Japanese banks oppose stricter capital rules for rate risk

[TOKYO] Japanese banks will oppose a push by global regulators to toughen rules on the capital lenders need to withstand an increase in interest rates, the new chief of the country's bank lobby said.

Stricter capital requirements for interest-rate risk on assets lenders plan to hold to maturity would have a "severe impact" on the nation's banks, Japanese Bankers Association Chairman Yasuhiro Sato said in an interview.

The Basel Committee on Banking Supervision is weighing updating the rules amid concern that some banks may not be prepared for higher rates when central banks end monetary easing. In Japan, such a revision may hamper the practice of lenders using returns from asset investments and loan profits to pay interest to depositors, according to Sato.

"The change may make banks cautious about holding sovereign debt," said Mr Sato, 62, who is also president of Mizuho Financial Group Inc. "This would have a negative impact not only on banking functions but also on the markets. We will coordinate with the Financial Services Agency and continue to express our opposition to it."

While Japanese banks have pared their government bond holdings from a peak of 171 trillion yen (US$1.4 trillion) in March 2012, they still held 124.8 trillion yen in their banking books in February, according to central bank data. That makes them vulnerable to writedowns if bond yields rise, reducing the value of the securities.

Major Japanese banks would incur 2.6 trillion yen in unrealized capital losses on their domestic government bond holdings if interest rates climb 1 percentage point across all maturities, the Bank of Japan estimated in October.

Global regulators have been bolstering banks' capital requirements to make them stronger following the 2008 global financial crisis. They set minimum rules on how far lenders must fund themselves through equity and other sources that can absorb unforeseen losses.

"There have been various 'too-big-to-fail' regulations, some of which were necessary," said Mr Sato, who replaced Nobuyuki Hirano as head of the lobby on Wednesday. "But there should be only so much you can do for fear of a large lender's bankruptcy."

Basel rules already include binding capital requirements for interest-rate risk on assets held in banks' trading books. For the banking book, international standards are limited to a system whereby banks regularly report to their national supervisors on risk levels. The supervisors then take decisions on whether more capital, or a reduction in the size of the position, is needed.

This is known as a so-called Pillar 2 process, compared with the setting of binding rules, known as Pillar 1.

"The issue before the committee going forward will be whether to, and how to, move toward a Pillar 1, or whether we should move toward a more rigorous Pillar 2 treatment," Stefan Ingves, the Basel committee chairman, said in an interview on March 27.

In Japan, interest rates have fallen as the central bank escalated purchases of government bonds to end more than a decade of deflation. Rates have remained low even as the public debt load swells to the largest portion among developed economies. Benchmark 10-year bond yields touched a record-low 0.195 per cent in January and were 0.395 per cent during trading Wednesday.

BLOOMBERG