Japan Urges Local Banks to Improve Asset Portfolio Management

Japan’s financial regulator is urging local banks to better manage risks tied to their $655 billion in securities holdings, even as they remain insulated from the recent turmoil at some US peers.

(Bloomberg) — Japan’s financial regulator is urging local banks to better manage risks tied to their $655 billion in securities holdings, even as they remain insulated from the recent turmoil at some US peers.  

“There is room for improvement in risk management at some banks,” said Tatsufumi Shibata, a senior official in charge of regional bank oversight at the Financial Services Agency. “Their portfolios have been changing both in their makeup and importance,” he said in an interview, adding it’s necessary to put systems in place to deal with this.

The regulator has been warning of risks posed by rising interest rates to regional lenders’ bond holdings long before the collapse of Silicon Valley Bank last month. During the ensuing tumult, Japanese officials stressed that the country’s lenders are unlikely to suffer the same fate as the US bank given their ample capital buffers and stable deposits.

Still, the demise of SVB underscores how banks can be caught out by sudden monetary policy shifts, at a time of speculation that the Bank of Japan may move away from its ultra-easy stance under new leadership. It also brought fresh attention to billions of dollars of unrealized losses on Japanese regional banks’ investments in foreign bonds, including US Treasuries.

Shibata said the FSA is urging some banks to improve their risk management practices, such as how they set risk tolerance and policies for dealing with sharp market moves. 

“We’re not telling banks to manage their portfolios in a specific way,” he said. “Making losses isn’t a problem in itself as long as they’re within the expected scope. You can’t always win.” 

Shibata’s remarks reflect the regulator’s concern that not all Japanese banks are fully equipped to manage their asset holdings, which have grown in complexity during years of ultra-low interest rates and tepid loan demand at home. 

Japan’s roughly 100 regional banks held 87.3 trillion yen ($655 billion) in securities at the end of September, Japanese Bankers Association figures show. Listed regional lenders had 1.4 trillion yen in unrealized losses on foreign bonds and other securities as of December, although these were more than offset by gains in their stock holdings, according to SMBC Nikko Securities Inc. 

Shibata said the FSA is playing close attention to the potential impact of domestic rate increases since it is likely to be wide-ranging and will vary for each bank. 

Such a policy shift may not be imminent, however, with new Bank of Japan Governor Kazuo Ueda saying on Monday that the central bank’s yield curve control and negative rates are appropriate in the current economy. 

“Generally speaking, a rise in domestic interest rates would push down the value of banks’ securities holdings but also have a positive impact on their earnings by boosting yields on loans and investment,” Shibata said. “We need to watch this from various angles.”

Transform, Not Consolidate

The FSA has been urging regional lenders to come up with viable business models as the rural population shrinks rapidly. Shibata said banks need to take advantage of deregulation that allows them to enter businesses beyond the traditional practice of collecting deposits and lending out the money. 

“Even if they don’t need cash, companies have various management issues such as labor shortages and business succession,” he said. Banks can play a role by offering services such as advice on mergers and acquisitions and even talent matching, he added. 

How glowing jellyfish helped a bank play Cupid with depositors

Shibata isn’t convinced that mergers are a solution for regional banks’ woes. “A combination of two old-style banks would only create one bigger old-style bank,” he said. “I would call for bank transformation rather than consolidation.”

He also said local banks need to do more to modernize their corporate culture, singling out gender equality as one of the areas where they lag behind larger financial firms. “Empowering women is a very important issue for regional banks.”

Another challenge is shareholder engagement. Regional lenders were in the spotlight during last year’s shareholder meeting season, when Silchester International Investors made proposals to Bank of Kyoto Ltd. and three other banks to change their dividend policies.

Shibata said publicly traded banks are no different from other listed companies. “They have to engage with shareholders including activists, and they have a responsibility to explain their capital policy,” he said. 

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.