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It is not our intention to stifle financial innovation by over-regulation, Takafumi Sato, FSA Commissioner in
The unfolding financial turmoil is a reminder that supervisory authorities are never able to escape the fate of pursuing two possibly conflicting objectives, he said, arising from the day-to-day supervisory operations and the envision of a direction for financial regulation over the longer term.
Reflecting on the causes of the crises there is an emerging consensus that the OTD model and misaligned incentives along the securitization chain caused moral hazard among the parties involved in the process, he said.
Furthermore, CRAs failed to keep pace with the increasing complexities in structured products. The shortcomings typically included weaknesses in rating models and methodologies, and inadequate due diligence regarding the quality of underlying assets, Sato added.
Sato sees that Japan could emerge as a centre of global financial re-regulation, exemplified by strengthened risk management and disclosure, due diligence in the securitization process, and strengthened supervision over CRAs.
“It is my sense that implementing the FSF recommendations could eventually lead to a world of finance more firmly based on value-adding activities related with the real economy”, he said.