MNI BRIEF: BOJ Warns Financial Intermediation May Be Impaired

The Bank of Japan warned the functioning of financial intermediation could be impaired based on modelling of current market conditions in its Financial System Report released on Friday. .

"The deterioration in capital adequacy ratios and profits makes financial institutions more cautious in their lending,” the FSR said.

“FIs (financial institutions) for which room for realizing gains has fallen would have difficulty in engaging in additional risk-taking, and their profitability would become more likely to decline. The functioning of financial intermediation could be impaired for some FIs."

“Lending margins are squeezed substantially, and margins on securities investment turn negative. Changes in both loan-related and securities-related net interest income contribute to the decline in foreign net interest income,” the review said.

“In the initial phase of simulation, valuation gains/losses on bond holdings deteriorate substantially for all types of banks,” it said.