Financial Supervision Our Experience Hideichiro HAMANAKA July 2016

Financial Supervision Our Experience Hideichiro HAMANAKA July 2016

Stock and Land Prices Peak (1989. 12. 29) Nikkei 225 : JPY 40 000, 00 Peak (1991. 03) Nikkei 225 35 000, 00 Land Index : Year 2000 =100 150, 0 Urban Land Price Index Jusen Problem (1996. 04) Fall of Berlin Wall (1989. 11) 30 000, 00 130, 0 Yamaichi, Sanyo, HTB Failure (1997. 11) Black Monday (1987. 10) 25 000, 00 140, 0 120, 0 LTCB, NCB Failure (1998. 10) 20 000, 00 110, 0 Second injection (1999. 03) Gulf War (1990. 08) 100, 0 90, 0 15 000, 00 FSA (1998. 06) 80, 0 10 000, 00 Plaza Accord (1985. 09) 70, 0 Iraq War (2003. 03) 5 000, 00 Lehman Shock (2008. 09) 60, 00 50, 0 1982 1985 1988 1991 1994 Phase I 1997 2000 Phase II 2003 Phase III 2006 2009

Disposal of non-Performing Loans Non-Performing Loans in Economic term No Political Considerations Failure of Banks, Securities Houses, Insurance Companies Severe Inspection Weaker ones Fail First Isolated failure/Chain of Failures Capital Injection Enhanced Regulation Establishment of FSA(Financial Supervisory/Services Agency) in View of creating Japanese Financial Market Free, Fair & Global

Inspection&Disposal of NPL 1998 -2000 First across the board Inspection followed by Capital Injection Disposal of NPL Mega-Bank Mergers 2000 Second Round Under Koizumi Today Normal Inspection 1927 case Gov’t asked banks strengthen their capital bases decreased the number of banks(over 1000 to 200)

Deregulation Japanese Financial Market became matured (Japanese Individual financial assets over 3 times of current GDP) Banks allowed to sell securities(debt) and insurance policy , allowed to have securities and insurance subsidiaries Securities Houses allowed to have banks and insurance companies Insurance Company allowed to have banks and securities houses (deregulation vs regulation) Single purpose supervision is limited Comprehensive Supervision necessary

Single Purpose Supervisor Banks : Bank Supervisor or Central Bank Securities : Securities Supervisor Insurance : Insurance Supervisor When the failure is isolated and confined within each industry, Single purpose supervisor is effective (1965 Yamaichi) When the failure spreads across indusries, product, market deregulated. Comprehensive Supervision is required (1997 -98 case)

FSA Financial Supervisory Agency Est. 1998 Started with 400 officials in headquarter Ex-post severe inspection Integrated Supervision of all Financial Services FSA Financial Services Agency Est. 2000 Power to propose legislation added Very Active Member of Basle Committee Started supervise Japan Post Bank group Bank of Japan Inspection Limited Bo. J account (vs Universal Supervision） Very Cooperative with FSA

Foreign Cases Bank of England & UK FSA Historically Bo. E is private company Traditionally Bo. E supervise & Inspect 1998 UK FSA Bo. E † Self-Governing Associations 2013 UK PRA & FCA (Prudential Regulation and Financial Conduct Authority) USA Federal Reserve & SEC, FDIC, CCC Most Complicated and Fragmented Supervision FED : mostly large banks SEC : securities industry supervision State Supervision : State Banks and Insurance Companies

German Case(Euro zone countries) ECB supervision : large banks Member Gov’t supervision : smaller banks Originally ECB responsible for Monetary Policy alone Member Gov’t(Bundesbank) responsible for supervision After European Financial Crisis Germany was against creating large EU-wide supervisory agency Compromise : ECB to be responsible for large banks

Dillemma ・Enhanced Supervision vs Small Gov’t Germany’s case UK proposal FSA under Bo. E Co-operation of Govt and Bo. J dates back to 1927 -, 1947 and 1998 - ・Supply of Money to near-failure Banks vs Supervision by Central Bank Bo. J rejected law enforcement function since 1927 (Central Bank Independence) UK PRA dictinct from rest of Bo. E Most Successful and Stable Division of Labor in JAPAN

Way Forward Build reservoir of experts for integrated supervision Recruit outsiders : lawyers, accountants, tax experts, financial consultants, former bank clerks, etc Start severe inspection and disposal of non-performing loans Capital Injection to economically viable ones Send clear messages to domestic and international market participants (and international peers) Create institutional memory of enhanced supervision Form sound triangular relation : enhanced supervision and monetary policy and fiscal policy Engage with international organizations and know supervisory peers do Good Luck !