RETAIL BANKING | Staff Reporter, Japan

Japanese banks risk-taking hits near 30 year high amidst profit crunch

This marks the highest point since 1990 during the asset-inflated bubble burst.

Reuters reports that risk-taking practices in the country’s financial sector has hit a near three-decade high in April-September, according to a central bank index, as players step up lending to middle risk-borrowers and ramp up real estate investment in a bid to weather the protracted industry downturn.

The latest index reading, which measures excess risk-taking by banks, has hit the highest level since 1990 when Japan first experienced the burst of the asset-inflated bubble.

“In times of stress, downward pressure on the economy from the financial system, such as through a decline in financial institution’s risk taking, could intensify more than in the past,” it said.

Although the banking system is on generally stable footing, there is growing divergence amongst the country’s 100 regional banks in terms of profitability. Regional lenders were quoted in a BOJ survey that loan interest rates for middle-risk firms do not sufficiently match credit costs through the business cycle as they bear the brunt of the profit crunch that their megabank counterparts are able to weather off through overseas expansion.

“[T]he tough domestic environment has affected the whole Japanese banking sector, and other banks may have allowed governance standards to slip in response to these challenges,” Fitch Ratings said in an earlier statement.

One such lender, Suruga Bank which published a report highlighting an aggressive corporate culture that witnessed employees resorting to fraudulent activity to meet unrealistic growth targets and the resignation of Higashi-Nippon Bank chairman in August over improper lending practices, illustrates the growing threat well.

Also read: Regulator launches probe into Japanese regional banks internal audit

“[R]egional banks face the challenge of developing infrastructure to efficiently service less-densely populated markets with older customers who can be uncomfortable with technology,” added Fitch.

Although lenders could develop new products to meet the changing needs of the aging market, regional banks have limited expertise in more complex products like savings and wealth management, insurance, retirement planning, and re-mortgaging.

Here’s more from Reuters:

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