Japan’s regulators are raising pressure on regional banks to pre-empt the kind of risks that took down Silicon Valley Bank as the country prepares for its first interest rate rise in more than a decade.
Even as Japan’s biggest banks churn out record profits and anticipate further gains from domestic rate increases, the country’s central bank warned in its recent Financial Stability Report that regional banks and shinkin financial co-operatives were exposed to interest rate risk after piling into long-term loans and securities.
Rising rates are normally welcomed by commercial banks, which can profit from a wider margin between what they charge for lending and what they pay to borrow. But dangers on the other side include so-called duration risk, which measures the exposure of long-term bonds to unexpected changes in interest rates. The risks can crystallise if banks are forced to sell long-term assets that are losing value as interest rates rise.