Basel III may make banks more cautious on loans

January 2, 2018

Tokyo- Major Japanese banking groups may lay greater emphasis on asset efficiency and become more cautious about lending once stricter international capital adequacy rules known as Basel III come into effect.

The banking groups are examining the impact of the new rules on their business operations. Under Basel III, worked out by the Bank for International Settlements' Basel Committee of Banking Supervision, internationally active banks are required to assess risk weightings for assets they hold, including loan claims and stocks.

The new rules, approved in early December, are expected to push down the banking groups' capital-to-asset ratios, a yardstick indicating their financial health.

When estimating risk-weighted assets, the denominator of the ratio, Mitsubishi UFJ Financial Group Inc. other large banking groups and major regional banks currently use their own calculation methods based on internal risk models.

Their risk-weighted assets are expected to increase under Basel III, which will limit their discretion in the calculation. The size of increase could reach about 21 trillion yen for Sumitomo Mitsui Financial Group Inc., more than 10 trillion yen for Mizuho Financial Group Inc. and nearly 10 trillion yen for Mitsubishi UFJ.

Internationally active banks will need to make a stricter evaluation of the risks of their loan claims that have so far been categorized as safe assets under their internal risk models.

"They may review terms of loans to businesses, including interest rates, or adjust loan balances," Yujiro Sato, chief researcher at the Mizuho Research Institute, said.

But major Japanese banks now have solid financial foundations after racking up profits over years.

"Even if the new rules are applied immediately, they would clear the criteria (a capital-to-asset ratio of 8 pct)," a senior official of the Financial Services Agency said. "In view of a five-year transition period until the rules come into force on a full scale, they will likely be more than capable of dealing with (the new rules)."

Some in the banking industry welcome the approval of Basel III as removing a key uncertain factor hanging over bank management. "It will be easier to draw up a long-term business strategy," a senior official of a major bank said. Jiji Press