TOKYO (Reuters) - Japan's financial watchdog on Wednesday proposed rules to expand its oversight of regional banks, including broad stress tests, with more focus on lenders' future profitability.
The move comes in the wake of growing concern among policymakers over the plight of regional banks, which have seen profits hit by years of ultra-low interest rates and an exodus of borrowers moving to bigger cities as the population shrinks.
Under current regulations aimed at pre-empting regional bank failures, the Financial Services Agency (FSA) has focused on whether commercial banks meet minimum capital adequacy ratios and past data in determining whether they are deemed financially viable.
The new rules would include the FSA verifying banks' core net income and capital adequacy under certain stress conditions for up to five years into the future, and doing this each fiscal year.
The regulator will conduct stress tests to identify which banks could fail to meet the minimum capital adequacy ratio of 4 percent if a big shock, such as a spike in interest rates or credit costs, hits.
If banks fail the stress tests, they could be slapped with business improvement orders.
To help lenders struggling to stay profitable amid low rates and a declining population, a government panel on Wednesday also discussed a plan to ease antitrust rules that will enable some regional banks to merge on a limited basis.
Many Japanese regional banks are grappling with diminishing returns from their traditional lending business, hit by a low-interest rate environment amid the Bank of Japan's ultra-loose monetary policy.
BOJ Governor Haruhiko Kuroda has said the central bank will be more mindful of the rising demerits of prolonged easing. But he has also stressed the central bank's priority is to achieve its 2 percent inflation target, signaling that money policy will remain ultra-loose for some time.