July 30, 2002
Financial Services Agency

Announcement of the ''Program Year 2002 Basic Guidelines and Basic Plan for Inspections''

Amid growing calls for fair and transparent financial administration together with clear rules, based on the market discipline and the principle of self-responsibility, we are announcing the ''Program Year 2002* Basic Guidelines and Basic Plan for Inspections'' in the interest of improving transparency of the administrative work associated with financial inspection.

* ''Program year 2002'' refers to the period from July 1, 2002 through June 30, 2003.

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(Provisional translation)

''Program Year 2002 Basic Guidelines and Basic Plan for Inspections''

I. Basic Guidelines for Inspections

Since its establishment, the Financial Services Agency (FSA) has made continuous efforts to achieve fair and transparent financial administration together with clear rules based on the market discipline and the principle of self-responsibility, in order to keep the stability of financial system, to protect depositors and investors, and to ensure smooth financing.

In the program year 2001(July 1, 2001 to June 30, 2002), on the basis of a series of programs such as the Advanced Reform Program, the FSA had been carrying out exact and accurate inspections, with the special inspections mainly focusing on borrowers whose market reputations were remarkably changing, in addition to highly strengthening of the normal inspection to major banks.

Inspections will be carried out in the Program Year 2002(July 1, 2002 to June 30, 2003) with particular emphasis on the following three items, in view of the current financial environment.

First, specific measures are taken to build a more robust financial system. More efficient and effective inspections to the major banking groups are indispensable in order to keep further stability of financial system.

Second, ensuring the implementation of inspections properly appreciating the actual business conditions of small and medium sized enterprises (SMEs) is essential. The proper inspections need to be ensured by enhancing accurate understanding of business conditions of SMEs.

Third, the appropriate response is needed for the current challenges surrounding financial administration. It is necessary to respond appropriately to the challenges related to the environmental changes, such as emergence of the systemic risk caused by the integration of major financial institutions or the partial removal of the blanket deposits insurance this April.

While dealing with these challenges, the FSA will simultaneously conduct more efficient and effective inspections, corresponding to the each character of various types of financial institutions, with further efforts to strengthen its inspection functions through various measures including enhancement of Inspection Manuals and training of human resources.

In view of the above, the following policies will steadily be implemented in the Program Year 2002.

1. Responding to building a more robust financial system

(1)	Introduction of year-round inspections and inspections by specialized sections corresponding to each major banking group Inspection units of the Inspection Bureau are to be reorganized corresponding to each major banking group in order to enhance the effectiveness and efficiency of inspections by establishing a de facto resident inspector system. In this system, inspections of each group will be assigned to each unit, thus each unit will be able to specialize in inspections of financial institutions within a group throughout a year on a continuous basis, while examining rigorously the effectiveness of management functions including internal audit functions.
(2)	Organizing the special team for risk management In order to check the adequacy and strength of specific areas such as market risk, and systemic risk, special teams consisting of experts with ample experiences in the private sector are to conduct inspections on specified areas across the banking groups.
(3)	Timely recognition of the borrower's classification The FSA will conduct the real time check to examine accuracy of the borrower's classification bearing in mind that it is appropriate to ensure an adequate classification of borrowers reflecting their business conditions and market signals against them on timely basis.

2. Responding to ensuring the implementation of inspections appreciating accurately the actual business conditions of enterprises

(1)	Ensuring the implementation of inspections appreciating accurately the actual business conditions of enterprises The FSA will make an effort to enhance accuracy of the classification of borrowers reflecting actual business conditions of SMEs, through the inspections based on the ''Supplement to the Financial Inspection Manuals: Treatment of Classifications regarding Credits to Small and Medium Sized Enterprises''.
(2)	Enhancement of training for inspectors The FSA will enhance its training programs, such means as implementing special training program of trial run of asset assessment, in order to prevent automatic and uniform application of the Inspection Manual.
(3)	Enhancing the monitoring system for inspection For the purpose of ensuring the appropriate inspection, the FSA will begin the ''off-site monitoring for inspection'' in which the comment of management of inspected financial institutions could be sent directly to the main office of inspectors by such measures as e-mail, letter and fax, in addition to the ''on-site monitoring for inspection'' where supervisors of inspectors come to hear their opinions directly during the inspection period. As for ''opinion submission system'', where inspected financial institutions can submit their opinions when they differ from inspectors' views, the FSA will continue to make efforts to make the system well-known and to improve further fair and transparent financial inspections.

3. Appropriate responses for current challenges

(1)	Strict examination of systemic risk In view of importance of computer system in business management of financial institutions, management function of computer system risk will continue to be examined strictly. Simultaneously, the FSA will issue the ''Supplement to the Financial Inspection Manuals'' to respond more appropriately to emergence of the systemic risk caused by integration of financial institutions.
(2)	Continuing to implement efficient and effective inspections, bearing in mind the partial removal of the blanket deposits insurance Bearing in mind the partial removal of the blanket deposit insurance, the FSA will continuously conduct strict examination of risk management function of financial institutions in order to make sure of stabilizing financial system, and inspections will be implemented in an efficient and effective manner based on actual business conditions of financial institutions. In cooperation with Deposit Insurance Cooperation, the FSA will closely monitor the status of establishing data system for grouping of deposits held by the same person. (Nayose)
(3)	Preparation for inspection of postal agency and government financial agencies As the diet has adopted the law that partially delegate authority to inspect the postal agency and the government financial agencies to the FSA (to be enforced in April, 2003), the FSA will make efforts to prepare the inspection function for efficient and highly effective inspections of these agencies.

4. Enhancement of the FSA's inspection functions

(1)	Establishing inspection manual for financial holding companies With business integration of financial institutions in the form of shareholding companies and the introduction of the year-round inspections and inspections by specialized sections corresponding to each major banking group, the FSA will establish an inspection manual for financial holding companies. Inspection Manuals will continue to be reviewed and prepared responding accurately to changes of the financial environment.
(2)	Further strengthening inspectors' capacities in special areas In order to respond to changes in the financial environment, such as advance of financial technology and information technology, the FSA will make efforts to recruit experts with ample experiences in the private sector and strengthen inspectors' capacities in special areas through training.
(3)	Introduction of joint inspection with local finance bureaus The joint inspection of the FSA and local finance bureaus (Inspectors of both FSA and local financial bureaus will conduct on-site inspection on the same institutions jointly) will be newly introduced to promote information sharing in the inspection site and to enhance mutually the abilities of inspections.
(4)	Cooperation with the Bank of Japan (BOJ) The FSA will continue to cooperate with the BOJ in coordinating the timing and the scope of the FSA inspection and the BOJ examination, in order to inspect in an efficient and effective manner within limited number of inspection team in the FSA.

5. Priority Issues by Financial Sectors

(1)	Deposit-taking financial institutions As for deposit-taking financial institutions, the FSA will steadily implement the policies stated above and conduct an efficient and effective inspections while examinating rigorously the effectiveness of management functions including internal audit function.
(2)	Insurance companies As regards insurance companies, the FSA will give its priorities to appreciating how the management themselves supervise and take leads and to examining whether adequate internal audit functions are established, in order to ensure sound and proper operations and to protect policyholders. The FSA will also rigorously examine the management of insurance policy sales as well as financial soundness such as the accuracy of solvency margin ratios.
(3)	Securities firms, etc. The FSA will implement inspections of securities firms, paying special attention to the adequateness of segregation between the client and the corporate assets, and the accuracy of capital adequacy ratios. On the occasion, the FSA will endeavor to implement efficient inspections through a further enhancement of its coordination with the Securities Exchange Surveillance Commission (SESC), which undertakes inspections to maintain the fairness of securities transactions. In principle, joint inspections will be carried out with the SESC. With regard to investment trust management companies and investment advisory services, the priorities of inspection will be put on compliance to fiduciary duties for clients and duty of explanation to customers, etc, following the newly established Inspection Manuals for investment trust management companies and investment advisory services.
(4)	Foreign financial institutions Following the policies from (1) to (3) stated above, the FSA will carry out effective inspections regarding foreign financial institutions (banks and securities firms, etc.) with particular emphasis on their compliance to applicable rules and regulations as well as their risk management functions, and grasp the real situations of financial groups. To this end, the FSA will continue to pursue closer cooperation with overseas supervisory authorities.
(5)	Other financial institutions The FSA will conduct inspections of other financial institutions mainly focusing on the following items: compliance of non-banking money lenders to applicable rules including rules of interest rate on loans and regulations which govern their loan collection behaviors; and situations of reserving adequate guarantee money with regard to the issuance of prepaid cards.

II. Basic Plan for Inspections

Note: (1)	These inspection numbers may be changed as necessary.
(2)	In the previous program year 2001, besides above-noted inspection numbers, the FSA conducted follow-up inspections and special inspections of 25 financial institutions and inspected 2 stock exchanges.
(3)	Figures on the ''Banks'' are the aggregated amounts of inspected banks and inspected bank holding companies. Those of ''Insurance companies'' are also the aggregated amounts of inspected insurance companies and inspected insurance holding companies.