Japan is to ease rules governing the way banks account for their capital in an effort to keep loans flowing to companies amid the credit crisis.
The government said on Friday it would allow banks to count some tradeable securities towards their capital at face value instead of the sharply reduced levels at which many instruments are trading following months of market turmoil.
The change will take effect from the current quarter and last until the business year ending March 2012. It will help smaller regional lenders more than big global banks such as Mitsubishi UFJ Financial Group and Mizuho, which will be able to exempt only national and municipal bonds from standard mark-to-market practice.
Banks that operate only within Japan will also be exempted from marking down the value of stocks – by far the biggest contributor to investment portfolio losses for Japanese lenders, which together owned Y25,000bn ($255.4bn, €200bn, £162.4bn) worth of shares at the end of March.
The value of those holdings, mostly in local companies to which banks have lent money, has collapsed as the Nikkei average fell to three-decade lows.
Japan’s move follows a similar decision this week by South Korea, which said it would delay full adoption of the Basel II capital adequacy standards until 2010. Seoul had started introducing the regulations this year and full adoption had been planned for January 2009. The Bank of Korea on Friday cut its benchmark interest rate by 25 basis points, its third cut in a month, to 4 per cent.
Japan has already adopted Basel II but Shoichi Nakagawa, the finance minister, said its rule change was within the bounds of that arrangement. “This is not something that changes international agreements,” he said.
Some bankers, including Masamoto Yashiro, the chairman of Shinsei Bank, had called for a much broader emergency suspension of mark-to-market accounting rules that would include instruments such as securitised debt. But those holdings – the bane of US and European banks but a relatively small problem in Japan – will continue to be accounted for at market prices under the new rules.
“We should see a small uptick in capital ratios but it’s unlikely to be dramatic, particularly at the larger banks,” said Jason Rogers, an analyst at Barclays Capital. He added that relaxing the rules for big banks to include stocks and other assets would have risked signalling panic to international investors. “It could have undermined confidence in Japanese banks,” he said.
Separately on Friday the Philippine central bank unexpectedly sliced bank reserve requirements from 10 to 8 per cent in its own effort to encourage more liquidity. The central bank opened a window until November 14 for Philippine banks to move bond holdings around their books to avoid mark-to-market losses.
Some Japanese lenders have felt the capital squeeze more than others. Last month Mitsubishi UFJ was forced to announce a Y990bn fundraising after it spent $9bn for a 21 per cent stake in Morgan Stanley and $3.5bn to take full control of Union Bank of California.
Japanese authorities fear a repeat of the credit squeeze that ruined many companies during the decade-long banking crisis that ended in 2003. Corporate bankruptcies have been rising again this year and jumped by a third in September.
Banks are required to keep a certain level of capital relative to their loans and other assets – 8 per cent or more for international banks and 4 per cent for domestic ones – so increasing their capital theoretically raises the maximum amount they can lend. But it was unclear how Japan’s new rules will affect lending in practice, since a lack of demand from creditworthy borrowers is a bigger problem, analysts say.