Business / Economy

Japanese banks oppose stricter capital rules for interest-rate risk

by Monami Yui and Shingo Kawamoto


Japanese banks will oppose a push by global regulators to toughen rules on the capital lenders require to withstand an increase in interest rates, the new chief of the country’s bank lobby said.

Stricter capital requirements for interest-rate risk on assets lenders plan to hold to maturity would have a “severe impact” on the nation’s banks, Japanese Bankers Association Chairman Yasuhiro Sato said in an interview.

The Basel Committee on Banking Supervision is weighing updating the rules amid concern that some banks may not be prepared for higher rates when central banks end monetary easing. In Japan, such a revision may hamper the practice of lenders using returns from asset investments and loan profits to pay interest to depositors, according to Sato.

“The change may make banks cautious about holding sovereign debt,” said Sato, 62, who is also president of Mizuho Financial Group Inc. “This would have a negative impact not only on banking functions but also on the markets. We will coordinate with the Financial Services Agency and continue to express our opposition to it.”

While Japanese banks have pared their government bond holdings from a peak of ¥171 trillion in March 2012, they still held ¥124.8 trillion in their banking books in February, according to Bank of Japan data. That makes them vulnerable to writedowns if bond yields rise, reducing the value of the securities.

Global regulators have been bolstering banks’ capital requirements to make them stronger following the 2008 global financial crisis. They set minimum rules on how far lenders must fund themselves through equity and other sources that can absorb unforeseen losses.

“There have been various ‘too-big-to-fail’ regulations, some of which were necessary,” said Sato, who replaced Nobuyuki Hirano as head of the lobby on Wednesday. “But there should be only so much you can do for fear of a large lender’s bankruptcy.”

Basel rules already include binding capital requirements for interest-rate risk on assets held in banks’ trading books. For the banking book, international standards are limited to a system whereby banks regularly report to their national supervisors on risk levels. The supervisors then take decisions on whether more capital, or a reduction in the size of the position, is needed.

This is known as a so-called Pillar 2 process, compared with the setting of binding rules, known as Pillar 1.

“The issue before the committee going forward will be whether to, and how to, move toward a Pillar 1, or whether we should move toward a more rigorous Pillar 2 treatment,” Stefan Ingves, the Basel committee chairman, said in an interview on March 27.

In Japan, interest rates have fallen as the central bank embarked on unprecedented monetary easing to end more than a decade of deflation. Benchmark 10-year bond yields touched a record-low 0.195 percent in January.

While the drop in rates has curtailed banks’ loan profitability, BOJ Gov. Haruhiko Kuroda’s policy has spurred the economy, Sato said.

“Interest rates hovering at low levels aren’t favorable for banks from the profit perspective, but it’s fair to say that the BOJ’s policy has been bringing about a big positive effect,” he said, citing improved data ranging from corporate earnings, bankruptcies and employment to bank lending.

Sato said it will be “quite a challenge” for the central bank to achieve its 2 percent inflation target amid falling oil prices. Kuroda should keep his pledge to pursue monetary easing until the goal is met, he said.

To counter shrinking loan margins, banks are bolstering fee businesses such as mergers advisory, succession planning and asset management, Sato said.

“While lending remains our bread and butter, our profit model is changing and expanding,” he said. “The challenge these days is how a lender makes money collectively.”

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