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    JFSA Summarizes Stress Testing Exercise, Responds to IFRS Consultation

    December 17, 2020

    JFSA published a paper that discusses the supervisory simultaneous stress testing exercise based on common scenarios, which BOJ and JFSA first conducted in 2020. The paper discusses differences from the institutional arrangements in Europe and the United States, describes the characteristics of the simultaneous stress testing conducted by BOJ and JFSA, and presents timeline and conclusions of the work conducted. In a separate statement, JFSA published the response of the IFRS Council of Japan to the IFRS consultation on sustainability reporting; the Council welcomes and supports the proposal to establish a new standard-setting board for sustainability reporting.

    In response to the consultation on sustainability reporting, the IFRS Council of Japan notes that it supports the establishment of a new standard-setting board for sustainability reporting, under the presumption that the IFRS Foundation will maintain its role and responsibility of improving capital market transparency and efficiency through high-quality standard-setting. The Council also suggested improvements to certain proposals. The Council believes that the primary audience for sustainability reporting should be capital market participants (with investors at the center) and other users of financial information.  The Council noted that it is important for the Sustainability Standards Board (SSB) members to have diverse backgrounds, including the regions they come from and the industries to which they belong. Furthermore, , other ESG factors, especially S (Social) and G (Governance), should also be addressed in parallel to climate change, suggested the Council. Believing that Japan is the largest contributor in the world, the Council pointed out that 320 companies and institutions from Japan support the Task force on Climate-related Financial Disclosures (TCFD) as of November 16, 2020. .  

    The paper on stress testing exercise highlights that the simultaneous stress testing exercise commenced in 2019. The common scenarios were formulated in October 2019 and these scenarios were presented to five major banks in early December 2019; these banks are Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, Mizuho Financial Group, Sumitomo Mitsui Trust Holdings, and Norinchukin Bank. These participating banks submitted the stress test results by the end of March 2020. Concurrently, BOJ and JFSA also conducted stress tests of each of these participating banks using the same scenarios. From April 2020, BOJ and JFSA jointly compared and examined the submitted stress test results while closely communicating with the participating banks. Subsequently, feedback was provided to the participating banks through mid-July 2020. BOJ and JFSA have already started working on preparations for the next round of simultaneous stress testing, such as the design of the common scenarios. In entering the process for the next round, BOJ and JFSA expect participating banks to report on how their management perceives the issues presented in the feedback and what actions they plan to take. Going forward, BOJ and JFSA will continue to closely work together and further improve the effectiveness of simultaneous stress testing.

     

    Keywords: Asia Pacific, Japan, Banking, Insurance, Securities, Stress Testing, Climate Change Risk, ESG, Reporting, Responses to Consultation, BOJ, JFSA

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