BOJ says Japan’s banking system is stable, warns of risks

A man wearing a protective mask walks past the Bank of Japan headquarters amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon/File Photo

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  • Foreign credit risk contained but signs of worsening – BOJ
  • Rising US yields will weigh on Japanese banks’ capital adequacy ratio
  • BOJ urges banks to diversify dollar funding instruments

TOKYO, Oct 21 (Reuters) – Japan’s banking system remains broadly stable, but financial institutions could face risks, including a possible increase in credit costs caused by a delayed economic recovery, the Bank of Japan said on Thursday. Japan (BOJ) in a report. .

Financial institutions also risk incurring losses on their securities investment portfolios in the event of a rapid market adjustment, the BOJ said, adding that the central bank should remain vigilant.

“Overseas lending credit risk is generally contained as overseas economies recover overall. Nonetheless, there are signs of deterioration in some portfolios that appear to be severely impacted by the pandemic,” said the BOJ in its semi-annual report analyzing the Japanese banking system. system.

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The stress tests highlighted the vulnerability of Japanese banks to potential market swings caused by an expected withdrawal of US monetary stimulus, according to the report.

Markets expect the Federal Reserve to announce bond reduction plans in November, with some predicting interest rate hikes as early as next year.

In a scenario where US long-term interest rates rise by 100 basis points and hurt emerging economies, major Japanese banks operating globally will see their capital adequacy ratio drop to 9.6% in fiscal 2023, up from 12.5% ​​currently, according to the report.

A further deterioration in the Japanese economy could deal a blow to banks focusing on domestic operations, with their capital adequacy ratio expected to fall to 9.5% from 10.1%, according to the report.

“In the event of substantial and rapid adjustment in global financial markets, the health of financial institutions could deteriorate and disrupt financial intermediation, which could then further harm the Japanese economy,” the report said.

The BOJ also urged Japanese banks operating globally to diversify ways to raise dollar funds as they expand overseas investment and lending.

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Reporting by Leika Kihara; Editing by Christian Schmollinger and Ana Nicolaci da Costa

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