Japan regulator will probe risks to banks from higher rates
JAPAN’S financial regulator will examine banks’ vulnerability to potential risks stemming from rising interest rates, including exposure to highly leveraged borrowers and real estate as the country’s central bank looks set to switch course.
The Bank of Japan (BOJ) is widely expected to make its first rate hike since 2007 within a few months. This raises the possibility that some borrowers will struggle to make higher interest payments.
“Banks need to be able to respond to interest rate moves and other changes in a timely manner,” said Toshinori Yashiki, deputy director-general at the nation’s Financial Services Agency (FSA). “Banks might have loosened their loan discipline in a rush to secure short-term profits under years of low interest rates.”
The BOJ left its monetary policy unchanged on Tuesday (Jan 23), a widely expected decision following a New Year’s Day quake. The swaps market indicated a 44 per cent likelihood of a rate hike by the April meeting and 98 per cent by the July gathering.
Yashiki, who is in charge of monitoring the soundness of banks and other financial institutions, urged lenders to pay particular attention to highly leveraged borrowers. He emphasised the risks from loans for leveraged buyouts (LBOs), especially those heavily relying on floating-rate debt. He also warned about non-recource property lending, meaning loans secured against the property and repaid by cash flows generated by it.
“In recent years, there have been cases of large credit costs on LBO loan deals, such as Marelli Holdings,” he said, referring to an auto parts maker whose turnaround plan caused billions of US dollars in bad loan costs for lenders.
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Last year, the volume of management buyouts in Japan increased to the highest on record. Companies that were taken private included Taisho Pharmaceutical and the educational services business Benesse Holdings.
Yashiki stressed that he did not object to banks funding LBOs. Rather, he said Japan needs to have a bigger LBO market with investors of various risk appetites, which would mitigate risk concentration on a few major lenders.
He also said he welcomes the moves by regional banks to start LBO loans as a way of offering various types of financing to local businesses. Banks have a responsibility to monitor the soundness of borrowers that are taken private through management buyout and other means, he said.
“Lender governance needs to be fully exerted on unlisted companies, which are not exposed to discipline by the stock market,” he said.
Changing environment
Yashiki, who is a former BOJ official, said there are new risk factors to consider that did not exist in the past rate-rising cycles, most notably, social media and digital banking.
FSA officials are aware of the impact of social media and had urged banks last year to check their readiness to respond after Silicon Valley Bank’s (SVB) collapse in the US in March. Corporate customers pulled billions from SVB within hours amid a social media-driven panic equivalent to a modern-day bank run.
The agency will examine banks’ abilities to secure funding to meet obligations, such as savers withdrawing deposits. The FSA will target not only major lenders but also some of the online and regional banks.
Yashiki also urged financial institutions to enhance internal audits to help ensure their readiness for times of stress. BLOOMBERG
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