MNI POLICY: BOJ Concerns Grow Over Regional Bank Stability

Regional and cooperative shinkin banks will find policy normalisation far more challenging than their larger peers due to the mismatch of interest paid on deposits compared to that received via their typically longer-dated fixed income investments, raising concern among Bank of Japan officials, MNI understands.

The BOJ’s decision last month to to terminate the negative interest rate and set the policy rate in a range of zero percent to 0.1% prompted major banks to increase their deposit rate to 0.02% from 0.001% immediately with many regional banks following. (See MNI BOJ WATCH: Ueda Says Rate Path Will Depend On Prices) The BOJ had held the short-term rate at -0.1% since 2016.

BOJ officials believe bank interest rate pass-through will increase as it phases out easy policy and raises interest rates, depending on economic and price developments. (See MNI POLICY: April Services Data Key For Further BOJ Rate Move) The higher deposit rates will squeeze bank profits as elevated lending rates take time to catch up, the BOJ has warned.

The Bank's simulations show net interest income of smaller regional and shinkin banks will decline for some time as their deposit rates rise faster than the return on their typically longer-term fixed-rate loan portfolios and long-term bond investments. Major bank profits, however, jump at the start of the simulation.