April 17, 2009
Comments on the Consultative Document for “Proposed Enhancements to the BaselII Framework” issued by the Basel Committee on Banking Supervision
Japanese Bankers Association

The Japanese Bankers Association would like to first express its gratitude
for this opportunity to comment on the Consultative Document released by theBasel Committee on Banking Supervision named “Proposed Enhancements to theBasel II Framework.”
It is our hope that the following comments will assist in the remaining work
towards finalizing the rules by the Basel Committee in the examination of thissubject.

General Comments
The “Proposed Enhancements to the Basel II Framework,” which is
attached to the Consultative Document (hereafter called as Framework

Enhancements) was established as a measure to counteract the financial crisis thatcommenced in the summer two years ago. In particular, it has sharply differentiatedcapital treatment between complicated structured products originated throughoff-balance sheet transactions or ABCP conduit transactions that triggered theso-called subprime financial crisis, with traditional structured products. It also
specifies that appropriate treatment should be taken from a regulatory capital
perspective. And, since the Japanese Bankers Association highly appreciates andwould like to support the Framework Enhancements. We also fully understand thatfrom the current perspective of international financial regulations and supervisionin the G20 and other countries and regions, there is an urgent need to implement
quick measures for requiring additional capital requirement.
We would like to comment mainly on the “definition of resecuritisations”
and “operational criteria for credit analysis” when using external ratings, from the1perspective of balanced regulations that take into account practical operationalburdens.
Regarding the former, we request that the Basel Committee explicitly state“economic substance” is a basis in the “definition of resecuritisations.” Furthermore,
based on a sufficient understanding of causes behind the origin of this financial
crisis, we ask that a decision will be made on setting a threshold, including whether
or not to establish such a setting, after giving sufficient consideration to whether or
not this would achieve the desired result.
Regarding the latter, taking into consideration a practical response tosecuritisation exposure or resecuritisation exposure already held, we would like for
implementation to start at the end of 2010, rather than at the end of 2009.
It is our hope that our comments will assist in the remaining work towards
finalizing the rules by the Basel Committee in the examination of this subject.

Specific Points
1. Definition of Resecuritisations (The First Paragraph in Page 2 of the Framework
Enhancements)(1) Clarification with respect to Judgment based on Economic Substance rather
than the Legal Form in terms of Resecuritisation
We request that “economic substance” be placed as a basis in the definitionof resecuritisations.
Securitisations have varying structures. For example, due to restricted bydomestic law in Japan, structured products are produced so that underlying assets
are to be transferred at first to a trust vehicle and then repackaging trust
beneficiary rights to securities product such as corporate bonds is made. For suchproducts, although it formally looks as though there are two securitisationtransactions being carried out, in light of the relationship with the underlying
assets, the risk of holding and becoming involved with the concerned productremains unchanged. Therefore, although there are formally two securitisationtransactions being carried out, if you look at the economic substance of thetransaction, then some of them can be deemed as first-level securitisations, not2

resecuritisation
Furthermore, the basic idea of the Basel II Framework Document(Paragraph 538) regarding this topic is that “Similarly, supervisors will look to theeconomic substance of a transaction to determine whether it should be subject to thesecuritisation framework for purposes of determining regulatory capital.”Moreover, we believe that differentiating between structured productsthat may lead to the incurring of losses, including credit risk, etc., and structured
products that do not, is in line with the philosophy of Basel II, which aims forrisk-sensitive regulations and that it is rational. We also believe that it would beeffective to prevent regulatory capital arbitrage that is derived from a difference
between rules regarding specialized lending and those regarding securitisations.
Therefore, from the view of promoting sound securitisation markets, we
propose resecuritisation exposure should be judged on the basis of “economicsubstance.”(2) Definition of Resecuritisation Exposure
In the Consultative Document, it says, “A resecuritisation exposure would

be defined as a securitisation exposure where one or more of the underlying
exposures meet the framework’s definition of a securitisation exposure.” However,we think that sufficient discussions need to be made before final determination due
to the fact that there are mainly two views regarding this topic among Japanesefinancial institutions as mentioned below.
The first view is that setting a threshold is unnecessary, giving a second
thought the fundamental cause of this crisis that the correlation between theso-called resecuritisations and systemic risk was higher than that between
traditional securitisations and systemic risk.
Another view is that while in favor of the policies expressed in theConsultative Document, it is not rational to treat all the following three in the samemanner: a) “one” securitization exposure that does not affect the entire resecuritised
portfolio, b) “one” securitisation exposure that greatly affects the entire
resecuritised portfolio and c) a resecuritised portfolio that mostly consists ofsecuritisation exposures. Therefore, they believe that the establishment of a certain3

low level threshold as the upper limit (the maximum being 5-10% of the entire
resecuritised portfolio) and the treatment that any resecuritised portfolio that fallunder that limit would be deemed as securitisation exposures rather thanresecuritisation exposures are worthy of discussion as a rational approach.
Due to this, we ask that the Basel Committee make a decision regarding
the definition of resecuritisation exposure, including whether or not to set athreshold, only after giving sufficient consideration to whether or not it would
achieve the desired regulatory goals based on a sufficient understanding of thecauses behind the financial crisis.

2. Treatment of “Operational Criteria for Credit Analysis” When Using External
Ratings (Paragraphs 565(i), (ii), (iii) and (iv) in Page 5 of the Framework
Enhancements)
The Consultative Document proposes that new criteria, i.e. “operationalcriteria for credit analysis” be added when using external ratings (Paragraphs
565(i), (ii), (iii) and (iv)). We understand that these criteria are necessary for banks
as investors to understand securitisation risk without excessive reliance on externalratings. As such, we strongly request on the following two items.
First of all, there are disclosure restrictions in light of contracts for alreadyheld securitisation exposures. Therefore, in order to meet the criteria mentioned in
the proposal, preparation time is required for gaining the understanding andcooperation of concerned parties in securitisation markets, including the timerequired for renewing the conditions of contracts. Therefore, taking into
consideration the commensurate time for meeting required criteria, we propose thatthe implementation date be set at the end of 2010, rather than at the end of 2009.
Next, in order to fulfill the criteria presented in the Consultative Document,
we ask that the Basel Committee and the relevant authorities promote thedisclosure of the information mentioned under Paragraphs 565(i), (ii), (iii) and (iv)
not only by banks who are the users, but also by originators, by securities
companies who are the arrangers, and by ratings agencies, since obtaining theircooperation is indispensable.

43. Treatment of ICAAP in the Pillar 2 at the Branch Office or Overseas Subsidiary
Level (Paragraph 4, Pages 9-10 of the Framework Enhancements)
Regarding the proposal concerning the Pillar 2, the Consultative Document
says “A financial institution’s ICAAP should be conducted on a consolidated basis

and, where appropriate, at the legal entity level” (Paragraph 4). Since ICAAP isoriginally meant to be managed on a banking group level, we ask that the BaselCommittee clearly states that ICAAP should not be unnecessarily imposed at theoverseas subsidiary or branch office level.
Under the laws and regulations, etc. of each nation, if ICAAP is mademandatory at the overseas subsidiary or branch office level, then it would impede
the independent and efficient capital management at the financial group level.
Furthermore, since arrangement of supervisory colleges are internationallyscheduled, we believe it would make little sense to require a single financial group
to make separate capital management on a country-by-country basis. Not only that,
we are afraid that significant confusion may arise since the treatment in eachcountry varies. The basis should be a single ICAAP for each financial group and aseparate management on a branch office and subsidiary basis in each country orregion should be kept to a minimum.
Furthermore, even in light of the thinking of “Home-Host Information

Sharing for Effective Basel II Implementation” announced by the Basel Committee
on June 2006, we understand that information sharing among the authorities of thehome country of an internationally active bank and those of the host countries
would promote meeting the above mentioned criteria stated in Paragraph 4.

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