inancial eport ystem Summary October 2017 Bank of Japan

Transcription

1 FSR ystem inancial eport Summary October 17 Bank of Japan

2 Financial intermediation Comprehensive assessment of the financial system No imbalances in financial and economic activities can be observed on the whole while the funding conditions for the nonfinancial private sector have been highly accommodative. The real estate market does not seem overheated on the whole, although transaction prices remain high in some places such as the Tokyo area. Stability of the financial system No major imbalances have been observed in financial and economic activities, and FIs on the whole have generally strong resilience in terms of both capital and liquidity. Thus, it can be judged that Japan's financial system has been maintaining stability. FIs' portfolio rebalancing through more active lending has been contributing to an improvement in economic developments, and if this leads to more proactive economic activities by firms and households, this in turn is likely to bring about a recovery in FIs' profitability. Potential vulnerabilities due to the decline in FIs' profitability The low profitability of Japanese FIs is striking from an international perspective. The number of FIs' employees/branches may be in excess relative to demand. This structural factor in turn leads to a decline in FIs' profitability through the intensified competition among FIs in Japan. If it becomes common for firms to choose the FI offering the lowest loan interest rate among a number of FIs when taking out a loan, this may lower the efficiency of capital allocation by discouraging FIs' information production activities in the medium to long run. Challenges from a macroprudential perspective The decline in population and the number of firms is a common shock occurring across Japan. In this situation, the intensification of competition among regional FIs would affect the systemic risk by increasing the effects of a common exposure, that is, by decreasing net interest income. In order to ensure both the efficiency and stability of Japan's financial system in the future, it is important for FIs to improve their profitability under the appropriate competitive environment. * FI stands for financial institution.

3 Part I. Financial cycle and the resilience of financial system Assess the financial cycle using the Financial Activity Indexes. Assess the resilience against the acute stresses in the macro stress testing framework.

4 Heat map: Financial Activity Indexes While the funding conditions among firms and households have been highly accommodative, none of the indicators are "red" or "blue," and on the whole no imbalances in financial and economic activities can be observed. The heat map shows, using colors, the deviation of 1 indexes from their trends in order to assess whether there are any signs of overheating or excessive contraction in various financial and economic activities. Chart III-5-1: Financial Activity Indexes Financial DI of lending attitudes of financial institutions institutions Growth rate of M Financial Equity weighting in institutional investors' portfolios markets Stock purchases on margin to sales on margin ratio Private Private investment to GDP ratio sector Total credit to GDP ratio Household investment to disposable income ratio Household Household loans to GDP ratio Business fixed investment to GDP ratio Corporate Corporate credit to GDP ratio Real estate firms' investment to GDP ratio Real estate Real estate loans to GDP ratio Stock prices Asset prices Land prices to GDP ratio CY

5 Firms' funding environment and business fixed investment "Total credit to GDP ratio" has been increasing. "Business fixed investment to GDP ratio" and "stock prices" have risen in tandem, suggesting that an expectation of improved corporate profits is driving the expansion of corporate investment. "DI of lending attitudes of FIs" remains at the highest level since the bubble period (in a zone close to "red"). The active lending stance of banks helps to improve business sentiment among firms Chart III-5-3: Total credit to GDP ratio 1 Original series Trend 1 CY Chart III-5-: DI of lending attitudes of FIs pts Accommodative Original series Trend - Severe -3 CY Chart III-5-: Business fixed investment to GDP ratio Original series Trend 3,,5 pts Chart III-5-5: Stock prices Original series Trend 18, 1 1,5 1 1, CY CY

6 Domestic loans FIs' domestic loans outstanding have been growing at a moderately faster pace on a year-onyear basis. By type of borrower, while growth in FIs' loans to local governments has slowed, loans to firms and individuals have continued to grow. Regional FIs have continued to make efforts to revitalize local economies. Meanwhile, they have held back from extending loans in Tokyo, including syndicated loans to large firms. By industry, loans to a large number of industries have been increasing. Chart III-1-: Corporate loans provided by regional banks y/y chg. Chart III-1-: Loans outstanding among FIs by type of borrower y/y chg. - - Large firms, etc. Small firms Local governments Individuals Total - CY Chart III-1-7: Banks' corporate loans outstanding by industry y/y chg CY Loans provided by Tokyo branches (35 tril. yen) Loans provided by local-area branches (19 tril. yen) Total (1 tril. yen) - FY Real estate Medical and nursing care Manufacturing Electricity and gas Financial institutions Wholesale and retail Goods rental and leasing Others Total

7 Domestic loans () FIs' average contract interest rates on new loans are hovering around historically low levels. While competition among FIs and the improvement in firms' financial conditions have exerted downward pressure on interest rates on long-term loans, a shift toward fixed-rate loans with longer lending periods is one of the factors that have put upward pressure on interest rates. Interest rates for loans linked to short-term prime lending rates and fixed-rate loans, which make up a relatively large share of regional FIs' loan portfolios, have continued on a declining trend under continuing monetary easing. This also reflects the effects of competition among FIs. Chart III-1-1: Average contract interest rates on new loans and discounts among domestically licensed banks Chart III-1-15: Average remaining maturity of fixed-rate loans among banks. 3.8 years Major banks Regional banks Short-term Long-term.5 CY Chart III-1-17: Lending rates among regional banks by type of interest rate Loans linked to short-term prime lending rate Fixed rate loans Loans linked to market rates. FY Sep Mar Sep Mar Sep Mar. 17 Chart III-1-18: Composition of loans by type of interest rate Major banks Regional banks Shinkin banks Fixed rate loans, etc. Loans linked to long-term prime lending rate Loans linked to short-term prime lending rate Loans linked to market rates 7

8 Real estate market The real estate market does not seem overheated on the whole, although transaction prices remain high in some places such as the Tokyo metropolitan area. In the commercial real estate market, the increase in real estate prices has been leveling off; the increase in investment by real estate developers has come to a pause, and "real estate firms' investment to GDP ratio" has recently declined. In the REIT market, there is no sign of further bullish expectations among investors. The J-REIT capitalization rate has recently been rising somewhat. Chart III-5-: Real estate investors' assessment of the market cycle 8 7 April 1 October 1 April 17 d e f 5 c g 3 a b h 1 Recovery Expansion Contraction Recession a b c d e f g h CY1= Chart III-5-7: Commercial property prices Chart III-5-8: Real estate firms' investment to GDP ratio Chart III-5-9: Capitalization rates of J-REITs Total Office Retail Residential 9 Commercial property Office Retail 8 CY Original series Trend -. CY CY

9 Real estate loans While loans to the real estate industry have continued to grow, the pace of growth has recently decelerated somewhat. The outstanding amount of real estate loans among regional FIs has continued to grow at a relatively faster pace, driven by increasing demand to build rental properties, etc. However, the year-on-year rate of change in new loans to rental housing businesses by individuals has recently turned negative, while the growth rate of new loans to SMEs has rapidly declined. Chart III-1-1: Newly extended real estate loans for fixed investment among regional banks y/y chg y/y chg. - FY Rental housing business by individuals Large firms Real estate-related local public corporations FY Chart III-1-13: Breakdown of real estate loans - FY Real estate-related local public corporations Special purpose companies for real estate Private firms, etc. Rental housing business by individuals Total Major banks Regional banks Shinkin banks y/y chg. 1 y/y chg FY Small and medium-sized firms Special purpose companies for real estate Total 9

10 Capital adequacy FIs' capital levels are generally adequate relative to the amount of risk they undertake. The amount of risk borne by major banks and regional banks has decreased somewhat, mainly reflecting the decline in market risk associated with stockholdings, while the amount of risk borne by shinkin banks is largely unchanged. FIs currently have sufficient capacity to absorb losses and to take on risks. Chart IV--: Risks borne and amount of capital among FIs tril. yen Major banks Regional banks Shinkin banks tril. yen tril. yen FY Credit risk Interest rate risk Capital FY FY Market risk associated with stockholdings Operational risk Capital + unrealized gains/losses on securities 1

11 Credit risk: real estate loans As for loans for the rental housing business, FIs that do not employ quantitative criteria in their initial screening and interim management as well as those that do not reflect the results of portfolio monitoring in their screening criteria tend to have loans of lower quality. Some sign of changes in the upward trend in the real estate market can be observed and vacancy rates in some regional rental housing markets have continued to rise. Against these backgrounds, FIs need to further increase the effectiveness of their credit risk management of real estate loans. Chart IV-1-8: Utilization of quantitative criteria at the initial screening of loans for rental housing business Chart IV-1-9: Utilization of risk management tools and quality of loans for rental housing business Debt Service Coverage Ratio (DSCR) Loan to Value (LTV).5 "In danger of bankruptcy" and below loan ratio () Regional banks Shinkin banks Utilized Not utilized.5 Initial screening Interim management Portfolio Use of findings monitoring for screening criteria Degree of utilization: low (regional banks) Degree of utilization: high (regional banks) Degree of utilization: low ( shinkin banks) Degree of utilization: high ( shinkin banks) 1. 11

12 Market risk (1) FIs have maintained their stance of active risk taking in securities. The outstanding amount of FIs' yen bond investment has been on a declining trend, but the pace of decline has recently been moderate. The outstanding amount of their foreign bond investment decreased following the rise in U.S. interest rates toward the end of 1, but most recently has been increasing again somewhat. The outstanding amount of their investment trusts has been on an upward trend. Chart III-1-5: Outstanding amount of yen-denominated bonds among FIs tril. yen Other domestic bonds JGBs FY Chart III-1-: Outstanding amount of foreign bonds among FIs tril. yen FY Yen-denominated foreign bonds Foreign currency-denominated foreign bonds Foreign bonds Chart III-1-7: Outstanding amount of investment trusts, etc. among FIs tril. yen FY

13 Market risk () Interest rate volatility -- especially in U.S. Treasuries -- has been at a historically low level, but such an environment will not necessarily persist in the future. If volatility were to return, as it did during the "taper tantrum" in 13, there is a risk that fluctuations in interest rates will be amplified through a surge in sales by investors, including FIs conducting VaR management. Chart II-1-: HVs of U.S. stock and Treasury prices and the U.S. dollar exchange rate Chart IV--8: Setting limits on securities holdings among regional FIs 1 U.S. Treasuries (lhs) Dollar index (lhs) S&P 5 (rhs) 1 8 Loss-cut rules for individual securities Foreign currency-denominated foreign bonds 1 Holding limits 8 Loss limits Risk limits CY Done Not yet 13

14 Funding liquidity risk for foreign currencies For major banks, the stability gap -- the gap between the amount of illiquid loans and stable funding -- has continued on a narrowing trend. Amid continuing increases in lending, banks have endeavored to bolster their funding bases. Nevertheless, to some extent, a gap still remains. In particular, given that about a quarter of client-related deposits consist of deposits by FIs, which have relatively low stickiness, it is necessary to carefully manage the risk of outflows. As for the resilience of foreign currency funding to short-term stress, banks generally hold sufficient liquid assets to cover the expected outflow of funds under a stress situation. Chart IV-3-3: Stability gap among major banks Chart IV-3-: Resilience to foreign currency liquidity stress among FIs 1, 8 bil. U.S. dollars Corporate bonds, etc. Medium- to long-term FX swaps and currency swaps Client-related deposits Financial institutions' deposits Loans 3.9 Stability gap bil. U.S. dollars Major banks CY Apr. 15 July Oct. Jan. Apr. July Oct. Jan. Apr Interbank funding, etc. Financial institutions' deposits Non-financial institutions' deposits Committed lines Foreign currency liquidity July 1

15 Macro stress testing: the tail event (1) Macro stress testing examines the resilience of the financial system dynamically under the tail event scenario, in which the assumed economic and financial conditions are comparable to those observed at home and abroad during the Lehman shock. Chart V-1-1: Loans outstanding Internationally active banks Domestic banks 8 y/y chg. Simulation Simulation Baseline scenario Tail event scenario FY Chart V-1-: Net interest income Internationally active banks Domestic banks tril. yen Baseline scenario Tail event scenario Simulation Simulation FY Chart V-1-3: Credit cost ratio Chart V-1-: CET1 capital ratio and core capital ratio Internationally active banks Domestic banks Internationally active banks Domestic banks. Baseline scenario 1 Tail event scenario Simulation 1.5 Break-even points 1 Simulation 1. Simulation Simulation -.5 FY Baseline scenario Tail event scenario FY

16 Macro stress testing: the tail event () At internationally active banks, the capital adequacy ratio falls due to a decrease in PPNR and an increase in unrealized losses on securities holdings. However, on average, the capital adequacy ratio still remains above the regulatory requirements. At domestic banks, the capital adequacy ratio declines mainly due to an increase in credit costs, but remains well above the regulatory requirements. There is some heterogeneity among FIs with regard to net income. FIs that record net losses tighten their lending stance to a greater extent. Chart V-1-: Distribution of net income Simulation 1th-9th percentile range Median Average -.8 FY Chart V-1-5: Decomposition of the CET1 capital ratio and the core capital ratio 13. Baseline scenario Increase in unrealized losses on securities holdings Internationally active banks Increase in credit costs Decrease in pre-provision net revenue (excl. trading income) Decrease in risk-weighted assets CET1 capital ratio Increasing factor Decreasing factor Others Taxes and dividends 7.9 Tail event scenario Baseline scenario Increase in credit costs Domestic banks Decrease in pre-provision net revenue (excl. trading income) Increase in risk-weighted assets Core capital ratio Increasing factor Decreasing factor Others Taxes and dividends 9. Tail event scenario Chart V-1-8: Distribution of profitability and loans outstanding Domestic banks (excl. shinkin) deviations of changes in loans outstanding, pts net income ROA, 1

17 Part II. Potential vulnerabilities of the financial system Assess/analyze the structural factors underlying FIs' low profitability -- intensified competition under the chronic stresses -- and their impact.

18 FIs' profit structure: number of employees, and profits per employee The decline in FIs' profits is common in advanced economies under the low interest rate environment. However, the low profitability of Japanese FIs is striking from an international perspective. Regional FIs in particular have a larger number of employees and lower gross operating profits per employee than U.S. and European FIs of a similar size.. thou. Average Median..3 Chart VI--1: Number of employees per FI thou thou. 15 thou Japan U.S. Europe Group 1. Smaller-scale institutions Japan U.S. Europe Group. Japan U.S. Europe Group 3 Larger-scale institutions Japan U.S. Europe Group Chart VI--: Gross operating profits per employee 5 mil. yen 5 mil. yen 5 mil. yen 5 mil. yen Weighted average 3 Median Japan U.S. Europe Group 1 Japan U.S. Europe Group Japan U.S. Europe Group 3 Japan U.S. Europe Group 18

19 FIs' profit structure: profits per branch Gross operating profits per branch are also low. Such low profitability is due to Japanese FIs' low net non-interest income as well as the decline in their net interest income under the prolonged low interest rate environment. Chart VI--3: Gross operating profits per branch 千 bil. yen Weighted average Median bil. yen bil. yen bil. yen.... Japan U.S. Europe Japan U.S. Europe Japan U.S. Europe Japan U.S. Europe Group 1 Group Group 3 Group Chart VI--: Net interest income and net non-interest income per branch bil. yen.3 bil. yen bil. yen bil. yen Japan U.S. Europe Group 1. Japan U.S. Europe Group. Japan U.S. Europe Group 3. Japan U.S. Europe Group Net interest income (weighted average) Net non-interest income (weighted average) Net interest income (median) Net non-interest income (median) 19

20 International comparison: net non-interest income (1) Japanese FIs have been making efforts to expand their fee-based business with the aim of diversifying their profit sources, but the net non-interest income ratio is low from an international perspective. In Japan, there are more than a few examples where FIs do not impose any fees on financial services that incur a reasonable amount of costs. In terms of diversity in profit sources, the fees for funds transfer services and investment trust/insurance sales account for a majority of fee income net non-interest income / gross operating profits, Japan U.S. Europe Japan U.S. Europe Japan U.S. Europe Japan U.S. Europe 1 Chart VI--5: International comparison of net non-interest income ratios Group 1 Group Group 3 Group Chart VI--8: Composition of fee and commission income th-9th percentile 5th-75th percentile 1th-5th percentile Weighted average Median Major Regional banks banks Japan Others Guarantee affairs Fiduciary activities Investment banking Sales of investment trusts, etc. Funds transfer services U.S. Others Insurance income Net servicing fees Investment banking Fiduciary activities Deposit account services Euro area Others Custody, etc. Securities Sales of investment trusts, etc. Asset management Payment services

21 International comparison: net non-interest income () The differences in the stance regarding the setting of fees and commissions for financial services in Japan and abroad also show up clearly in the composition of household consumption expenditure and the developments in financial services prices. Chart VI--: Weights of financial services in the CPI Chart VI--7: Price indices for financial services in the CPI Japan.3.7. U.S. Germany Switzerland. France Netherlands EEA31.99 Canada 1. U.K Italy CY3=1 Japan U.S. Canada EEA31 Switzerland 7 CY

22 International comparison: number of FIs and their branches If the number of post office branches is included, the number of FIs' branches per capita in Japan is about the same as that in Germany, which is regarded as being overbanked. The number of FIs' branches per habitable land area is conspicuously large in Japan. If FIs' branches are densely crowded in a small area, the state of competition will intensify. In terms of attracting deposits, FIs in Japan were competing intensely with each other, as well as with the postal savings system. And thus it was difficult for private FIs to adopt a strategy of charging deposit-related fees. Under these circumstances, a business model premised on not charging deposit-related fees seems to become entrenched at FIs Chart VI-3-: Number of FIs' branches per capita number of branches 7 More excessive Spain France Portugal Italy Austria Germany + post offices Japan + post offices Germany Switzerland U.S. Belgium Japan Greece Sweden U.K. Netherlands 5,, 3,, 1, Chart VI-3-3: Number of FIs' branches and population per habitable area FIs' branch density Population density number of branches Higher density Japan + post offices Japan Germany + post offices Belgium Italy Germany Switzerland France Spain Austria Portugal Netherlands U.K. Greece U.S. Sweden mil. Japan Netherlands Belgium Germany U.K. Switzerland Italy Austria France Portugal Spain Greece Sweden U.S.

23 Number of FIs, branches, employees, and firms The number of FIs' employees/branches in Japan may be in excess (overcapacity) relative to demand. Even though the number of branches/employees has fallen through the mid-s, overcapacity has remained. This likely reflects that the population and number of firms, which determine the demand for financial transactions, have continued to decline. 5 number of FIs Chart VI-3-: Number of FIs, branches, and employees FIs Branches Employees 5 thou. 55 thou CY CY CY Chart VI-3-5: Firm entry and exit rates, and number of firms Firm entry and exit rates Number of firms 8 ten thou Exit rate 35 1 Entry rate 3 CY CY

24 Regional distribution of FIs' branches While the number of firms has declined in almost all regions of Japan over the past decade, there are many regions where the number of FIs' branches has remained unchanged, and there are even some metropolitan areas where the number of branches has increased. Chart VI-3-: Number of firms and FIs' branches Changes in the number of firms from to 1 Changes in the number of branches from 5 to 15

25 Excess in the number of branches for each municipality FIs tend to concentrate their branches in metropolitan areas with a relatively high density of firms, i.e., the "economies of density" holds. "Economies of density": In service industries, the population density and firm density greatly influence the firms' profitability since the geographical scope of the market is limited based on the face-to-face supply of services at a store. For individual FIs, it may be a rational strategy to determine the geographical configuration of branches based on the economies of density. However, if many FIs adopt the same strategy, this may give rise to overcapacity, i.e., the "fallacy of composition." Chart VI-3-7: Relationship between branch density and firm density.15 branch density Insufficient relative to demand Chart VI-3-8: Excess in the number of FIs' branches for each municipality.1 Excessive relative to demand Tokyo area.5 Osaka area Nagoya area firm density 5

26 Changes in relationship with firms (1) The intensified competition among FIs' branches has started to have a clear effect on the business relationship between FIs and firms. Firms have been able to obtain more favorable loan conditions by increasing the number of FIs that each of them transacts with. The increase in the number of FIs that each firm transacts with has occurred especially in areas in which the excess in the number of branches seems to be severe. Chart VI-3-1: Number of FIs that each firm transacts with number of FIs Chart VI-3-1: Distribution of the number of FIs that each firm transacts with in each municipality ratio of firms with five or more FIs, FY5 FY FY Distribution of the excess in the number of branches frequency, 5 3 Region 1 Region Region 3 Region Low Branch density High Chart VI-3-11: Relationship between branch density and the number of FIs that each firm transacts with Number of FIs that each firm transacts with in each region 3 number of FIs 75th-9th percentile range 5th-75th percentile range 1th-5th percentile range Median excess in the number of branches Region 1 Region Region 3 Region Low Excess in the number of branches High

27 Changes in relationship with firms () Whereas for micro and small firms, the number of FIs that each of them transacts with has increased, for large firms, the number has decreased. If it becomes common for firms to choose the FI offering the lowest loan interest rate among a number of FIs when taking out a loan, business relationship between firms and their main bank will weaken. This may lower the efficiency of capital allocation by discouraging FIs' information production activities Chart VI-3-13: Decomposition of changes in the number of FIs that each firm transacts with deviation from FY5 Micro firms Others Credit cooperatives Shinkin banks Regional banks Major banks Total deviation from FY5 Small firms FY FY deviation from FY5 Medium-sized firms. deviation from FY5 Large firms FY FY

28 Intensified competition and FIs' markups FIs, which have business areas with the excess in the number of branches, tend to face fierce competition and have lower pricing power. If competition among FIs continues to be excessively severe, there is a risk that FIs' stability will be undermined. The upward trend of regional banks' EDF coincides with the declining trend of their markups over the long run. Chart B-1: Cross-sectional estimates: effects of branch density on FIs' markups Explanatory variables Dependent variable: markups Regional banks Branch netw ork excess -.5 *** (.) Number of FIs that each firm transacts w ith -.11 *** (.) Loan-to-deposit ratio Nonperforming loan ratio Capital adequacy ratio.1 **..1.1 ***.. (.) (.3) (.1) (.) (.3) (.1) Adj. R.7.7 S.E Chart VI-3-15: Expected default frequency and markup of regional banks Short-term EDF Medium- to long-term EDF Markup 1.5 pts 5th-75th percentile range 5th-75th percentile range 1. Median 5 Median 1.3 CY CY th-75th percentile range Median. FY

29 Intensified competition among FIs and systemic risk (1) If regional FIs continue to face the common and chronic stresses and remain under the intensified competition without diversifying their profit sources and properly adjusting their resource input relative to demand, many FIs will simultaneously lose their loss-absorbing capacity in the medium to long run, and this could develop into systemic risk. In fact, with competition among regional FIs intensifying, the CoVaR, a systemic risk indicator extracted from the stock market, is moderately increasing. Decomposing the size of stress in the financial system (CoVaR) into the two factors, while any significant change is not observed in the size of individual banks' risk (VaR), the comovement between the risk (β) has been increasing on the whole. Chart B3-1: CoVaR among regional banks CoVaR Individual risk (VaR) Comovement (β) 5 pts 5th-75th percentile range Median 5 pts 5th-75th percentile range Median th-75th percentile range Median FY FY FY

30 Intensified competition among FIs and systemic risk () When regressing CoVaR and β on the markups, a decline in markups is found to exert upward pressure on systemic risk. An increase in common exposure among banks (i.e., an increase in β) is an important channel through which competition among banks raises systemic risk. Chart B3-: Panel estimates: impact on systemic risk Dependent variables: systemic risk indicators CoVaR Individual risk (VaR) Comovement (β) Explanatory variables Markup -.39 *** *** (.93) (.13) (.33) Total assets.58 ***.13 ***.159 *** [logarithmic value] (.1) (.7) (.15) Loan-to-asset -.8 *** *** ratio (.) (.) (.) Adj. R S.E