Japanese Banks Suffer Blow Amid Bond Anxiety After SVB Fallout
Japanese Banks Take Post-SVB Hit Over Bond Fears
The recent collapse of Silicon Valley Bank (SVB) and the subsequent turmoil at Credit Suisse has prompted concerns over the resilience of Japanese banks in the face of rising interest rates. The country’s regional banking sector has become a focal point of the markets’ attention since the 2008 global financial crisis. As a result, shares in Japanese banks fell more heavily than their counterparts in the US and Europe, with the Topix banks index down 17% from March 9 to Friday, compared to a 13% decline for the S&P banks index in the US and a 16% fall for the Euro Stoxx banks index.
The Risks for Japan’s Regional Banks and Financial Systems
Japan’s regional banking sector has been in long-term decline, negatively impacting its income. Combined bank deposits for the country account for nearly half of the total cash. There are concerns about the effect inflation and wage increases, coupled with rising borrowing costs, may have on these banks’ stability. Although Japanese lenders had little exposure to the $17bn wipeout of additional tier 1 bonds at Credit Suisse, the nature of the SVB collapse seems to echo Japanese regional banks’ historical response to decades of ultra-low interest rates.
The long-standing risks accumulated within the Japanese regional banking sector stem from its high savings rate and a stagnant economy, creating a vast pool of savings on deposits. As a result, the country’s 78 listed banks have been voracious buyers of US Treasuries and other global assets. With the rise in US interest rates, Japanese regional banks have experienced significant losses on their holdings of US Treasury bonds, whose value has fallen as yields have risen. The crucial question is whether Japan’s regional banks and financial system can withstand the impact of future interest rate increases.
The Regulators’ Response
Officials at the Financial Services Agency (FSA) have said that the risk for Japanese regional banks is low since their debt condition, liquidity, and capital base are all stable. However, regulators are surveying the securities that regional banks have bought since the summer of 2021 to examine the risks they run if borrowing costs rise. Nevertheless, FSA officials have reassured the public that Japanese banks face higher capital and liquidity standards than SVB and that the risk of sudden bank withdrawals and cancellation of policies at life insurers is low. Another mitigating factor is the sizeable unrealized gains from substantial portfolios of equities in listed Japanese companies that Japanese regional banks also hold, which have risen in value as Japan’s stock market has reached heights not seen in three decades.
- The failure of SVB has left Japan’s Matsui Securities, which lent money for an unfortunate derivative product sold to retail investors by the bank, facing a loss of around $285m.
- The Bank of Japan bought a record amount of domestic stocks and exchange-traded funds (ETFs) last year amid concerns about the pandemic’s impact on the economy.
- A recent Reuters poll showed analysts expected Japan’s Bank of Tokyo-Mitsubishi UFJ to shift more resources back to Japan from overseas operations in 2021.
The post-SVB hit on Japan’s banks highlights the vulnerability of regional banks to rising interest rates and how the sector’s historical reliance on US Treasury bonds has exposed them. While financial regulators have said the risks are low and Japanese banks face higher capital and liquidity standards than SVB, there are still concerns over their stability if borrowing costs rise. However, the sizeable unrealized gains from portfolios of equities in listed Japanese companies Japanese regional banks also hold are a mitigating factor.
The SVB collapse and the resulting market instability have brought Japan’s ailing regional banking sector and its financial institutions under scrutiny. While there is optimism among officials at the FSA, many investors remain cautious, given regional banks’ reliance on US Treasuries and the Japanese economy’s uncertain future. As a result, it remains to be seen whether Japanese banks can weather the storm of rising interest rates and market volatility or whether the long-term decline of the regional banking sector will continue unabated.