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Japanese regulators to tighten bank oversight as foreign interest rates rise

Makiko Yamazaki and Takahiko Wada

TOKYO (Reuters) – Japan will step up oversight of banks’ risk controls as rising overseas interest rates pose potential risks to their holdings of foreign bonds The losses, reflecting concerns about bank risk control, were impacted by the impact of U.S. monetary tightening on the nation’s financial system.

The Financial Services Authority “will have a dialogue with banks on market risk controls” as rising global interest rates lead to unrealized losses on its holdings, Japan’s regulator said in its annual policy guidance released on Wednesday Major banks, in search of higher returns than their local counterparts, invested heavily in foreign bonds, mainly U.S. Treasuries. But when yields rise, as they do with monetary tightening by the Fed and other central banks, the value of bonds falls. The Bank of Japan was caught off guard.

Overseas bonds held by Mitsubishi UFJ Financial Group (NYSE: MUFG) financial group and two other top banking groups The composite valuation loss of 2 is 2. 656 trillion yen ($. billion) at the end of June, an increase of more than 50% from the end of March.

The Bank of Japan did not join the global cycle of rising interest rates as inflation in Japan remains tame and the economy is fragile.

The financial regulator also said it would encourage major banks to strengthen risk management related to foreign currency liquidity, especially since Japanese banks’ market-based currency purchases are vulnerable to sudden market volatility.

The regulator added that it will conduct stress tests with the central bank on banks’ risk exposures.

This year’s policy guidelines mention the need to address potential issues related to leveraged buyout financing. Long-term ultra-low domestic interest rates are pushing major banks to look beyond traditional lending in search of yield.

Japanese auto parts supplier Marelli Holdings Co KKR & Co (NYSE: KKR) with The highly leveraged buyout, which entered a court-led restructuring process in June, has debt exceeding 1 trillion yen. That caused huge losses to about two dozen creditors, including Mizuho Financial Group.

($1 = 138.91 Yen)

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