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Japan to prod regional banks to boost profitability with new rules
[TOKYO] Japan's financial watchdog will conduct stress tests on regional banks around mid-year and review rules to prod them to speed up efforts to boost profitability, a government official with direct knowledge of the matter said on Friday.
The move comes in the wake of growing concern among policymakers over the plight of regional banks, which have seen profits hit by years of ultra-low interest rates and an exodus of borrowers moving to bigger cities as the population shrinks.
Under current regulation aimed at pre-empting bank failures, the Financial Services Agency (FSA) focuses on whether commercial banks meet minimum capital adequacy ratios and past data in determining whether they are deemed financially viable.
Japan's Nikkei newspaper reported on Friday that the FSA will review such guidelines to focus more on the future business outlook of the banks and whether their profitability is resilient to chronic pressure such as low rates and an ageing population.
The new guidelines would allow the FSA to slap business improvement orders against regional banks that are not making enough efforts to boost profitability, the official said, confirming the Nikkei's report.
The financial regulator will conduct stress checks on the nation's 105 regional banks, to identify ones that could fail to meet the minimum capital adequacy ration of 4 per cent if a big shock - such as a spike in interest rates or credit costs - hits, the official said.
The FSA plans to come up with the new guidelines by June, the official said on condition of anonymity due to the sensitivity of the matter.
Many Japanese regional banks are grappling with diminishing returns from their traditional lending business, hit by a low interest rate environment amid the Bank of Japan's ultra-loose monetary policy.
"The (BOJ's) policy has provided sufficient benefits to the economy. On the other hand, various side-effects are emerging in areas like financial intermediation and bond market functions," Takashige Shibato, head of Japan's regional bank lobby, said on Wednesday. "We hope the BOJ takes these into account," he added.
BOJ Governor Haruhiko Kuroda has said the central bank will be more mindful of the rising demerits of prolonged easing. But he has also stressed the central bank's priority is to achieve its 2 per cent inflation target, signalling that monetary policy will remain ultra-loose for some time.