December 15, 2016 / 4:41 PM / 7 months ago

UPDATE 1-Japan FSA probes banks' rate risk management as yields surge -sources

3 Min Read

* Authorities worried over 'sea change' in rates

* Probe covers most major, regional banks

* Yields have surged since Trump election (Adds details, background)

By Taro Fuse and Takahiko Wada

TOKYO, Dec 16 (Reuters) - Japanese authorities are investigating banks' ability to manage interest-rate risk, people involved in the discussions say, with the U.S. bond market leading a surge in global yields that could mean problems for banks holding large bond investments.

As bond prices have sunk, posing potential problems for the huge debt holdings held by Japan's major and regional banks, the Financial Services Agency has launched urgent checks on the lenders, said the sources, who asked not to be identified as the discussions are private.

An FSA spokesman could not immediately be reached for comment.

The benchmark U.S. Treasury 10-year yield has roughly doubled to about 2.6 percent since Donald Trump was elected president last month, promising major spending increases and tax cuts, and as the Federal Reserve raised U.S. rates on Wednesday for the first time in a year.

The 10-year Japanese government bond yield has been dragged into positive territory by the U.S.-led move. This has tested the Bank of Japan's commitment to target the yield around zero, while the widening U.S.-Japan rate spread has boosted the dollar to its highest against the yen since February.

The FSA began by looking at lenders whose foreign-bond profits had posted the biggest declines but decided to investigate almost all the roughly 100 regional banks, as "a surprising number of regional banks are cover for struggling loan businesses with profits from their securities investments," a senior FSA official said.

The Bank for International Settlements, dubbed the central bank for central banks, said on Sunday that markets have been remarkably resilient to rising bond yields since Trump's election, but that the scale of uncertainties ahead means the adjustment will be "bumpy".

The FSA's Supervisory, Inspection, and Planning and Coordination Bureaus are involved in the investigations into what one official said "could be a sea change that only happens once in several years". (Reporting by Taro Fuse and Takahiko Wada; Editing by William Mallard/Mark Heinrich)

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