TOKYO Aug 7 Japanese financial authorities are
joining forces to scrutinise for the first time banks' exposure
to a potential spike in interest rates, with a focus on the
risks to regional lenders when the central bank eventually ends
its massive easing.
While the risks look small now with Japan's economy
recovering and interest rates extremely low, the nation's 105
regional banks represent the weak link in the financial system.
With local economies depopulating in this fast-ageing society,
loan demand tepid and scant resources to seek profits overseas,
regional lenders have little alternative for their huge deposits
but to hold Japanese government bonds.
The Financial Services Agency and the Bank of Japan are
scrutinising the smaller lenders' interest-rate risk as they
jointly step up their "macroprudential" oversight - looking to
identify and minimise risks to the financial system amid broad
shifts in the economy, people involved in the process say.
"At present, interest rates are very low and stable, but we
don't know when or how the financial environment will change,"
the FSA's new commissioner, Kiyoshi Hosomizo, told regional bank
heads in a private meeting last month, according to a person who
attended the meeting.
Regional banks, which sit below the five major banks in
Japan's financial pyramid, have total deposits and loans roughly
equal to the biggest lenders but are largely tied to shrinking
local economies outside the vibrant big cities. They vary
greatly, with the market value of the listed banks ranging from
over $7 billion for the Bank of Yokohama Ltd just
outside Tokyo, to barely $50 million for Howa Bank Ltd
in the western city of Oita.
The FSA, the financial industry regulator, has been prodding
regional lenders to consider mergers and acquisitions for
greater efficiency to cope with the bleak economic outlook. So
far, the local bank chiefs have shown no willingness to give up
their local fiefdoms and consolidate.
REGULATORS TEAM UP
Earlier in June, the FSA and BOJ set up a joint task force
to share information on the nation's financial institutions,
with a new focus on systemic risks. The rate risk for regional
banks was highlighted in a July report by the bank regulator.
The FSA's future stress tests will include simulations of
higher rates on banks and the broader financial system, one
source said. Spokesmen for the FSA and BOJ declined to comment.
The FSA is expected to put more focus on macroprudential
oversight when it compiles its annual bank-inspection guidelines
in the next month or so, people familiar with the inspection
process say. It is unclear if the authorities will take new
The FSA, whose inspections have focused on the health of
individual banks, is tapping the BOJ's expertise on
financial-system stability to ensure a smooth transition out of
nearly two decades of deflation, the sources say.
While BOJ Governor Haruhiko Kuroda says it is too early to
discuss winding down the central bank's 16-month-old
"quantitative and qualitative easing", the recent attention on
interest-rate risk shows that in practical terms Japan's
financial authorities have begun eyeing the exit.
Kuroda's central bank has crushed Japan's market interest
rates - the 10-year JGB yields barely 0.5 percent - by
purchasing 70 percent of the government's debt issuance in an
unprecedented monetary easing. Policymakers worry that if growth
picks up or investors think the central bank is moving toward
tapering its purchases, interest rates could jump and the value
of the JGBs held by the country's regional lenders would get hit
The BOJ estimates that most banks have capital buffers to
withstand a 2 percentage-point rise in long-term rates. But a
1-point rise would hit regional banks with 3 trillion yen ($29
billion) in valuation losses on their JGB holdings, more than
the 2.6 trillion yen estimate for the more profitable major
LAGGING THE MAJORS
Regional banks hold less in JGBs than the major banks
relative to deposits or assets. But policymakers privately worry
that the smaller lenders have made little progress in trimming
their bond holdings while remaining reliant on longer-term debt
and lacking other outlets for their cash.
Since the global financial crisis, Japan's major banks have
greatly reduced their interest-rate risk by shortening the
duration of the debt they hold - making them less vulnerable to
rising long-term yields - and selling down their government bond
holdings, the FSA said last month in its Financial Monitoring
Report. Regional banks, by contrast, have offset their JGB
decreases by purchasing corporate debt, the report says.
Major banks slashed debt with more than five years to
maturity to 13 percent of their holdings by March 2013 from 23
percent in 2008, while regional banks held flat at about 50
percent in longer-term debt, according to data compiled by Japan
The BOJ says Japan's banking system remains sound with no
immediate signs of financial imbalances. But the BOJ is becoming
more mindful of the potential drawbacks of its easing and the
market volatility it may cause when it starts to wind down the
"In general, it's true that prolonged monetary loosening
could lead to future financial imbalances as markets engage in
excessive risk-taking," Deputy Governor Hiroshi Nakaso told a
news conference last month.
"There are various debates on what roles macroprudential
policies and monetary policy should play in addressing financial
imbalances," said Nakaso, who has played a key role in enhancing
macroprudential policies and is spearheading recent coordination
with the FSA. "Still, I think there's a certain role monetary
policy can play."
($1 = 102.1500 Japanese Yen)
(Additional reporting by Takahiko Wada, Ritsuko Ando and Taiga
Uranaka; Editing by William Mallard and Ryan Woo)