July 28, 2000
Financial Services Agency

Amid growing calls for fair and transparent financial administration, financial inspections are taking on new importance. We are therefore publishing the "Program Year 2000* Basic Guidelines and Basic Plan for Inspections" in the interest of improving the transparency of the administrative work associated with financial inspection.

* "Program Year 2000" refers to the period from July 1, 2000 through June 30, 2001.

The Financial Services Agency (FSA) was established on July 1, with its mission to make the financial system reliable and vigorous, and to create fair and efficient financial markets. By pursuing these missions, it also aims to contribute to the improvement of the national welfare and the economy.

The FSA is required to persist in its efforts to enhance the convenience and protection of market participants including individual depositors, and to maintain the integrity of the credit system by pushing forward with fair and highly transparent financial administration based on clear rules anchored on market disciplines and the principle of self-responsibility. In particular, in light of measures for prompt corrective action and the adoption of Financial Inspection Manuals, the quality of financial inspections and the transparency of related procedures must be increased even more than before to achieve fair and highly transparent inspections.

The implementation of efficient inspections is necessary to build a more stable financial system considering the fact that the emergency measure to protect all bank deposits will be terminated, and the so-called "pay-off", limited protection of bank deposits, will be reintroduced in April 2002. At the same time, it is essential to carry out highly effective inspections that accurately respond to rapid changes in financial technology and information and communication technology, and the adoption of mark-to-market accounting for various financial products.

In view of these issues, inspections will be carried out rigorously in the Program Year 2000 (July 1, 2000 to June 30, 2001) while placing the highest priority on the following items.

1. Implementing Fair and Highly Transparent Inspections

(1) Developing and enhancing inspection manuals

Following the creation of Financial Inspection Manuals and Insurance Inspection Manuals, the FSA will endeavor to increase the transparency of inspections by developing and enhancing inspection manuals, including the establishment of Inspection Manuals for Securities Firms, in a manner that responds to changes in the environment for financial institutions, etc.

(2) Full implementation of comment submission procedures

To enhance the fairness of inspections, every effort has to be made during on-site inspections to allow for substantial discussion between inspectors and financial institutions. As a means to enhance such discussions, the FSA will fully implement procedures to enable financial institutions to submit their views when differences of opinion arise with inspectors after exit meeting.

(3) Use of Inspection Superintendent

To increase the quality of inspections including the accurate application of Inspection Manuals, the FSA will endeavor to strengthen managing inspectors by assigning specialist Inspection Superintendents to train inspectors and oversee the progress of inspections.

(4) Strengthening personnel development

The FSA will strengthen its training programs for inspectors, which includes on-the-job training for less experienced inspectors. In addition, the FSA will endeavor to appoint private-sector experts and promote staff exchanges with foreign supervisory authorities to be able to respond promptly and accurately to the development of financial technology and information and communications technology and the globalization of finance.

(1) Implementing prioritized inspections

Based on inspection results and on information gathered through off-site monitoring, etc., the FSA will seek to implement efficient and flexible inspections of varying frequency and scope.

(2) Integrated inspection of financial institution groups/conglomerates

To accurately understand consolidated asset positions and transaction relationships within financial institution groups, the FSA will take advantage of its broad supervisory authority over different financial sectors to attain an integrated understanding of financial institutions' headquarters, their subsidiaries, and their foreign operations.

(3) Strengthening and upgrading the Inspection Unit system

In addition to upgrading its inspection regime by increasing the number of inspectors and inspection units, the FSA will endeavor to increase the continuity of each unit's work in order to carry out highly specialized inspections in conformity with the differing characteristics of financial sectors.

Furthermore, to accurately assess the nature of risk management in such specialized areas as market risk and computer system risk, when necessary, the FSA will organize specialized teams to undertake inspections with a further depth.

(4) Use of internal and external auditing

The FSA will rigorously evaluate the effectiveness of financial institutions' internal auditing to encourage effective internal auditing, and will make use of internal and external auditing to efficiently understand true natures of financial institutions.

(5) Implementing highly effective inspections

The FSA has now become responsible for financial system planning, inspection, supervision, and surveillance. Based on the FSA's broad authority, close cooperation between the inspection department and such relevant bodies as the supervisory department, which enforces supervisory measures, and the Securities and Exchange Surveillance Commission, will be maintained. Such cooperation is expected to contribute to the appropriate and timely correction of problems which are accurately identified and pointed out to financial institutions through inspections.

(1) Intensive inspections of credit cooperatives

Responsibility for the inspection and supervision of credit cooperatives was transferred from prefectural governments to the FSA in April 2000. In order to promptly understand the situation of asset positions, etc., Local Finance Bureaus will undertake intensive inspections of credit cooperatives with the goal of completing on-site inspections by March 31, 2001.

Furthermore, in accordance with the progress of Local Finance Bureaus' inspections, the FSA will endeavor to facilitate the inspection process, by utilizing the inspection support unit that was newly established within the Inspection Department of the FSA headquarters.

(2) Inspections of other deposit-taking financial institutions

The inspection of financial institutions will be based on Financial Inspection Manuals and will seek to obtain an accurate understanding of their risk management practices and compliance to applicable rules and regulations.

Given that the inspection of major banks, regional banks, and second regional banks will enter the second round since the founding of the former Financial Supervisory Agency, priority will be placed on assessing improvements made with respect to matters identified in previous inspections.

In the case of shinkin banks, the first round of inspections to attain an understanding of asset positions, etc., has been largely completed. On-site inspections will be carried out for the remaining shinkin banks, with the goal of completing such inspections by March 31, 2001.

With regard to foreign financial institutions, the frequency and intensity of inspections will be increased in line with the expansion of the responsible inspection units.

(3) Inspections of insurance companies

Measures for prompt corrective actions were adopted for insurance companies in April 1999. Therefore, in the previous program year, the FSA undertook intensive inspections, primarily of life insurance companies, to attain an understanding of insurance companies' asset positions, etc.

In the current program year, the FSA will be guided by newly developed Insurance Inspection Manuals and will endeavor to attain an accurate understanding regarding risk management practices and compliance to applicable rules and regulations, such as in relation to the management of insurance policy sales.

(4) Inspections of securities firms, etc.

As in the previous program year, priority in the inspection of securities firms will be placed on understanding the quality of asset positions, on the accuracy of capital adequacy ratios that serve as the basis for prompt corrective action measures, and on confirming that client and corporate assets are properly segregated. In this process, to attain efficient and highly effective inspections, the FSA will carry out simultaneous inspections as necessary in cooperation with the Securities and Exchange Surveillance Commission, which undertakes inspections aiming to preserve the fairness of securities transactions.

Note: These inspection numbers represent initial plans for the year. They may be changed as necessary to carry out accurate and timely inspections in view of the severity of the business environment for financial institutions.