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3 August 1999
Financial Supervisory Agency
Publication of the "*1999 Program Year Basic Guidelines and Basic Plan for Inspections" |
Financial inspections are taking on new importance as
the need for fair and transparent financial administration rises. We have therefore
decided to publish the "1999 Program Year Basic Guidelines and Basic Plan for
Inspections" in the interest of improving the transparency of the administrative work
associated with financial inspection.
The "1998 Program Year Basic Guidelines and Basic Plan for Inspections" was published in Financial Inspection This Year (PY 1998) (June 22, 1999).
| * | 1999 Program Year refers to the period from July 1, 1999, through June 30, 2000. |
| For further information contact:
Mr. Kurosawa (03-3506-6060) Financial Inspection Coordination Division |
Tentative Translation
1999 Program Year Basic Guidelines and Basic Plan
for Inspections
| I. | 1999 Program Year
Basic Guidelines for Inspections |
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| 1. | Basic concepts |
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| (1) | 1999 Program Year marks the second year
since the inception of the Financial Supervisory Agency, and is the year in which we will
solidify our base of operations so as to achieve more efficient and effective financial
inspections. Since its establishment, the Agency has endeavored to contribute to the
protection of individual depositors and the preservation of the integrity of the credit
system by pushing forward with the transition to highly-transparent government
administration, based on rigorous adherence to the principle of self-responsibility and to
clear rules anchored in market disciplines. In order to discharge our responsibilities in
this program year, we will be hiring more inspectors, employing a division-based
organization headed by Chief Financial Inspectors, establishing the posts of Special
Inspector and Expert Inspector, and enhancing the Financial Inspection Manuals. These
developments represent significant enhancements to every aspect of the Agency's inspection
regime, and our focus this program year will be on conducting expert, probing inspections
while continuing to enhance our internal control systems.
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| (2) | The implementation of inspections will
take into full account the following changes to financial administration. Less than two years remain to March 2001, at which time the special provisions protecting all deposits in full will expire. It is therefore vital that we address the task of improving the stability and reliability of the Japanese financial system. During the preceding program year, the Agency conducted concentrated, intensive inspections of the assets of the major banks, regional banks, and members of the Second Association of Regional Banks, in accordance with the "Comprehensive Plan for Financial Revitalization (Version 2)." This program year, we need to take advantage of the greater number of inspectors to increase the frequency of inspection and to gradually begin to conduct inspections for other sectors (insurance companies, shinkin banks) that we were not necessarily able to adequately cover last year. Last December, the Financial System Reform Law took effect. The purpose of the law is to solidify the position of Japanese financial markets as international financial markets, and to this end efforts are now underway to globalize Japanese finance and bring it into conformance with international standards for accounting and disclosure. Inspections must be conducted appropriately in light of these trends. This program year will witness the change to the year "2000." The agency must therefore conduct dynamic, priority "Y2K compliance" inspections to ensure that all preparations have been completed. |
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| 2. | Priority items in
inspections |
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| (1) | Financial institution inspection During the preceding program year, the Agency, working in cooperation with the Local Finance Bureaus and Bank of Japan, conducted concentrated, intensive inspections of major banks, regional banks, and members of the Second Association of Regional Banks. These inspections focused on institutions' self-assessments and their resulting write-offs and reserves and were conducted as an emergency measure. In light of the significant changes that have occurred over the last few years in the environment in which financial institutions find themselves; the tremendous degrees of sophistication that have been attained in financial transactions; the internationalization of finance; and the increase in the number of incidents involving financial institutions, the focus of inspections this program year will be on attaining an accurate picture of the soundness of institutions' asset positions, their compliance to applicable rules and regulations, and their risk management systems. These inspections will be based on the Financial Inspection Manuals, and will assume rigorous adherence on the part of financial institutions to the principle of self-responsibility. |
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| (2) | Integrated inspection of the
groups/conglomerates led by financial institutions etc. The agency will inspect the trust banking and securities subsidiaries of financial institutions and the like for asset-position soundness, compliance, and risk management. Every effort will be made to conduct effective inspections (e.g., integrating the inspection of the parent financial institution and the financial subsidiaries in the group). This will be done in light of the need to provide supervision of financial institutions on a consolidated basis. The foreign branches and foreign subsidiaries of Japanese financial institutions and the like will also be inspected in conjunction with inspections of head offices and parent companies. These inspections will place priority on compliance and risk management, with particular attention being given to trading that would have an impact on the soundness of the head office's assets. |
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| (3) | Inspections of insurance companies A self-assessment system was introduced in March 1998 for insurance companies as it had been for banks, with insurance companies required to make appropriate write-offs and reserve provisions based on their self-assessments. The "prompt corrective action system" introduced in April 1999 also require insurance companies to take appropriate measures at appropriate times based on their solvency margins. In light of these institutional frameworks, we will conduct, one by one, concentrated inspections of asset positions this program year, primarily at life insurance companies. |
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| (4) | Inspections of securities companies Financial system reforms have significantly deregulated the business of securities companies, which has made it more important for inspections to forn an accurate picture of asset positions. Since April 1999, securities companies have been required to segregate securities entrusted to them by their clients from the assets of the securities company themselves. The priority in inspections will therefore be on rigorously measuring the asset positions of securities companies, checking the capital adeguacy ratios that serve as the basis for prompt corrective action system, and confirming that client and corporate assets are segregated. |
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| (5) | Inspections of foreign financial
institutions etc. As the Big Bang moves into full implementation, a greater number of foreign financial institutions are setting up operations in Japan and developing partnerships with Japanese financial institutions. It is therefore has become more important than ever that inspections of foreign financial institutions in Japan place priority on compliance and risk management. We will endeavor to conduct effective inspections of foreign financial institutions, integrating bank branches, securities branches, trust banking subsidiaries, investment advisory services, and the like as groups as warranted by activities in Japanese markets. |
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| (6) | Inspections of internal models Market risk regulations were introduced into Japan in January 1998 pursuant the agreement of the Basle Committee. We will continue to conduct inspections of market-related risks, as was done last year, while also emphasizing checks of the appropriateness of the risk measurement models employed by institutions in the measurement of market risks (internal models). |
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| (7) | Y2K inspections There is little time left to prepare for the Y2K Inspections will therefore place priority on confirming that system compliance programs have been completed and on verifying the content of the contingency plans created by institutions. |
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| 3. | Dynamic inspection |
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| (1) | Financial institutions remain in severe
straits, and it will be important to respond in an accurate and timely manner should there
by a sharp deterioration or other crisis in the asset position of a financial institution.
Because of this, the Agency will endeavor to respond in a dynamic and flexible manner in
the formulation of inspection plans and the organization of inspection teams. |
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| (2) | In the past, the agency organized
different inspection teams for each individual inspection, and individual inspectors were
required to inspect different sectors and areas. With the increase in the number of
inspectors this year and the adoption of divisional inspection organizations, we will
endeavor to perform more expert, probing inspections that take into account the unique
features of individual sectors. |
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| (3) | The increase in the number of
inspectors must be accompanied by the establishment of effective inspection methods and
improvements in the quality of inspections. To this end, we will continue to endeavor to
enhance and strengthen the following areas: 1. The efficiency and uniformity of inspections (by using Financial Inspection Manuals and formulating inspection checklists). 2. The overall quality of inspections (by enhancing inspection oversight functions and organizing evaluation divisions). 3. Our absorption of the inspection expertise of major foreign financial supervisory agencies and our ability to utilize private-sector expertise in inspections (by expanding personnel exchange programs with foreign agencies and by hiring qualified private-sector experts).
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| II. | Basic Plan for
Inspections |
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| 1. | Number of financial
institutions scheduled for inspection Banks: 75 Shinkin banks: 220 Total: 295 |
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| 2. | Number of insurance
companies scheduled for inspections Insurance companies: 20 |
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| 3. | Number of securities
companies, etc. scheduled for inspection Securities companies: 90 Securities investment trust management companies: 5 Investment advisory services: 35 Total: 130 |
Please note that these inspection numbers represent
initial plans for the year. They might be changed if necessary to carry out timely
inspections, taking into account the severity of the business environment in which
financial institutions find themselves.