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By Hiroshi Inoue
TOKYO (MNI) - With concerns growing over the health of some Japanese
lenders, Bank of Japan officials believe the Financial Services Agency, the lead
regulator, needs to make significant changes to its rule book in order to exert
greater pressure on regional banks to strengthen risk management, MNI
The BOJ feels the capital bases at regional banks are in reasonable shape
at present, but worries are growing as some have upped investments in risk
assets without a sufficient corresponding buffer boost, exposing their reserves
to increased erosion risk as they seek to overcome low investment returns.
Possible tools the BOJ thinks the FSA could use include increasing regional
banks' capital adequacy ratios from 4%, while forcing then into stricter risk
evaluation, and prompt regional banks to increase non-performing loan reserves.
In the continuing low rate environment, the BOJ is growing increasingly
vigilant that overreach among competing financial institutions could damage
profitability, risking a pullback in lending activity and maybe a destabilizing
of the financial system. Some BOJ analysis already suggests major banks have
reduced loans to some small- and medium-size companies on risk management
Along with riskier investment portfolios, regional lenders are to some
extent picking up the slack offered as the majors hold back, extending loans to
the smaller companies deemed as 'risks' by the megabanks, further threatening
their financial position.
The BOJ is aware that precarious lending at such low rates could also
impact on its policy transmission in the event of an extended downturn, as
pushing policy rates deeper into negative territory would further pressure bank
profitability and their lending ability.
There are concerns that the regionals in part are looking to support local
companies, which, the BOJ feels, throws up moral hazard issues, as lawmakers
elected in provincial cities will seek to coddle even the most indebted banks in
their regions -- feathering their political position by protecting both the
constituency and corporates who bankroll them.
The BOJ continues to monitor the situation and urge banks into necessary
action, but it has no power to force commercial banks to restrict businesses, as
it isn't the competent authority.
Unless the FSA strengthens its regulation framework, regional banks will
not take risks seriously and will not preemptively deal with potential threats,
BOJ officials feel, who are concerned that it will be too late for banks to
address risks if a slowing economy exposes them.
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