Tighter global money risks exposing banks’ fault lines

Significance

Addressing the concerns this raises for banks' profitability, the Financial Services Agency announced that it would stress test Japan's 105 regional banks in mid-2019. Central banks in Japan, the euro area, Sweden, Denmark and Switzerland have cut their policy rates more aggressively than other countries since the 2008-09 financial crisis. Authorities have done this to spur banks to lend more, but in doing so have increased banks' risk-taking.

Impacts

• Central banks with policy rates close to zero or negative will require higher countercyclical buffers from banks failing stress tests.
• In Japan, banks will be highly exposed to asset price fluctuations when the BoJ winds down QE.
• The BoJ holds a large amount of US collateralised loan obligations, exposing it to a credit cycle downturn in the United States.
• The less efficient euro-area banks and high-deposit banks involved in syndicated loans will be most at risk when interest rates rise.
• Danish, Swedish and Swiss banks are vulnerable to higher rates and a property crash because of their large mortgage lending portfolios.