Japan’s FSA finds regional banks incurred losses on foreign bond investments: source

TOKYO (Reuters) – Around 20 of Japan’s regional banks lost money on their foreign bond investments amid the recent jump in U.S. long-term yields, an emergency review conducted by Japan’s Financial Services Agency (FSA) showed, a source with direct knowledge of the matter told Reuters.

The FSA is expected to ask banks to improve their performance, said the source, who is not authorized to discuss the matter publicly.

Squeezed by shrinking local populations and the Bank of Japan’s negative interest rate policy, many of these smaller banks have managed to stay in the black thanks to securities trading. However, their bond investments have taken a hit, and there are worries these banks could face more trouble ahead.

The FSA has fretted for some time about the long-term health of regional banks, which hold about half the country’s $4 trillion in outstanding bank loans.

Over half of Japan’s 100 or so regional banks lost money on their core lending and fees businesses in the year to March 2017, with profits falling faster than expected.

The FSA conducted a similar investigation when U.S. yields rose after Donald Trump was elected president in 2016, and ordered some regional banks to improve their performance.

U.S. Treasury yields have surged this year, with those of the benchmark 10-year note () rising to its highest in four years, on expectations the Federal Reserve could raise interest rates more than expected this year.

The 20 or so banks the FSA inspected recently were the ones it singled out during its 2016 review as needing improvement.

Finance Minister Taro Aso told a regular news conference on Tuesday that while some regional banks have incurred capital losses on their foreign bond investments, it has not reached a dangerous level.

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