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Japan regulator preps rules to limit regional banks' bond investments

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Japan regulator preps rules to limit regional banks' bond investments

Japan's Financial Services Agency plans to issue new rules in fiscal 2018 to limit regional banks' investment in domestic and foreign bonds, The Nikkei reported June 8.

The new rules are part of an effort to discourage banks from taking excessive risks and drive them back to core lending operations. The rules would require banks without overseas operations to curb valuation losses on their bond holdings to 20% of core capital.

Amid a negative rate policy at home, Japanese regional banks have been investing in securities vulnerable to interest rate changes. As of April 30, top- and second-tier regional banks held a total of ¥12.5 trillion in foreign bonds and ¥29 trillion of Japanese government bonds, according to the report.

Under the new rules, potential losses would be calculated based on estimated price changes due to interest rate fluctuations. Banks will receive a warning if the calculations point to possible losses totaling more than 20% of a bank's capital. Currently, the FSA conducts a hearing if banks incur losses on bonds exceeding a fixed proportion of core capital.

The FSA plans to implement similar rules based on Basel III guidelines for Japan's megabanks - Sumitomo Mitsui Financial Group Inc., Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. - and other institutions starting in the current fiscal year.

At the same time, the regulator plans to ease lending rules as a means to entice banks back to core lending. Banks will have greater independence in assessing the financial health of borrowers. The regulator will also encourage banks to lend proactively and look to clients' future business potential.

As of June 7, US$1 was equivalent to ¥109.34.