TOKYO (Reuters) – Japan’s financial watchdog has instructed regional banks to curb potential losses on their foreign bonds and other securities, by selling such investments if necessary, two people with direct knowledge of the situation said, in its strongest step to shore up smaller lenders’ financial health.
The Financial Services Agency has asked the banks to ensure the unrealized losses on their securities do not exceed the profits from their core lending business or their equity capital, the sources told Reuters.
Japanese banks are currently not required to book losses on their securities investments until they are realized. The rare move by regulators underscores a desire to discourage smaller lenders from making risky investments, which could further hurt their already fragile states of financial health.
A spokesman for the FSA declined to comment. An official for the Regional Banks Association of Japan declined to comment on member banks’ investment strategies.
Profits at Japan’s roughly 100 regional banks are being squeezed by the Bank of Japan’s negative interest-rate policy, even as loan demand shrinks with the population outside the nation’s biggest cities in decline.
Smaller lenders have shifted their investment targets to riskier assets, such as foreign bonds, to offset weakening profits at their core business. But this strategy has met challenges with U.S. economic growth and tighter Federal Reserve monetary policy hurting bond prices. The benchmark U.S. Treasury yield rose on Thursday to a seven-year high.
Earlier this year, the FSA identified about 20 regional banks that were losing money on their foreign bond investments as yields for U.S. long-term bonds rose.
More than half the regional banks lost money on their core lending and fees businesses in the year to March 2017, according to the most recent annual figures..
The FSA has told regional banks, they should if necessary sell securities and realize losses before they get too big, said the sources, asking not to be identified because they are not authorized to speak to media.
Overall, Japan’s roughly 80 listed regional banks reported about 100 billion yen ($900 million) in losses from their foreign-bond investments for the year to March, an analyst at a major brokerage who did not want to be named estimated. That compared with about 1.3 trillion yen profit from their core business.
(Reporting by Taro Fuse and Takahiko Wada, Writing by Junko Fujita; Editing by William Mallard and Sam Holmes)