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(Bloomberg) -- Japan’s financial regulator plans a sweeping crackdown on $67 billion of high-yield loans backed by government bonds and other assets that have gained popularity among regional banks even after officials warned about their risks.
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The Financial Services Agency will scrutinize banks that have increased purchases of Japanese government bonds that are repackaged into loans over the past year, said Toshinori Yashiki, director-general of the agency’s strategy development and management bureau. Brokerages that are actively pitching these products to lenders will also be in the regulator’s crosshairs, he said in an interview on Thursday.
The FSA is stepping up enforcement after it noticed some regional banks are buying more of these products despite the regulator’s warning in January 2024. Officials are also concerned that some lenders lack proper risk management for the opaque products and could suffer mounting losses if market rates move against them.
The regulator has a strong sense “that there are banks that have started or greatly increased repackaged loans since our alert last year,” Yashiki said, without identifying any banks or brokerages.
The amount of regional banks’ repackaged loans, including those backed by assets other than JGBs, was nearly ¥10 trillion ($67 billion) as of September, an increase of about 20% to 30% from a year earlier, according to Yashiki. He declined to say how much of the total was backed by JGBs specifically, only that it was in the billions of dollars.
“Given the growth of these assets, it is understandable that regulators, to mitigate systemic risks, would crack down on the improper use of such loans,” said Michael Makdad, a senior analyst at Morningstar Inc.
The Topix Banks Index of shares fell 1.8% on Friday afternoon in Tokyo, in line with the benchmark Topix’s 2.2% decline.
While Yashiki said it’s the prerogative of bank management to decide what assets to invest in, a closer scrutiny by the regulator is likely to dissuade the lenders from buying the loan products.
These products typically bundle Japanese government bonds or other assets with derivatives contracts to enhance returns. Banks lend money to special purpose companies or other vehicles that use the money to buy government bonds. The banks then receive income from the bonds and the derivatives.