MNI BRIEF: BOJ Urges Bank Vigilance Against Tail Risks

The Bank of Japan’s Financial System Report on Thursday urged commercial banks to remain vigilant against tail risks and warned of a period of prolonged stress which could continue due to global monetary tightening.

“From a long-term perspective, a decline in banks’ loss-absorbing capacity could lead to a contraction of financial intermediation activities or an overheating, such as excessive search for yield,” the FSR noted. “With these in mind, it is necessary to address the potential vulnerabilities appropriately and ensure the stability of Japan’s financial system into the future.”

However, the BOJ noted Japanese banks have sufficient capital bases and stable funding to withstand various types of stress. The country's financial system has maintained stability on the whole and financial intermediation has continued its smooth functioning, the BOJ said.

MNI reported policy normalisation could impact smaller regional and cooperative banks. (See MNI POLICY: BOJ Concerns Grow Over Regional Bank Stability)