Transition in Inspection Policy toward Banks

* Written by PPPC Visiting Fellow

 TBS’s drama “Naoki Hanzawa” had an audience rating of 42.2% in its

final play on September 22. One of the central themes in the drama was

the battle between the banks and the financial authority over the

inspections.

 When the bad loans of the banks were so serious in this country,

every financial institution was afraid of the inspections by the

Financial Services Agency.

 After the collapse of Japan’s bubble economy, due to the increasing

criticisms against the Ministry of Finance for treating too leniently

the financial institutions caused to have a huge amount of

nonperforming debts, the governmental branches in charge of checking

and supervising the financial institutions were separated from the MoF

and the new Financial Services Agency was established.

 The main feature of the Agency was that the Inspection Bureau, in

charge of on-the-spot inspections, was designed as a highly autonomous

branch separated from the Supervisory Bureau engaging in day-to-day

investigations in order to prevent on-the-spot judgments from being

discarded by the supervisory branch finally responsible for improving

the performances of the banks; an internationally-unique institutional

feature.

 For such a historical background, the Inspection Bureau carries a

heavier weight in the Financial Services Agency and its Commissioner’

s post has been dominated by the ex-inspection bureaucrats.

 In the past, all the inspectors from young to veterans used to

investigate rationality and appropriateness of the banks’

categorization of the debtors based on the financial documents called

the “line sheets” submitted by each branches of the financial

institutions. Based on categorization as the normal debtors, debtors

to be watched, debtors in risks of bankruptcy, debtors substantially

in failure and debtors in failure, the financial losses of the banks

would be calculated and the amount of allowance would vary. In the TV

drama, the focus was whether the fictitious hotel would be categorized

into the “debtors substantially in failure”.

 Roughly speaking, the traditional way of supervising the industry was

that the Inspection Bureau notified the banks of the final results of

its inspections based on the spotted points submitted from the actual

site, and the Supervisory Bureau tried to reflect the result of the

inspections into its requests to the industry to improve management of

the financial institutions.

 Nonetheless, such the financial administration weighted on the

inspections has come to a turning point this time. Traditionally, the

FSA had released the annual basic guideline and basic plan of

inspections every year (July-June), and released its supervisory

policy simultaneously but separately.

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