Table of Contents

*Please note that not all items, including regulations and articles posted on the website, have been translated into English. Therefore some of the items that are mentioned in the following articles may not be translated fully into English.

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[Topics]

In response to the recent global financial crisis, there have been various discussions held in Japan and overseas on such topics as over-the-counter (OTC) derivative transactions and hedge funds. In view of these discussions and the actual condition of Japan’s markets, the Financial Services Agency (FSA) decided to commence a detailed examination on the issues that Japan should address in preparation for the 2010 ordinary session of the Diet. In the “Development of Institutional Frameworks Pertaining to Financial and Capital Markets” published on November 13, 2009, the FSA decided to conduct a survey of market participants and others on each of the following issues: (i) regulation of OTC derivative transactions, (ii) regulation of hedge funds, (iii) strengthening of securities clearing and settlement systems, (iv) consolidated regulation of securities companies, etc., and (v) ensuring investor protection and fair trade. Based on the fact-finding survey of market participants and others, from the viewpoint of taking appropriate responses in the context of international discussions and the actual state of affairs of Japan’s financial systems and financial industry, the FSA published the “Draft Blueprint for the Development of Institutional Frameworks Pertaining to Financial and Capital Markets” on December 17, 2009. The FSA then conducted another round of public consultative exercise regarding the blueprint, aimed at obtaining a broader range of opinions from market participants and others.

Based on these opinions, the “Development of Institutional Frameworks Pertaining to Financial and Capital Markets” has been finalized and was released on January 21, 2010. In addition, in cases such as where administrative penalty has been imposed on a fund sales agent or trustee companies, at present a risk exists concerning the protection of investors, etc., owing to the fact that the FSA does not have the authority to initiate bankruptcy procedures of the fund sales agent, or appointment of alternative trustees, etc. Therefore in order to protect the investors and beneficiaries, improvements to the system to deal with such situations will be made.

Specific details are as below. Going forward, the FSA further takes steps to improve the system, including the presentation of a draft bill for consideration at the Diets during the 2010 session.

«Outline of the development of institutional frameworks pertaining to financial and capital markets »

 

*For further details, please refer to the Development of Institutional Frameworks Pertaining to Financial and Capital Markets (January 22, 2010) in the “Press Releases” section of the FSA website.

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On December 17, 2009, the Basel Committee on Banking Supervision (BCBS) published consultative document to propose revisions of the Basel II framework, aiming at strengthening the capital regulations pertaining to internationally active banks, and at introducing international framework for liquidity risk measurement, standards and monitoring.

[1. Background]

On December 17, 2009, the BCBS announced a series of regulatory reform proposals for internationally active banks. These proposals are presented as ones among various options of the international rules for liquidity standards, bank capital and leverage. They were based on the calls by the G20 leaders at their London Summit last April and at their Pittsburgh Summit last September to strengthen capital base of banks.

The financial crisis triggered by the U.S. subprime mortgage problem, developed into a global financial and economic crisis, illustrated for instance by the subsequent collapse of Lehman Brothers and the injection of public funds into major banks in Europe and North America. The world economy has not yet completely shaken itself free from the recent crisis. In order to address problems of bank’s risk coverage, which is what instigated this crisis, the BCBS announced to strengthen regulations related to higher risk weights for re-securitisation exposures and tighter treatment of trading books in July last year. Along with the July 2009 revisions, the recently announced series of regulatory reform proposals are part of the comprehensive response designed to strengthen the soundness and risk management of banks in the medium to long term, and aim to prevent a recurrence of the financial crisis.

[2. Main elements of the consultative documents]

The regulatory reform proposals can be classified into five categories: (1) strengthening quality, consistency and transparency of capital, (2) strengthening risk coverage (strengthening the treatment of counterparty credit risk, etc.), (3) introducing leverage ratio regulation as a supplementary measure, (4) mitigating procyclicality, and (5) introducing regulatory standards for liquidity. Comments on the consultative documents should be submitted by April 16, 2010, to the Secretariat of the BCBS.

[3. Position of the consultative documents, and implementation of the regulations]

The BCBS considers several options at the consultative documents. Also, from February 2010, the BCBS plans to collect necessary data from banks in each country to conduct a quantitative impact study (QIS) in order to comprehensively analyze the overall impact of the proposals. In light of the results of the QIS and the comments received, the BCBS plans to finalize the new regulatory reform proposals by the end of this year.

At the processes of finalizing the regulatory reform proposals, the BCBS will adjust standards for each of the proposed regulations. Although these adjustments have not been indicated in the consultative documents, they will be made taking into account all of the main elements associated with the series of regulatory reform proposals. At this time, broad consideration will be given to the effects of the proposed regulations on the lending activities of banks and on the real economy. Moreover, with the aim of implementation by end-2012, the BCBS plans to phase in new standards as financial conditions improve and the economic recovery is assured. It will ensure that the new regulations are implemented in a way that is consistent with financial market stability and sustainable economic growth.

Moreover, in implementing the regulation, the BCBS has clearly stated that when it brings the new regulations into force, it will put in place grandfathering arrangements (allowing the existing treatment for a certain period even after the new regulations have been brought into force) for a sufficiently long period in order to ensure a smooth transition from the existing regulation.

In this way, based on the comments received from the public and the results of its QIS, the BCBS will conduct a review aimed at formulating the final proposed regulations, and at the same time, it also plans to examine how specifically to transfer to the new regulation in a way that does not adversely affect the real economy.

*For further details, please refer to the Basel Committee on Banking Supervision releases consultative documents for strengthening the resilience of the banking sector (December 27, 2009) in the “Press Releases” section of the FSA website. (Japanese only)

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[Featured]

The Financial Research and Training Center (FRTC) of the Financial Services Agency (FSA) hosts joint international conferences with the financial industry, academic, and government sectors on practical issues related to the financial system. The topic for this year’s conference was “A Perspective of Asian Financial Sector under the Global Financial Crisis” and the conference was held on Thursday, January 21, 2010, co-hosted by the International Monetary Fund (IMF), the Asian Development Bank Institute (ADBI) and the Keio University Global Center of Excellence Program. The conference was attended by about 230 participants from Japan and overseas, including researchers, government and central bank officials, financial institutions, and representatives from foreign embassies in Tokyo.

The conference examined the effects of the global financial crisis on banks in Asian countries, and considered through panel discussions a desirable approach to supervision and regulation of financial activities to maintain financial stability and underpin economic recovery.

Impact of the current crisis on Japanese and Asian Financial Sector (Session I)

In Session I, Mr. Susumu Okano (Executive Officer and Head of Research, Daiwa Institute of Research, Ltd.,) reported that the direct impact of the subprime mortgage problem on financial institutions in Japan and other parts of Asia was relatively small compared to U.S. and European financial institutions. He continued that, despite a shortage of the U.S. Dollar in major Asian financial markets, there were no significant disruptions in the markets because lessons had been learnt from the 1997 Asian currency crisis and various measures had been taken against crises. Mr. Okano also reported that, although there were indirect effects of the financial crisis on the Japanese economy caused by a drop in exports of durable consumer goods, Japan’s financial system was little affected; and Japan’s manufacturing industry has been suffering from a decrease in exports, but the impact was smaller than that after the collapse of the bubble economy. Following his report, comments were made on why the effects of the financial crisis have been small on Asian financial institutions. The following four points were given as the reasons: (1) investment by Asian financial institutions in subprime-related instruments was small; (2) banks in Asia were relatively sound compared to banks of other regions; (3) deposit insurance systems and other safety nets were in place; and (4) sound macroeconomic policy was being implemented.

Banking Regulation: Main lesson from the current crisis (Session I)

In the second half of Session I, Mr. Shunsuke Shirakawa (Director, Office of International Affairs, FSA) reported on the consultative documents published by the Basel Committee on Banking Supervision (BCBS) in December 2009. The main elements of the reform proposal are as follows: (1) strengthening the quality of capital, (2) strengthening the risk coverage, (3) introduction of a leverage ratio (a supplementary measure), (4) mitigation of pro-cyclicality (effects of amplifying business fluctuations), and (5) introduction of regulatory standards for liquidity. The BCBS plans to have internationally-agreed rules formulated by the end of 2010, based on the results of public consultation and a quantitative impact study. In response to this presentation, there was a comment that, given that the financial regulatory reforms currently being undertaken by the BCBS and other global forums are being led by developed countries, perspectives from developing countries should also be incorporated into the reforms in the future. Prof. Naoyuki Yoshino (Director of the FRTC; Professor of Economics, Keio University) and Mr. Tomohiro Hirano (Research Fellow of the FRTC) reported on their research at the FRTC on the desirable capital requirement that would stabilize lending. They conducted an analysis using a general equilibrium model, which includes the loan market, stock market, land market, goods market and money market, and found out that it would be desirable to link capital adequacy requirements to various macroeconomic variables such as stock prices, land prices, GDP and interest rates. They also explained that their analysis showed that, because economic structures and bank behavior are different from country to country, it would be appropriate to have different capital requirements for different countries calculated based on their economic structures, instead of applying the same capital adequacy ratio (8 percent for instance) to all countries.

Macro-prudential regulation and the perimeter of regulation (Session II)

In Session II, Hervé Ferhani (Deputy Director, Monetary and Capital Markets Department, IMF) explained that, before the financial crisis, financial regulation had been conducted based on the understanding that the stability of the overall financial system would be maintained if the soundness of each individual financial institution was maintained. The global financial crisis, however, showed that even if individual financial institutions were sound, this does not necessarily mean that the financial system as a whole was stable. Ferhani said that there was a consensus that macro-prudential regulation, which looks at the stability of the overall financial system, was necessary. In the ensuing discussion, the aim of macro-prudential regulation was defined as mitigation of “systemic risk,” the risk accumulated in the overall financial system, and that such risk can be mitigated by broadening the scope of regulation. With regard to the coverage of regulation, it was pointed out that the financial institutions that should be subject to regulation need to be determined by focusing on the function and businesses they perform rather than on what categories of financial institutions they fall under. A comment was also made that, following the financial crisis, discussions at the global forums are moving toward expanding the coverage of regulation, but it must be noted that effective supervision should not be sacrificed by the expansion of regulation.

Asia’s financial sector reforms: ensuring effective financial intermediation with stability (Session III)

 

 

In Session III, Dr. Hank Lim (Research Director, Singapore Institute for International Affairs) reported that the recent financial crisis has severely affected small and medium-sized enterprises (SMEs) in Asia. Dr. Lim explained measures taken by Asian governments, such as loan guarantees and setting targets for loans to SMEs. In particular, the Singapore government has introduced the “Special Risk-Sharing Initiative (SRI),” which was a scheme that promoted bank lending. The scheme enabled high-quality firms to raise funds and many SMEs were enjoying the benefits of this scheme. Then, the situation of SMEs in Korea was reported. Since most SMEs in Korea are export-related firms, exchange rate fluctuations greatly influence their financing, and many SMEs frequently used derivatives to cover exchange rate fluctuations, which as a result, severely affected such SMEs at the time of the recent financial crisis. Lessons can be drawn from this Korean experience that financial regulation should be conducted taking into account the specific features of SMEs in each country.

Ms. Cyn-Young Park (Principal Economist, Office of Regional Economic Integration, Asian Development Bank) reported that, although the effects of the recent financial crisis on Asian financial systems have been limited, they remain vulnerable, and therefore Asia needs to develop its financial systems by advancing the regional financial reforms in line with global reforms. To this end, it was necessary to further strengthen efforts, such as the Chiang Mai Initiative and the Asian Bond Markets Initiative, and to achieve even closer cooperation by, for instance, arranging policy dialogue for the financial stability of the Asia region.

Panel discussion (Session IV)

In Session IV, Prof. Naoyuki Yoshino (Director of the FRTC) opened by summarizing discussions made in the earlier sessions, before holding a panel discussion. The main reports and discussions are as follows. Mr. Pietro Ginefra (Chief Representative, Bank of Italy) explained Europe’s response to the recent financial crisis. He explained how it had been decided to create the European Systemic Risk Board to conduct macro-prudential regulation of the financial system in the EU.

Mr. Yongxiang Bu (Director, Financial Risk Division, Research Department, the People’s Bank of China) reported that, although the effects of the recent financial crisis on China’s banks had been limited, China’s financial system was still vulnerable, and that the reforms of the financial and capital markets were lagging. Going forward, he stated that China would need to work toward implementation of prudential policy measures such as creation of a deposit insurance system, while closely watching international developments in macro-prudential regulation.
Mr. Hervé Ferhani (Deputy Director, Monetary and Capital Markets Department, IMF) commented that, while economies have become more globalized, there was no global regulator, and thus there was a need to take a global approach to financial regulation so as not to cause fragmentation of regulation. In response to this, Dr. Masahiro Kawai (Dean, ADBI) said, given that financial systems in Asia are at different stages of development, and there are regulatory and legal differences, it would be difficult to apply the same regulations as the United States and Europe to Asian countries. The conference concluded with the remark that perspectives of Asia and other regions need to be incorporated into any global regulation.

*For further details of the conference, please refer to the Conference Materials for International Conference on “A Perspective of Asian Financial Sector under the Global Financial Crisis” on the website of the FRTC. The conference program, presentation materials and a summary of the conference are available at the site.

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