Japanese regulator to tighten banking supervision as foreign interest rates rise



Japan to tighten risk control oversight of banks as overseas interest hikes create latent losses in their holdings of foreign bonds, reflecting concerns over the impact of US monetary tightening on the country’s financial system .

The Financial Services Agency ‘will hold dialogues with banks on controlling market risk’ as rising global interest rates caused unrealized losses on their holdings of foreign bonds, the regulator said in guidelines annual policies released Wednesday.

In search of higher yields than those available locally, major Japanese banks invested heavily in foreign bonds, primarily US Treasury bills. But when yields rise, as they have in response to monetary tightening by the US Federal Reserve and other central banks, bond values ​​fall.

The current round of aggressive foreign interest rate hikes has caught Japan’s big banks off guard.

Combined valuation losses on foreign bond holdings of Mitsubishi UFJ Financial Group and two other major banking groups amounted to 2.656 trillion yen ($19.12 billion) at the end of June, an increase of more than 50 % compared to the end of March.

The Bank of Japan has not joined the global cycle of interest rate hikes, as Japan’s inflation is still subdued and its economy fragile.

The financial regulator also said it would encourage major lenders to strengthen FX liquidity risk management, particularly because Japanese banks’ market-based supply of FX was vulnerable to sudden market swings.

The regulator added that he and the central bank would conduct stress tests on banks’ risk exposures.

This year’s policy guidance mentioned the need to address potential issues with financing leveraged buyouts.

The country’s prolonged ultra-low interest rates are causing major banks to look beyond traditional lending in search of returns.

Japan’s Marelli Holdings Co, an auto parts supplier that KKR & Co bought with high leverage, began a court-led restructuring process in June with more than 1 trillion yen in debt. This caused massive losses to around two dozen creditors, including Mizuho Financial Group.

($1 = 138.91 yen)

(Reporting by Makiko Yamazaki, Takahiko Wada and Leika Kihara; Editing by Bradley Perrett)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

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