BOJ To Step Up Scrutiny Of Impact Of Interest Rate Hikes On Banks, Deposits
The Bank of Japan said it will step up scrutiny of how lenders estimate the impact of interest rate hikes on their profits in on-site inspections next fiscal year, as some were found to have inadequately understood the risk of deposit outflows.
After ending a decade of massive stimulus last year, the BOJ raised interest rates in January to 0.5%, the highest since the 2008 global financial crisis.
Major financial institutions have seen their profitability strengthen as interest rates rise, the central bank said Tuesday in a report on on-site inspection findings for the current fiscal year ending in March.
But some lenders face challenges in estimating the impact of rising interest rates on their profitability, and setting realistic projections for how far they can raise lending and deposit rates, the BOJ said.
Some financial institutions have had problems with risk management or lacked a proper framework to mitigate losses, leading them to incur increased valuation losses on their securities holdings, the report said.
The BOJ also warned that some smaller regional lenders were not adequately prepared to cope with the risk of deposit outflows, as larger rivals or online banks sought to lure depositors with higher interest rates or more convenient services.
"There are financial institutions that see deposits declining as a trend or increasing at a slow pace. Some have failed to adequately analyze the development of such deposits," the report said.
In its inspections for the year starting in April, the BOJ will step up scrutiny of whether lenders have a sufficient understanding of how their deposits, loans and securities holdings will be affected by rising interest rates, the report said.
"The BOJ will examine how financial institutions that see deposits falling or increasing at a slower pace analyze the development of deposits, and whether they are taking effective countermeasures," the report said.
The BOJ will also examine whether financial institutions have policies to deal with the risk of deposit outflows, including via the internet, it said.
The guidance underscores the BOJ’s attention to risks associated with its plan to keep raising interest rates to a level deemed neutral for the economy — seen by staff as between 1% and 2.5% in nominal terms.
Source: Investing.com
