By Leika Kihara
TOKYO (Reuters) -Japanese financial institutions have sufficient capital buffers to absorb any losses caused by various external risks, such as rising overseas interest rates, the Bank of Japan (BOJ) said on Tuesday.
But many regional banks faced challenges in risk management such as analysing the impact on their portfolios in times of heightened market volatility, the BOJ said in an annual report on its on-site examination results of financial institutions.
Japanese financial institutions have actively taken on market risk in recent years amid ultra-low interest rates, though they have become “somewhat cautious” on their investment in light of rising global interest rates, the BOJ said.
“Some regional financial institutions have suffered a substantial increase in valuation losses” and failed to adequately assess their risk tolerance against profits, it said.
Some regional financial institutions also did not sufficiently ascertain how declining interest payment could affect their future earnings, the BOJ said.
“Thus, many regional financial institutions were found to have issues in terms of conducting effective risk management,” the report said.
As a whole, financial institutions continued to channel funds to borrowers smoothly even under various types of stress such as supply constraints, rising raw material prices, materialisation of geo-political risks and rising overseas interest rates, the BOJ said.
The report did not make direct mention of the potential fallout from the collapse of U.S. lender Silicon Valley Bank, which sent shockwaves across global markets and sent Japanese financial shares tumbling.
(Reporting by Leika Kihara; Editing by Jacqueline Wong & Shri Navaratnam)
