BOJ Warns Banks Face Rising Credit Costs, Investment Losses
(Bloomberg) -- Japanese lenders must brace for rising bad-loan costs and investment losses even as the financial system shows resilience to the coronavirus-fueled economic slump, according to the central bank.
If the downturn is prolonged, more companies at home at abroad could face solvency problems, raising credit costs, the Bank of Japan said Tuesday in its semiannual Financial System Report. Losses on banks’ securities investment “could deteriorate” due to financial-market moves, and foreign-currency funding may become destabilized, it said.
The central bank left unchanged its assessment that Japan’s financial system has been “maintaining stability on the whole.” Banks have “considerable resilience” in terms of capital and liquidity, and the government and central bank have implemented “swift and powerful” policy measures, it added.
The pandemic is adding to pressures on Japanese banks that have increased risk-taking to make up for declining profitability due to ultra-low interest rates and a shrinking population. To cushion the impact of the economic slump, the central bank has expanded asset purchases while the government has announced a record stimulus package.
Japanese banks, which have been investing abroad in search of returns, shifted their stance since the market turmoil intensified last month, with an increasing number taking a “more cautious” approach, the BOJ said.
Unrealized losses “deteriorated substantially” due to plunging stock prices and a spike in overseas credit spreads, the central bank said. While these were mostly offset by improvements on bond holdings thanks to falling interest rates, there may be less scope for additional gains, it added.
“Given that there is less room for further decline in overseas interest rates, the negative impact could surpass these improvements,” the BOJ said. “Should there be further adjustments in prices of stocks and credit assets overseas, sales losses and impairment losses from related investments could become large,” it said.
Still, the central bank said the overall credit quality of Japanese banks’ portfolios is high. It pointed out that their holdings of overseas bundled leveraged loans -- known as collateralized loan obligations -- are almost entirely AAA rated.
Still, the central bank said it is “too early to conclude that market functioning has fully recovered,” and developments in Japanese banks’ foreign-currency funding “warrant vigilance.”
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