Bank of Japan Deputy Gov. Hirohide Yamaguchi urged the nation's banks Wednesday to accelerate efforts to strengthen their capital base to make them less vulnerable to economic crises.
"It is important for (Japanese financial institutions) to willfully accelerate efforts to strengthen their capital base," not just to brace for tougher global capital standards, Yamaguchi said in a Tokyo speech.
Japanese banks are under pressure to increase their capital base as global regulators discuss tougher capital standards for banks to prevent another financial crisis.
Last week, Mitsubishi UFJ Financial Group Inc., Japan's largest banking group, said it plans to raise up to ¥1 trillion by selling new common shares.
While stressing the importance of boosting the capital base, Yamaguchi described it as "the last resort to absorb loss."
He also said it is necessary to address the issue of Japanese banks' large equity holdings because such practices are making their earnings vulnerable to fluctuations in stock markets.
Japanese banks traditionally hold their client companies' shares to cement business ties.
Yamaguchi said this was one reason why Japanese banks were hurt in a way that was "absolutely not small" in the global financial crisis.
"The latest global financial crisis shed light on the basic challenges rooted in the management of our country's financial institutions," he said.
He also said Japanese financial institutions' profitability is low, especially in the core lending and deposit operations. The difference behtween interest rates on loans and those on deposits averaged less than 2 percent for Japanese financial institutions over the past 20 years, lower than 5 percent to 6 percent for their U.S. counterparts, he said.