Japanese banks did not excel and engage in such trades.  In that sense, the financial sector has experienced dramatic changes, and the real economy has been heavily affected since the Lehman Brothers shockwave-even in Japan, production at Toyota Motor Corporation dropped by as much as 40 percent at one point.

In this context, the financial sector has ballooned more than the real economy, and risks can no longer be contained within the risks of one financial institution.  The Lehman Brothers shockwave was a typical example of this.  It has a broad impact on the national economy and the global economy.  Back in 1929, economies were organized into economic blocks, which became a remote cause of the Second World War according to some people.  Having learned a bitter lesson from the War, G8 and G20 mobilized their wisdom and reached a consensus on Basel III as well.  I am looking forward to seeing an accord reached on Basel III at the upcoming Seoul Summit.  I believe that the human race has learned a few lessons since the Great Depression after 1929 in conjunction with the globalization of economies around the world.  With this in mind, the general rule is to facilitate the financial sector that supports companies, as well as the yen, and properly execute risk management.  As relationship of trust is fundamental to financial businesses, financial institutions do not function properly if customers lack confidence in financial institutions, as you are well aware.  Taking this into account, we are steering the financial sector at an extremely difficult time.  Even at times like this when the financial sector is undergoing dramatic change on a global scale, we are committed to fulfilling our responsibilities properly while seeking your wisdom and people's opinions, bearing in mind that Japan's economy is not isolated but interlinked with American and Chinese economies as well due to globalization.

Q.

I am Namikawa from Toyo Keizai.

On the topic of the Incubator Bank of Japan, a conference was established to prepare a financial reform program under (former) Minister Mr. Takenaka at the time when the Incubator Bank of Japan was given approval, and Mr. Kimura was one of several members of this conference. None of the meetings have been disclosed to the public. In these closed meetings, the topic of creating a new bank dedicated to SMEs had come up in discussions in the context of the program, and then, consequently, such a bank emerged. While Seven Bank existed before that, the FSA had established extremely tough guidelines for businesses in other industries to enter the banking business. However, from what I remember, not much work was done to establish proper guidelines for creating a completely different type of bank.

My point is whether it is possible to disclose the minutes of the meetings, which were not disclosed to the public at the time. We would like to know what kind of discussions took place in the FSA, with the Minister for Financial Services, in those meetings, regarding the positioning and the public necessity of the bank and what led to the establishment of the bank. If you cannot disclose the minutes, we would have to make a request for disclosure of information, but before taking such a step, we would appreciate the FSA disclosing the minutes given the failure of the Bank.

A.

As you know, I was a member of the Diet during those years, when there were so-called ex-ante regulations and ex-post regulations: in Japan, government officials had given every possible help to businesses in granting approvals and licenses since the Meiji Era, and in the case of banks, the so-called “convoy-fleet” approach used to be taken.  This continued for many years.

Then came the sweeping trend of neo-conservatism, which was maximized under Mr. Koizumi and Mr. Takenaka, who encouraged the government to give approval to as many applicants as possible.  The extreme logic at the time was to leave the consequences up to courts.  This tended to be close to the American model, where, in a nutshell, approval is given to as many applicants as possible provided that minimum requirements are met, and the success and failure of a company is entirely dependent on its own efforts, and to go to the extreme, if the company violates any laws or regulations, it is the role of the courts to deal with such consequences.  I remember that was certainly the trend back then.

There was indeed such a time, but what you just said is news to me, so we intend to properly deal with this matter by taking into account the fact that the Chief Cabinet Secretary had mentioned that an inquiry should properly be conducted by the Minister, Senior Vice Minister, and Parliamentary Secretary.  The Incubator Bank issue is extremely regrettable, and I feel responsible for it as well.  In that sense, we must regain public confidence and at the same time, draw a lesson from this issue and properly engage in financial regulation and supervision.

Q.

Haven't the minutes been kept?  Aren't the minutes kept in the Executive Bureau?

A.

Minutes have not been kept, according to the administrative staff.  Having been a politician for 25 years, it is not impossible for me to understand the position of officials.  I have read a newspaper article stating that a “pay-off” scheme was implemented at the Incubator Bank of Japan due to the change in government.  In some aspects, there may certainly be such political factors.  We intend to respond to people's voices by taking such matters into consideration.

(End)