1. Financial Supervision Our Experience
Hideichiro HAMANAKA
July 2016

2. Stock and Land Prices Phase I Phase II Phase III Peak (1989.12.29)
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Nikkei 225 :JPY
Land Index : Year2000 =100
Nikkei 225
Urban Land Price Index
Jusen Problem
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Fall of Berlin Wall
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Yamaichi, Sanyo, HTB Failure
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Black Monday
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LTCB, NCB Failure
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Second injection
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Gulf War
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FSA
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Plaza Accord
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Iraq War
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Lehman Shock
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Phase I
Phase II
Phase III

3. 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

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

5. 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

6. 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 deregulatedComprehensive Supervision is required ( case)

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

8. Foreign Cases Bank of England & UK FSA Historically BoE is private company Traditionally BoE supervise & Inspect UK FSA BoE † Self-Governing Associations 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

9. 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

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

11. 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 !