Japan\\\'s regional banks face stress test for ultra-low rates

TOKYO, Dec 29 (Reuters): Japan's financial regulator is running stress tests to see if too much cash in the system is stifling smaller banks' ability to earn, unlike regulatory tests elsewhere that have been designed to see whether lenders had enough capital to cope with financial shocks.

Two people with direct knowledge of the process said the Financial Services Agency (FSA) had initiated the tests on concerns that with 10-year Japanese government bond yields near a record low around 0.3 per cent, regional lenders in particular could be at risk as the gap between what they pay for deposits and what they collect on loans and bond holdings shrinks.

The FSA told Reuters: "As a general matter it is important for financial institutions to have the ability to respond to changes in the operating environment, including changes in interest rates. That applies beyond regional banks. We cannot comment on any specific or individual matters beyond that."

The action highlights one of the unintended risks of Prime Minister Shinzo Abe's programme to end decades of deflation with the support of the Bank of Japan (BOJ), which by injecting monetary stimulus into the economy is helping to keep interest rates at rock bottom.