The role of integrated supervision to maintain financial stability and economic development Takafumi Saito Supervisory Policy office Supervisory Bureau Financial Service Agency, JAPAN (JFSA) The views expressed in the presentation are the speaker’s and not necessarily the JFSA’s. The slides are prepared for the purpose of discussion at this conference only. 1 1.Basic Concept of Supervision (in Japan) 2.Integrated Supervision 3.Focus of Supervision for Large and Complex firms (Integrated Supervision) 4. Macro Prudential Supervision 5. Crisis Management 2 Basic Concept of Supervision (in Japan) Overcome deflation and build a positive economic cycle Effective financial intermediation Provide financial products/services for the benefits of customers Positive cycle Stable profit growth for financial institutions Financial institutions benefit from the growth of their customers Growth/development of customers • Maintain sustainable growth of industries/enterprises • Encourage stable asset formation by individuals Maintain safety and soundness of the financial system and financial institutions as precondition for effective financial intermediation (Source: JFSA Financial Monitoring Policy for 2014-2015) 3 Integrated Supervision • Systemically Important Banks (SIB) - Size, Interconnectedness, Substitutability, Global activity, Complexity • Higher prudential standards Internationally agreed • More intensive integrated and macro-prudential supervision How ? 4 Department of the Treasury HM Treasury SEC AMF CFTC NAIC Insurance State Regulators Bafin (former: ACAM) FSB BCBS IOSCO SESC FCA State Authorities OJK PRA FDIC Ministere des Finances BOE OCC Banks Securities Bundesministerium der Finanzen France IAIS FRB District Fed Banks German Autorite de Controle Prudentiel FSA UK （former: Commission Bancaire） Ministry of Finance US FPC Planning of Financial System Japan Bundesbank Indonesia International Forum 5 G20 Integrated Supervision : Organizational Arrangement Focus of Supervision for Large and Complex firms (Integrated Supervision) Group Governance: • It is important that - the holding company takes the lead and properly understands and controls risks facing the group, and - the management personnel takes appropriate actions to implement a risk appetite framework (a group-wide framework to discuss, understand, and evaluate the risk level which the group is willing to take based on the group management strategy). 6 Focus of Supervision for Large and Complex firms (Integrated Supervision) Stress Testing, Recovery Plan and Capital Adequacy: • Intensive discussions in order to validate G-SIBs’ stress testing methodology in the process of stress testing with common supervisory scenarios and reviewing their recovery plans.  It enables regulators to gain a deeper understanding on not only their stress testing method but their risk profile and risk management as a whole. 7 Focus of Supervision for Large and Complex firms (Integrated Supervision) Management Information Systems: •System development plans to achieve quick aggregation and reporting on a group-wide basis, which are needed for making business judgment and reporting to regulators. •The progress of “principles for effective risk data aggregation and risk reporting,” issued by the Basel Committee. 8 Focus of Supervision for Large and Complex firms (Integrated Supervision) Legal Compliance Systems: • The financial group appropriately establishes and makes a functioning legal compliance system encompassing the prevention of the abuse of dominant bargaining power, control of customer information, and management of conflicts of interest. Human Resource Management: • In view of the fact that risks facing financial groups with large and complex operations are becoming more and more complex, these financial groups are encouraged to take actions from a medium to long-term perspective to ensure that personnel, including at the management level, in charge of risk management and internal control, are fostered and retained. 9 Macro Prudential Supervision Interacting Global economy/market trends ・Safety and Soundness of the Japanese financial system ・Business and behavior of individual financial institutions JFSA will make an analysis of the following issues with a forward-looking perspective and review the risk management framework of financial institutions based on its result. 1) Impact of the global economy and market trends towards the safety and soundness of the Japanese financial system and financial institutions 2) Impact of the business and behavior of financial institutions towards the Japanese economy and markets (i.e.) ・Change in globally expanding credit market ・Change of interest rates and other asset prices in response to overcoming deflation in Japan (Source: JFSA Financial Monitoring Policy for 2014-2015) 10 Crisis Management Risk of overshooting the bottom due to negative feedback loops between: •Banks and other banks, •banks and market, •financial system and real economy, •banking system and public finance, and •economy and politics through: •interbank exposures, •fire sales and declines in asset prices and market liquidity, •panic and runs on deposits and other claims, •credit crunch, recession and increased credit costs, and •economic performance, confidence in political leadership and feasibility of taking effective measures. 11 Crisis Management Lessons Learned: 1. A non-systemic case can have a systemic signaling effect. 2. Sequencing is the key. 3. Publish bad news and remedial measures at the same time. 4. Practical detail matters. 5. Be strict on management and shareholders, careful on creditors. 12 Thank you ! 13