Findings from research and studies conducted at the Financial Research Center (FSA Institute) are organized and published as Discussion Papers to stimulate further discussion and comment.
The views expressed in the papers are those of the authors and do not necessarily reflect the views of the Financial Services Agency or the FSA Institute.
Discussion Papers (FY 2017)
|Study on Protection of Financial Services Users in view of International Developments: International Comparison of Cryptocurrency Regulation and Possibility of Issuance of Digital Currency by Central Banks
Ryoji Kitami, Yutaka Shuto
Abstract | Full text (PDF:1.50MB) (Full text is available only in Japanese.)
|Study on Early Detection of Inappropriate Accounting to Address Recent Changes in the Economic Environment
Abstract | Full text (PDF:1.10MB) (Full text is available only in Japanese.)
|Market Risk Measurement under the Minimum Capital Requirements
Abstract | Full text (PDF:1.99MB) (Full text is available only in Japanese.)
|Information Colletction and Analysis Based on Open Source Intelligence (OSINT) regarding Cyber-Attack Actions
Abstract | Full text (PDF:3.57MB) (Full text is available only in Japanese.)
|A survey of recent discussions regarding the lean-against-the-wind policy
Abstract | Full text (PDF:631KB) (Full text is available only in Japanese.)
|A Study on Concentration Risk in Credit Portfolios: Toward More Sophisticated Risk Management
Abstract | Full text (PDF:1.81MB) (Full text is available only in Japanese. Data are also available only in Japanese.)
|Trading and Ordering Patterns of Market Participants in High Frequency Trading Environment -Empirical Study in the Japanese Stock Market-
Taiga Saito, Takanori Adachi, Teruo Nakatsuma, Akihiko Takahashi, Hiroshi Tsuda and Naoyuki Yoshino
Abstract | Full text (PDF:503KB)
"Study on Protection of Financial Services Users in view of International Developments: International Comparison of Cryptocurrency Regulation and Possibility of Issuance of Digital Currency by Central Banks"
Ryoji Kitami, Special Research Fellow, Financial Research Center (FSA Institute)
Yutaka Shuto, Special Research Fellow, Financial Research Center (FSA Institute)
2017 was a year where much attention was given to cryptocurrency (or virtual currency). Looking at the price developments of Bitcoin, a major cryptocurrency, its value trended upward until mid-December in 2017, but dropped to about half its peak and is recently being traded at that level. In the meantime, regarding the use of its core technology, the blockchain, pilot tests for payment and settlement services using blockchain technology have been realized and, from the summer onwards, securities authorities have strengthened regulation of securities laws given active developments in initial coin offerings (ICO) around the world (Chapter 1).
We examine closely the overall regulatory developments in cryptocurrency in chapter 2, and regulation of ICO in chapter 3. In both cases, there are two trends, namely countries that have moved to completely prohibit cryptocurrency and those that have aimed to benefit from cryptocurrency by controlling it through regulation.
The possibility of the issuance of bank digital currency and central bank digital currency, as well as digital currency issued against deposited funds, is discussed in chapter 4, explaining the features, benefits and challenges for each. Issues discussed for benefits and challenges include (a) enhancement of user convenience, (b) possible implications on monetary policy, (c) possible effects on financial system stability, and (d) costs incurred for maintaining systems for central banks accounts. Bank digital currency and central bank digital currency, as well as the direction of economic and social development, are likely to depend greatly on the possibility of technological development.
Keywords: Blockchain; money laundering regulation; bank and central bank digital currency.
"Study on Early Detection of Inappropriate Accounting to Address Recent Changes in the Economic Environment"
Mingzi Song, Special Research Fellow, Financial Research Center (FSA Institute)
This study is broadly structured from two parts. One is a review of previous research on early detection of inappropriate accounting and the other is a proposal on development of a model framework for early detection of inappropriate accounting based on the analysis of previous research.
In reviewing previous research, studies at home and abroad on early detection of inappropriate accounting are examined taking into account changes in the recent economic environment. Among various types of accounting misconduct, the review focuses on false disclosure statements, and analysis is made on previous research regarding prediction of inappropriate accounting, using corporate financial data and corporate governance data. In conducting analysis, previous research that is being referred to by many literatures is selected and examined. As major studies abroad on prediction of inappropriate accounting using qualitative data from corporate financial data, the outlines of models for M-Score by Beneish (1999a) and that for F-Score by Dechow et al. (2011) are summarized. As for studies based on Japanese firm-level data, models prepared by Song et al. (2016) are summarized. Regarding previous research abroad on prediction of inappropriate accounting based on corporate governance information, reviews are made for several studies for which analysis can be made using corporate governance information in Japan. Further, regarding the relationship between corporate governance information and inappropriate accounting, besides a review of previous research, empirical analysis is conducted for corporate governance information, including information on governance, board members, affiliate companies, and major shareholders. The result of the analysis shows some of the corporate governance indicators that are useful for predicting inappropriate accounting.
A proposal concerning a model framework for early detection of inappropriate accounting is made upon examining various quantitative data and corporate governance information that are effective in predicting inappropriate accounting from previous research. The study proposes to adopt some of the corporate governance indicators, which have been found effective, to the model framework.
Keywords: Inappropriate accounting; Prediction model; Corporate governance.
Shogo Isobe, Research Fellow, Financial Research Center (FSA Institute)
In the minimum capital requirements applied to banks, market risk is a key component of risk-weighted assets along with credit risk and operational risk. In measuring market risk, banks have two approaches: (i) the standardised approach using predetermined calculation methods, and (ii) the internal models approach where banks use their own internal risk management models. The Basel Committee on Banking Supervision (BCBS) has been developing the framework for measuring market risk ever since it agreed on the introduction of capital charges for market risk in 1996.
Banks subject to the current market risk framework vary from country to country and by region. In the United States, the market risk framework is applied to banks with substantial volumes of trading activity, and the banks are required to use the internal models approach for general market risk. In the EU, on the other hand, the scope of banks subject to the market risk framework is broader and the use of the internal models approach is not mandatory.
Given that the current framework for market risk does not fully address the lessons of the global financial crisis, the BCBS has agreed to a fundamental review of the trading book (FRTB) in January 2016. In the implementation of the FRTB, while monitoring and analyzing the impact, it is important to address remaining challenges of the FRTB and to have effective international cooperation. Further, it would be useful to make available in more detail the theoretical background of the FRTB framework and various methodologies, in order to enhance understanding by a wide range of interested parties, and also to assess the framework for market risk in the future.
Keywords: Minimum capital requirements; market risk; FRTB
"Information Collection and Analysis Based on Open Source Intelligence (OSINT) regarding Cyber-Attack Actions"
Takahito Hanada, Research Fellow, Financial Research Center (FSA Institute)
Threats of cyber attacks against institutions, including financial institutions and government agencies, are heightening and means of attack are diversifying. In order to counter the changing threats of cyber attacks, it is important that financial institutions and government agencies themselves collect and analyze information about cyber attacks, and use this to review their institutions’ cyber security frameworks (self-help) and to share information with other institutions (mutual assistance, public help).
The author, as research fellow of the FSA from 2015, grasps threats of cyber attacks in the financial industry and circulates information to FSA staff, by collecting and analyzing information using open source intelligence (OSINT). This paper explains the knowledge and experiences gained thorough his role, including specific and effective means of information collection and analysis regarding cyber-attack threats, and measures to distribute effectively information throughout an institution. In particular, details are provided with specific examples regarding types of information sources that should be collected, ways to determine useful information sources, and points to be noted in analyzing information collected. In the closing, the author discusses his views on how Japanese financial institutions should deal with threats of cyber attacks.
Keywords: Cyber attack; cyber sercurity; OSINT
Takeki Sunakawa, Special Research Fellow, Financial Research Center (FSA Institute)
After the financial crisis, policymakers in each country have recognized that the price stability, which has been the main purpose of monetary policy, is not sufficient for the financial stability, and fragility in the financial system may translate into price instability through a negative feedback amplifying shocks to the economy. Under such circumstances, policymakers are facing a tradeoff between financial vulnerability in low interest environment and drops in inflation and output by raising the nominal interest rate via the risk-taking channel of monetary policy. In this note, we will survey recent discussions of the lean-against-the-wind policy considering the financial vulnerability. We believe that this provides a useful reference to financial supervisory authorities which conduct macroprudential policies.
Keywords: Lean-against-the-wind policy; Risk-taking chanel of monetary policy; Macroprudence
Yukio Muromachi, Special Research Fellow, Financial Research Center (FSA Institute)
''A Study on Concentration Risk in Credit Portfolios: Toward More Sophisticated Risk Management''
Recently, the use of the Herfindahl-Hirschman Index (HHI) is discussed positively to evaluate concentration risk in financial institutions. Amidst this movement, we discuss concentration risk inherent in credit portfolios of financial institutions, and point out some problems with the use of HHI. In this paper, the optimality of a portfolio is considered from the viewpoint of the risk contribution, and the necessary conditions are derived for optimality. The results can be applied to any portfolios, not only the entire portfolio of a financial institution but also sub-portfolios such as domestic stocks, bonds, and other asset classes. Therefore, the results have implications for practical problems which Japanese financial institutions are facing, for example, how to construct appropriate asset allocations between asset classes such as (i) lending, (ii) government bonds, (iii) domestic securities, and (iv) foreign securities. Additionally, we propose alternative indicators for concentration risk, and check their merits by using simple models. Our numerical results suggest that the proposed indicators do not always work well, and also show that HHI does not either.
Keywords: Herfindahl-Hirschman Index (HHI); concentration risk; credit portfolios; optimality of a portfolio; risk contribution
''Trading and Ordering Patterns of Market Participants in High Frequency Trading Environment -Empirical Study in the Japanese Stock Market-''
Taiga Saito, Research Fellow, Financial Research Center (FSA Institute)
Takanori Adachi, Visiting Professor, BKC Research Organization of Social Sciences, Ritsumeikan University
Teruo Nakatsuma, Professor, Department of Economics, Keio University
Akihiko Takahashi, Professor, Graduate School of Economics, The University of Tokyo
Hiroshi Tsuda, Professor, Department of Mathematical Sciences, Doshisha University
Naoyuki Yoshino, Chief Advisor, Financial Research Center (FSA Institute), Professor Emeritus at Keio University, and Dean of the Asian Development Bank Institute (ADBI)
In this study, we investigate ordering patterns of different types of market participants in Tokyo Stock Exchange (TSE) by examining order records of the listed stocks. Firstly, we categorize the virtual servers in the trading system of TSE, each of which is linked to a single trading participant, by the ratio of cancellation and execution in the order placement as well as the number of executions at the opening of the afternoon session. Then, we analyze ordering patterns of the servers in the categories in short intervals for the top 10 highest trading volume stocks. By classifying the intervals into four cases by returns, we observe how different types of market participants submit or execute orders in the market situations. Moreover, we investigate the shares of the executed volumes for the different types of servers in the swings and roundabouts of the Nikkei 225 index, which were observed in July, August, and September in 2015. The main findings of this study are as follows: Server type A, which supposedly includes non-market making proprietary traders with high-speed algorithmic strategies, executes and places orders along with the direction of the market. The shares of the execution and order volumes along with the market direction increase when the stock price moves sharply. Server type B, which presumably includes servers employing a market making strategy with high cancellation and low execution ratio, shifts its market making price ranges in the rapid price movements. We observe that passive servers in Server type B have a large share and buy at low levels in the price falls. Also, Server type B, as well as Server type A, makes profit in the price falling days and particularly, the aggressive servers in the server type make most of the profit. Server type C, which is assumed to include servers receiving orders from small investors, constantly has a large share of execution and order volume.
Keywords: High frequency trading, Trading and ordering patterns, Japanese stock market