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

Author

Listed:
  • Kazutoshi Kan

    (Bank of Japan)

  • Yoshiyuki Fukuda

    (Bank of Japan)

  • Yoshihiko Sugihara

    (Bank of Japan)

  • Shinichi Nishioka

    (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.

Suggested Citation

  • Kazutoshi Kan & Yoshiyuki Fukuda & Yoshihiko Sugihara & Shinichi Nishioka, 2012. "Correlation risk between stockholdings and loans or bondholdings at Japan's banks," Bank of Japan Review Series 12-E-5, Bank of Japan.
    • Handle: RePEc:boj:bojrev:12-e-5
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