BOJ published its semiannual Financial System Report. This issue of the report discusses current developments in financial markets and the financial intermediation activities of Japanese financial institutions amid the ongoing impact of the COVID-19 outbreak. It also analyzes and assesses the impact on the financial stability of Japan as well as the risks posed by the outbreak. The issues and challenges that warrant close vigilance going forward have been identified. In addition, BOJ published a review that summarizes background of the implementation of the "simultaneous stress test based on a common scenario."
The report highlights that the financial system of Japan has been stable. Looking ahead, even in the case where the economic recovery remains moderate, the financial system is likely to remain highly robust. However, developments in the spread of COVID-19 and their impact on the domestic and overseas economies are subject to considerable uncertainty. Under the severe stress event of the persistently stagnated pace of economic recovery and significant adjustments in financial markets, a deterioration in financial institutions' financial soundness and the resultant impairment of the smooth functioning of financial intermediation could pose a risk of further downward pressure on the real economy. In this regard, the following three risks warrant particular attention.
- The first risk is an increase in credit costs due to the potentially prolonged economic downturn at home and abroad. In Japan, close attention should be paid to the impact on lending to areas where vulnerabilities accumulated before the COVID-19 outbreak. The overall credit quality of the overseas loan portfolios of Japanese banks has remained high. Careful risk management is essential given that the current downturn in overseas economies is more severe than that during the global financial crisis.
- The second risk is a deterioration in gains or losses on securities investments due to substantial adjustments in financial markets. Under the prolonged low interest rate environment in Japan, Japanese financial institutions have been actively taking on market risk, particularly for domestic and overseas credit products and investment funds, to search for yield.
- The third risk is destabilization of foreign currency funding due to the tightening of foreign currency funding markets mainly for the U.S. dollar. As foreign currency funding markets are still vulnerable to shocks, Japanese banks need to make continuous efforts to strengthen their foreign currency funding bases and liquidity management.
Future developments in the spread of COVID-19 and their impact on the domestic and overseas economies remain highly uncertain. Against this backdrop, the major challenge for financial institutions is to smoothly fulfill their financial intermediation function by balancing their financial soundness and risk taking. Careful assessment of the sustainability of the borrowers' businesses, in addition to the provision of swift liquidity support, will become increasingly important. In this respect, providing effective support tailored to the needs of borrowers by assisting with their core business and financing as well as facilitating their business succession, transfer, and restructuring will become more essential. From a medium to long-term perspective, BOJ will actively support initiatives of financial institutions by preparing institutional frameworks for the financial system and by taking measures to facilitate digital transformation.
Keywords: Asia Pacific, Japan, Banking, Securities, Stress Testing, COVID-19, Credit Risk, Financial Stability, BOJ
Previous ArticleHM Treasury Publishes Update on UK-US Regulatory Group Meeting
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.
ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.
EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).
PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.
The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.
FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.
OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.
To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).
HM Treasury announced that G7 Finance Ministers and Central Bank Governors met ahead of COP 26, the 2021 UN Climate Change Conference, and agreed on green agenda.