Japan banks to undergo stress test to prepare for any crisis: sources

FILE PHOTO: A businessman stands on a terrace overlooking a banking district in Tokyo, Japan, February 16, 2016. REUTERS/Thomas Peter

TOKYO (Reuters) - Japan’s major financial institutions are set to undergo a stress test to prepare for any major shakeout in financial markets in light of worries about a global recession and a protracted Sino-U.S. trade war, sources with direct knowledge of the matter told Reuters on Monday.

The stress test will be overseen by the Bank of Japan and the Financial Services Agency (FSA), which will assess the results to see how capital and liquidity on-hand would be affected at Japanese financial firms if stocks took a tumble and the yen spiked, the sources said.

It wasn’t clear when the test will be conducted, they said, but noted it marked the first time the BOJ and FSA were closely coordinating to manage the process.

Previously, each financial institution has drawn up their own scenarios when conducting stress tests, the results of which were examined by the FSA.

Seven Japanese institutions will be subject to the stress test, including the three mega banks designated as G-SIBs, or global systemically important banks, and four other domestic systemically important banks dubbed D-SIBs.

None of these institutions will likely be required to beef up their capital, but they may be urged to improve any shortcomings as a result of the stress test, the sources said.

The FSA and the BOJ have stepped up coordination lately. Last month, the two embarked on joint investigation into surging investments in collateralized loan obligation (CLO).

Reporting by Takahiko Wada; Writing by Tetsushi Kajimoto; Editing by Shri Navaratnam