Japan to scrutinize banks' stress tests, stopping short of Fed

[TOKYO] Japan's financial regulator is stepping up oversight of its biggest banks while stopping well short of imposing the type of intrusive stress tests that have been adopted in the US and Europe.

Unlike the Federal Reserve and the Bank of England, which conduct annual examinations of the large banks they supervise, Japan's Financial Services Agency has no plans to impose its own stress tests on the country's lenders. Instead, it is looking for ways to verify the banks' own reviews.

"We're considering if we can come up with a stress test-like setup," Toshihide Endo, the director-general of the FSA's supervisory bureau, said in an interview last month.

"We don't plan to impose external tests."

Japan's regulator has already signaled a different approach than overseas peers in the way it oversees the country's banks, with FSA Commissioner Nobuchika Mori condemning a supervisory approach to bankers where the "sentiment of trust seems to have become a thing of the past."

Mitsubishi UFJ Financial Group Inc's President Nobuyuki Hirano cautioned global regulators against restricting the use of banks' own methods for gauging operational risk, questioning the need for authorities to impose a standardized regime when they're able to review internal models.

Japanese taxpayers didn't have to bail out lenders during the global financial crisis as the nation's banks escaped the scale of losses incurred by overseas financial institutions.

The regulator may analyze big banks with international operations to see if they're adequately reflecting risks such as oil price movements and the economic performance of emerging nations in their own stress tests, according to Mr Endo. The FSA may start scrutinizing the stress tests of banks from as early as the second half of this year, he said.

MUFG, Japan's largest lender by market value, runs a number of stress tests on its balance sheet using different scenarios that include measures of interest and exchange rates, stock-market movements and economic growth, according to an e-mailed reply from spokesman Kazunobu Takahara. The impact from the different tests on the bank's assets and profitability are then estimated, he said.

Sumitomo Mitsui Financial Group Inc has included oil and price measures in stress tests it conducts since 2014, according to an e-mailed reply from the bank.

Mizuho Financial Group Inc uses the results of its own tests in setting risk-appetite parameters, and to check operational plans and evaluate capital, according to spokeswoman Masako Shiono. The bank also uses factors such as oil price movements in tests, Ms Shiono said by e-mail.

The regulator had used an early-warning system to assess banks' balance sheets using historical data, Endo said. The idea to review internal stress tests is a step forward to managing real-time risks, according to Mr Endo.

The Basel Committee on Banking Supervision doesn't plan to raise capital requirements across the board in the remaining projects of its post-crisis bank rule overhaul, it said earlier this year. The group, which includes the Bank of England, the European Central Bank and US Federal Reserve, said it will assess the potential costs of any additional action.

BLOOMBERG