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Correlation risk between stockholdings and loans or bondholdings at Japan's banks

June 4, 2012
Kazutoshi Kan, Yoshiyuki Fukuda, Yoshihiko Sugihara, Shinichi Nishioka
Financial System and Bank Examination Department

Stockholdings by Japan's banks have been a factor undermining their profits. Along with the holding of particular firms' stocks, banks have extended a large amount of loans to those firms. Banks would suffer losses on both loans and stocks if such firms defaulted. Moreover, banks have increased investment in bonds, particularly government bonds, amid sluggish borrowing demand in the private sector. Banks' stockholdings are large even after considering the hedging effect between stockholdings and bondholdings in normal market conditions where stock prices and interest rates move in the same direction. A shock in financial markets may destroy such a relationship, which results in banks' large losses on both stockholdings and bondholdings. Therefore, banks should reexamine the merits arising from business ties strengthened by stockholdings and then reduce their risk associated with stockholdings at a measured pace.

Notice

Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2012-E-5, is a translation of the original Japanese version, 2012-J-6, published in April 2012. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.

If you have comments or questions, please contact Shinichi Nishioka, Financial System and Bank Examination Department (E-mail: shinichi.nishioka@boj.or.jp).