Japan’s financial regulator is running stress tests to see whether too much cash in the system is stifling smaller banks’ ability to earn, unlike regulatory tests elsewhere that gauge whether lenders have enough capital to survive financial shocks.
Two people with direct knowledge of the process said the Japanese Financial Services Agency (FSA) had initiated the tests on concerns that, with 10-year Japanese government bond yields near a record low about 0.3 percent, regional lenders could be at risk as the gap between what they pay for deposits and what they collect on loans and bond holdings shrinks.
The regulator was immediately not available for comment.
The action highlights an unintended risk of Japanese Prime Minister Shinzo Abe’s program to end decades of deflation with the support of the Bank of Japan, which is helping to keep interest rates low with monetary stimulus.
It was not immediately clear what scenarios or assumptions the Japanese regulator was using to assess risks to regional and smaller banks, nor how it would follow up with lenders that appeared to be threatened by a period of persistently low long-term interest rates.
Japan’s more than 100 regional banks account for about 40 percent of the nation’s US$4.6 trillion in outstanding loans, but overall loan demand has shrunk 10 percent over the past 20 years.
Such banks, which typically serve smaller businesses, have seen lending fall as Japan’s population ages, and many have cut their interest rates to win business.
For more than a year, the agency has urged regional banks to consolidate or seek customers abroad.
Japan’s second-largest regional lender, Bank of Yokohama, last month said that it was considering a merger with Tokyo-based Higashi-Nippon Bank Ltd in a potential deal that analysts said could spur consolidation.
Regional banks’ lending rates have come under pressure from the central bank’s quantitative easing, which began early last year.
Average lending rates from 64 regional banks have fallen over that period from about 1.5 percent to about 1.2 percent, central bank data showed.
At the same time, average loan rates for the group of smaller institutions known as secondary regional banks have fallen from about 1.7 percent to about 1.5 percent.
As a group, profits from core lending by the regional banks dropped 1.7 percent in the most recent quarter from the same period a year earlier and by 3.7 percent for the secondary regional banks, according to data from the central bank.
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