MNI: BOJ Kuroda: Higher Credit Cost To Destabilize Fncl System

     TOKYO (MNI) - The Bank of Japan must watch with care how banks' risk-taking

activities develop in a period of prolonged easy policy and how they may

destabilize the financial system, BOJ Governor Haruhiko Kuroda said Monday.

     "As downward pressure on banks' profits continues, we need to be mindful of

the possible consequences of banks' engagement in excessive risk taking," Kuroda

said at a Tokyo meeting sponsored by the Europlace forum.

     "Risk taking by banks that have abundant capital bases provides financial

support to firms' production activities, thereby contributing to economic

expansion," Kuroda said.

     "If appropriate risk management measures are not taken and the continued

decline in profits leads to insufficient capital bases, credit costs could rise

sharply, and the stability of the financial system could be threatened in the

event of a large exogeneous shock that leads to an economic downturn," Kuroda

warned.

     The Governor also said that regional banks' core profitability has

continued to decrease amid both the prolonged low interest rate environment and

a fall in customer base due to the persistent decline in the population and the

number of firms. The regional banks' capital adequacy ratios have also gradually

decreased, he noted.

     "We should be mindful of the possible consequences, including any downward

pressure on the real economy from the financial system, since financial

institutions tend to become more cautious in their risk taking if their capital

adequacy ratios fall substantially or they continue to register net losses in

the event of stress," Kuroda said.

     He also said that if banks' competition intensifies on the back of

shrinking demand for credit, this will put further downward pressure on their

profits, leading to a reduction in net interest income.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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