19 May 2009

FSA Japan Sato - Too hasty measures make crises management more difficult

Sato warned that if the policies lean too much toward crisis management, it could cause moral hazard or distort the system in the longer run. Too hasty measures could exacerbate the current situation and make crisis management even more difficult.

"Japan’s financial system itself is still relatively sound compared with those in the United States and Europe", FSA Japan Commissioner Sato said at a conference at the Columbia Business School.

 

Commenting on recent political decisions under way Sato warned that if the policies lean too much toward crisis management, it could cause moral hazard in the marketplace or distort the system in the longer run. Also, too hasty implementation of medium-term measures could rather exacerbate the current situation and make crisis management even more difficult.

 

The fact that dysfunction of the financial system has caused the current economic mess does not deny the fundamental roles the financial sector should play in supporting the real economy, Sato reminded.

 

The relative soundness of Japan’s financial sector stems from the fact that its losses incurred from complex securitized products are relatively small, and the exposure of Japan’s financial sector to opaque, toxic assets is also significantly smaller, Sato explained.

 

Reasons for this result partly form the fact that Japan’s financial firms were not strongly innovation-oriented and implemented the Basel II agreements at an early stage. Also they were giving priorities to improving their financial soundness rather than enhancing their profitability in the recent several years, Sato said. “When the so-called “originate-to-distribute” business model became widespread, it happened that many of Japan’s financial firms were at the final stage of resolving the non-performing loan problems”, he underlined.

 

However, the risks to Japan’s financial system result from rising credit costs caused by the weakening of the real economy, and valuation losses and impairment on shares held by banks, Sato said.

 

Against this background, Sato underlined that the FSA does not intend to further tighten the restrictions on banks’ shareholdings by outright regulation. However, the FSA is working on medium-term reforms to “re-design” the regulatory framework in order to prevent the recurrence of a similar kind of crises in the future.

 

Recent developments in Japan include:

Ø       The FSA strengthened the disclosure requirements for financial firms with respect to their exposure to the securitization market. It also made sure that the underlying assets of securitized products were traceable along the chains of origination and distribution;

Ø       A bill to introduce a legal framework for regulating credit rating agencies is under way, which is consistent with the developments in the United States and Europe;

Ø       Japan FSA has established the colleges for Japan’s three megabanks and Nomura. It is also member of the colleges for several foreign firms with significant influence over Japan’s financial markets.

 

Full speech

 

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