Frequently Asked Questions - Banks and Other Financial Institutions

Q8   What are the inspections for?

The source of the loans from financial institutions to enterprises etc. is the money deposited by depositors, and therefore, financial institutions must lawfully invest and manage the loans and other assets and maintain sound management so that they can securely reimburse the deposits. The inspectors of the FSA visit the business offices of financial institutions, investigate the ledgers and other documents and check whether the soundness of their management is maintained.

Q9   What are the Inspection Manuals? Do inspections include regulating loans by financial institutions?

The Inspection Manuals are guidebooks to fundamental concepts and specific inspection points for inspections of financial institutions by inspectors. The draft was drawn by the ''Financial Inspection Manual Review Committee'' that consists of officers of the Inspection Bureau of the Financial Services Agency, scholars, certified public accountants, civilian businessmen and other external specialists after repeated discussions and opening the original draft to the public for a variety of comments. The manuals are publicly accessible because although these are the manuals for inspectors, it is necessary for financial institutions who are the subjects for inspections to thoroughly understand the inspection points in advance in order to conduct transparent, fair administration based on rules, and this may contribute to the soundness of financial institutions.

The Inspection Manuals include instructions necessary to be followed to check whether financial institutions are correctly managing the loans in the manner that suits particular conditions. Financial institutions conduct assessment and management of the loans by referring to these manuals to assess by itself whether the money deposited by depositors is invested for safe and secure assets in order to maintain their own soundness. This assessment is called internal assessment. The inspectors check whether those internal assessments are conducted correctly, but the objective of the inspections is to ensure correctness of internal assessments in order to protect depositors in every sense, so the borrowers of the individual loans are not subject for inspections.

For details, please access the following :
*     Inspection Manuals

Q10   What are special inspections?

Special inspections are inspections conducted on major banks to look at large borrower firms experiencing significant changes in their market indicators such as stock prices. Inspectors carry out on-site inspections during banks' internal self-assessment period to ensure appropriate borrower classifications which reflect, in a timely manner, latest information on business conditions and market signals of those borrowers.
After appearing in the ''Reform Schedule'' (reported to the Cabinet on September 26, 2001) as one of the measures to solve the NPL problem, the special inspections became a part of the ''Front-Loaded Reform Program'', enacted following the schedule (decided by the Ministerial Council on Economic Measures on October 26, 2001). The inspections were carried out starting October 2001, and the results were announced in April 2002.
With regard to the borrower firms classified as those ''in danger of bankruptcy'' in the special inspections, banks were advised to take any of the following measures: (1) drawing up comprehensive reconstruction plans following the ''Guideline for Multi-Creditor Out-of-Court Workouts'' and other principles; (2) reconstruction via legal process including under the Civil Rehabilitation Law; or (3) sales of loan assets to the Resolution and Collection Corporation (RCC).

The ''Program for Financial Revival'' released on October 30, 2002 stipulated that: ''Towards the settlement of account at the end of March 2003, the FSA will in practice conduct another round of special inspections, in the form of continuing rigorous examination of accuracy of borrowers' classification on a real-time bases.'', with the view to underpinning tighter asset assessments by major banks. One of primary objectives was to examine the impact of the changes in the economy over the year since the previous round of the special inspections. It was also found likely that the method used in the special inspections remained effective in improving the quality of banks' self-assessment. Special inspections this time were conducted starting January 2003, and the results were announced in April.
Being a part of the ''Program for Financial Revival'', special inspections in 2003 were conducted in an integrated manner with other measures also in the program to promote tighter assessment of major banks' assets. The measures included intensive examination of reconstruction plans by a special team, and requested application of newly introduced discounted cash flow-type method to major banks' provisioning for losses from loans to large borrowers that ''need special attention''.

Note:   The special team for examining reconstruction plans consists of 11 members including an expert for corporate reconstruction specially hired from the private sector and a professor specializing in the field of Commercial Law, in addition to FSA inspectors, a number of which are certified lawyers, accountants, and real estate appraisers. The team was established in December 2002.
For more details, please access the following:
*     Results of the Special Inspections on Major Banks (April 12, 2002)
*     Results of the Special Inspections and Other Measures (April 25, 2003)
*     The Advanced Reform Program (Extract --Financial Sector--) (October 26, 2001)
*     Program for Financial Revival