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.)

Dear reader,

Business Standard has always endeavored to provide up-to-date information and commentary on developments that matter to you and that have wider political and economic implications for the country and the world. Your constant encouragement and feedback on how to improve our offering has only strengthened our resolve and commitment to these ideals. Even in these challenging times stemming from Covid-19, we remain committed to keeping you informed and up-to-date with credible news, authoritative opinions and incisive commentary on relevant topical issues.
However, we have a request.

As we battle the economic impact of the pandemic, we need your support even more so that we can continue to bring you more great content. Our subscription model has received an encouraging response from many of you who have subscribed to our online content. More subscriptions to our online content can only help us achieve the goals of bringing you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practice the journalism we are committed to.

Support quality journalism and subscribe to Business Standard.

digital editor

Comments are closed.