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Economy

Taking the bite out of Japan's financial watchdog

Panel proposes that the FSA be more of a dialogue partner to industry

TOKYO -- Japan's Financial Services Agency is being prodded to scrutinize the financial sector less and talk with it more. So the 20-year-old agency will likely step away from its role of dishing out penalties to financial institutions that stray from regulations and become more avuncular.

The shift is being portrayed as a way to help the financial sector grow.

The FSA last week released a proposal from a panel of experts concerning the future direction of the country's financial administration.

The financial watchdog, formerly part of the Ministry of Finance, became an independent agency in 1998, when it was known as the Financial Supervisory Agency. At the time, Japanese banks were weighed down by mountains of nonperforming loans that had been growing since the late 1980s "bubble economy" imploded.

At its inception, the FSA prioritized pushing the industry to regain its soundness and the public's trust. Since then, those mountains have been melting, and today the country's bad loans are at a record low.

Even when western banks were devastated by the Wall Street-induced financial crisis that stuck in 2008, Japan's financial system managed to chug along in pretty good shape. 

A discussion agency

During the past two decades, the soundness and risk management capabilities of Japanese financial institutions have dramatically improved.

Along the way, a belief grew that the FSA's rule-bound approach was hampering financial companies and that the watchdog needed to be more of a mediator to help enterprises grow.

The FSA inspects financial institutions, paying attention to small details. Lenders and other players have grown anxious about passing the point-by-point inspections as set forth in an FSA manual.

Last August, FSA Commissioner Nobuchika Mori set up the panel. The members then discussed how the regulator could be transformed into an entity that would help industry better respond to Japan's shrinking population, ultralow interest rates and other challenges.

The panel's report sees financial authorities and the private sector discussing major management challenges and future plans -- in addition to the FSA conducting compliance audits.

The FSA has already decided to fundamentally change the inspection manual that has caused so much industry consternation. The regulator plans to integrate its inspection check list with its supervision guidelines.

Hire from private sector

The report also says the FSA needs to tear down the wall between its inspection and supervisory units so that it can better lead the way in maintaining the financial system.

Meanwhile, the FSA plans to review redundancies among its inspection, supervisory, and planning and coordination bureaus with an eye toward being more effective and cross-functional.

Developing talent will also be crucial as the organization heads in a new direction. Today's FSA officers might be challenged discussing management issues with top financial industry executives. The agency could solve this issue by hiring experienced personnel from the private sector or by rehiring former FSA employees who left the organization to work at lenders and other financial enterprises.

The report, in fact, encourages the agency to do this.

(Nikkei)

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