Abstract
This statement provides an update on events that took place after the staff report was finalized. The additional information does not change the thrust of the staff appraisal.
This statement provides an update on events that took place after the staff report was finalized. The additional information does not change the thrust of the staff appraisal.
1. An alleged fraud in a small securities dealer has attracted significant media attention. The fraud highlighted weak risk management practices in the company— Stocks and Securities Limited (SSL)—which holds assets of about US$120 million (or 0.8 percent of the assets of the non-bank financial system). The alleged fraud reportedly amounts to US$6-19 million. It has had no systemic impact.
2. The authorities have reacted promptly. The Financial Services Commission (FSC)—the regulator of non-bank financial institutions—issued an injunction imposing a strict reporting requirement on SLL, barring it from disposing of assets or accepting new deposits without authorization. It also obtained a court order blocking SSL's directors from winding down the company and liquidating assets. The head of the FSC resigned and was replaced by the central bank's (BOJ) chief prudential officer. In addition, most of the FSC Board was replaced with senior BOJ executives. It is worth noting that securities dealers--which account for about one-third of the assets of the non-bank financial sector—are, as a whole, financially sound (with capital adequacy of about 22 percent, well above the 14 percent minimum, and liquid assets of 13 percent of total assets).
3. The authorities have announced their intention to move toward a unified regulatory structure, centered in the BOJ. In the short-term the FSC will continue to supervise the non-bank financial system but with stricter regulations and penalties for misconduct for securities dealers. Over time, the government will propose legislation to provide the BOJ with the mandate for prudential oversight over banks and nonbanks with the FSC focused on overseeing market regulation and consumer protection. Since the financial system is dominated by financial conglomerates, a unified supervision model under the BOJ would be consistent with efforts already underway to ensure consolidated supervision for financial intermediaries. The authorities have requested Fund CD support to design such a system.