Japan regulators highlight interest rate risk; regional banks vulnerable to BOJ exit

TOKYO: Japanese financial authorities are joining forces to scrutinise for the first time banks' exposure to a potential spike in interest rates, with a focus on the risks to regional lenders when the central bank eventually ends its massive easing.

While the risks look small now with Japan's economy recovering and interest rates extremely low, the nation's 105 regional banks represent the weak link in the financial system. With local economies depopulating in this fast-ageing society, loan demand tepid and scant resources to seek profits overseas, regional lenders have little alternative for their huge deposits but to hold Japanese government bonds.

The Financial Services Agency and the Bank of Japan are scrutinising the smaller lenders' interest-rate risk as they jointly step up their "macroprudential" oversight - looking to identify and minimise risks to the financial system amid broad shifts in the economy, people involved in the process say.

"At present, interest rates are very low and stable, but we don't know when or how the financial environment will change," the FSA's new commissioner, Kiyoshi Hosomizo, told regional bank heads in a private meeting last month, according to a person who attended the meeting.

Regional banks, which sit below the five major banks in Japan's financial pyramid, have total deposits and loans roughly equal to the biggest lenders but are largely tied to shrinking local economies outside the vibrant big cities. They vary greatly, with the market value of the listed banks ranging from over $7 billion for the Bank of Yokohama Ltd just outside Tokyo, to barely $50 million for Howa Bank Ltd in the western city of Oita.