Statement to the Congress
Greenspan, Alan, Federal Reserve Bulletin
Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Banking and Financial Services, US. House of Representatives, December 5, 1995
I appreciate the opportunity to discuss with you today' the issues raised by the recent events relating to the U.S. operations of Daiwa Bank and to provide you with our preliminary conclusions on these issues. As you requested, my testimony will be presented in two parts. I will first address the events that culminated in the issuance of consent orders requiring Daiwa to terminate its banking operations in the United States. I will then summarize for you the present system of supervision of the U.S. offices of foreign banks and explain a number of initiatives the Federal Reserve has implemented in this area in the past two years.
EVENTS RELATING TO DAIWA BANK
I believe the basic facts surrounding this incident are fairly well known, but I will briefly summarize the key events. A more detailed chronology is provided in an attachment.(1) Of course, I would be pleased to answer, to the extent that I can, any questions that you might wish to ask regarding these events.
On September 18, 1995, Daiwa Bank met with a Federal Reserve representative and reported that Daiwa's New York branch had incurred losses of $1.1 billion from trading activities undertaken by Toshihide Iguchi, a branch official, over a period of eleven years. These losses were not reflected in the books and records of the bank or in its financial statements, and their existence was concealed through liquidations of securities held in the bank's custody accounts and falsification of its custody records. Although Daiwa indicates its senior management learned about these trading losses in July, they concealed the losses from U.S. banking regulators for almost two months thereafter. Moreover, they
(1.) The attachment to this statement is available from Publications Services, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551. directed Mr. Iguchi to continue transactions during the two-month period that avoided the disclosure of the losses.
We understand that some officials at the Japanese Ministry of Finance were informed in early August about Daiwa's losses. They did not instruct Daiwa to inform the U.S. authorities; nor did they themselves do so. This lapse on the part of the Ministry of Finance is regrettable because open communication and close cooperation among supervisory authorities are essential to the maintenance of the integrity of the international financial system. Finance Minister Takemura has acknowledged the ministry's failure in this regard and has pledged that in the future the ministry will promptly and appropriately contact US. authorities on such matters of U.S. interest. We have been assured that the ministry is taking steps to implement this pledge. In addition, we have been pleased that once the Daiwa problem was disclosed, the Japanese authorities have fully cooperated with U.S. supervisors in dealing with the consequences.
On October 9, Daiwa also announced that its separate federally insured bank subsidiary in New York had incurred losses of approximately $97 million as a result of trading activities, at least some of them unauthorized, between 1984 and 1987. These losses should have been reflected in the books and records and financial statements of the subsidiary but were not. Instead, the losses were concealed from federal and state regulatory authorities through a device that transferred the losses to offshore affiliates, apparently with the knowledge of senior management.
On October 2, 1995, the New York Superintendent of Banks and the Federal Deposit Insurance Corporation (FDIC), together with the Federal Reserve, issued cease-and-desist orders against Daiwa requiring a virtual cessation of trading activities in the United States. …