FSA probes regional banks' rate-rise resilience, may question them in August

2026-07-14

Japan's Financial Services Agency has begun examining whether regional banks across the country have management structures capable of withstanding rising interest rates. It will narrow the focus as soon as August and move into detailed hearings. The agency will check whether banks can cope with competition for deposits and unrealized losses on their bond holdings, and will push for improvements if needed.

ALM examined at all banks

It is unusual to examine ALM, or asset-liability management, a core function of bank management, across all regional banks. In a world with positive interest rates, lending margins are widening, but more regional banks are struggling to secure deposits, the funding source for loans. The FSA is on alert for banks whose management could become unstable as competition intensifies.

The FSA first conducted a questionnaire this spring covering about 100 regional banks and asking roughly 15 questions. It checked whether banks have dedicated staff who understand interest rate rise risks, which department and who controls deposit and equity positions, and what measures they use to contain risk, among other points.

Going forward, it is considering conducting more detailed interviews with at least more than 10 banks. The agency sees cases where staff numbers appear large but employees actually hold multiple roles, leaving risk management insufficiently effective, as well as cases where responsibility is unclear.

Loan-to-deposit ratio tops 80%

The loan-to-deposit ratio at regional banks, which shows lending against deposits, remains at a high level above 80%. Some banks are also setting extraordinarily high time deposit rates to expand lending. Unrealized losses on bonds may in some cases be larger in substance than what is disclosed in earnings reports, the agency said.

In discussions, the FSA will seek measures such as new funding options, restructuring of systems and training for staff who are well versed in the interest rate environment. If it judges that problems are extremely serious, such as a bank having no grasp of its own position at all, it will also consider inspections.

More recently, interest in risk management at financial institutions has increased further over procedures involving the bankruptcy case of Zento-shin, a credit card payment processor based in Osaka. 'With interest rates rising, our view of loans and deposits has changed 180 degrees. Unless we fundamentally review our system, it could lead to trouble,' said an executive at a major regional bank. The FSA will determine whether the management systems of regional banks, which have continued under ultra-low interest rates, can adapt to a rising-rate environment.

Enjoyed this article? Share it with your network!