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

Kazutoshi Kan, Yoshiyuki Fukuda, Yoshihiko Sugihara and Shinichi Nishioka
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Kazutoshi Kan: Bank of Japan
Yoshiyuki Fukuda: Bank of Japan
Yoshihiko Sugihara: Bank of Japan
Shinichi Nishioka: Bank of Japan

No 12-E-5, Bank of Japan Review Series from Bank of Japan

Abstract: 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.

Date: 2012-06-04
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