JEI's Spin on the News

Japanese Financial Regulators Show Their Teeth

Friday, June 4, 1999

Because nearly all its staff were transfers from the Ministry of Finance, the Financial Supervisory Agency faced questions about its independence and effectiveness even before it officially opened its doors last July. Having made several policy missteps and been accused of being too cozy with the financial institutions they regulated, MOF bureaucrats had lost credibility with both the public and politicians. Skeptics warned that simply reassigning MOF bureaucrats to FSA would not change anything but their meishi (business cards).

FSA officials set out to prove the critics wrong. The watchdog agency almost immediately launched thorough audits of major Japanese banks, leading to the nationalization of two in the second-half of 1998. In contrast to MOF bureaucrats — who would call financial institutions are tell them when "surprise" audits would be conducted and what documents would be requested — FSA officials made unannounced visits and carted off boxes of documents before prime-time news cameras. More recently FSA has begun cracking down on smaller regional banks, issuing warnings to sick ones and closing the terminally ill.

Since the start of this year, FSA has turned its attention to foreign financial institutions and their major role in the complex trading of financial derivatives. It launched an investigation of the Japanese branch of Credit Suisse First Boston, which is still going on. It raided the local offices of Lehman Brothers and Cresvale International Ltd. in late May. Further unannounced audits of foreign financial firms are expected.

The unannounced audits and investigations have spurred concerns among foreign firms that they are being treated unfairly. FSA regulators counter, however, that they are being treated just like their Japanese counterparts. In fact, many foreign financial institutions have been preparing for audits and the raids came as no surprise to those inside the Japanese financial community, foreigners included.

FSA is looking for any evidence that foreign firms — which had been treated with kid-gloves by the Ministry of Finance when it came to audits — were are or involved in schemes to help Japanese companies hide the full extent of their losses on financial dealings. In particular, FSA is looking into whether any foreign firm helped Long-Term Credit Bank, Ltd. and Nippon Credit Bank Ltd. — both of which have been nationalized by Tokyo — disguise the true extent of their financial problems.

Credit Suisse First Boston appears to be in the most trouble, although not necessarily because it helped LTCB or NCB hide their losses. In response to FSA's initial raid, CSFB employees destroyed documents that might have contained incriminating evidence. Officials of the parent corporation hired a law firm to conduct an independent investigation, uncovering the cover-up. CSFB officials have given the results of their private investigation to FSA, suspended or penalized the employees involved and issued an apology. Neither FSA nor CSFB officials, however, would comment on other possible violations. Lehman Bros. and Cresvale International executives both say they have done nothing wrong, although they and Japanese officials admit that the rules regarding financial derivatives contain many gray areas.

EI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.

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