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By Leika Kihara
TOKYO (Reuters) - The Bank of Japan said it will increase scrutiny into how lenders are estimating the impact of rising interest rates on their profits in next fiscal year's on-site inspections, as some were found not adequately grasping the risk of deposit outflows.
After ending a decade-long, massive stimulus last year, the BOJ raised interest rates in January to 0.5%, their highest since the 2008 global financial crisis.
Major financial institutions have seen their profitability strengthen due to the rising interest rates, the central bank said on Tuesday in a report on the findings of its on-site inspections for the current fiscal year ending in March.
But some lenders faced challenges in estimating the impact of interest rate hikes on their profitability, and setting realistic projections on the extent to which they can raise loan and deposit rates, the BOJ said.
Some financial institutions had problems with risk management or lacked adequate frameworks to mitigate losses, which led to them suffering an increase in valuation losses on their security holdings, the report said.
The BOJ also warned that some smaller, regional lenders were not prepared enough to cope with the risk of an outflow of deposits, as bigger competitors or online banks seek to attract depositors with higher rates or more convenient services.
"There were financial institutions that saw deposits decline as a trend or increase at a sluggish pace. Some failed to sufficiently analyse such developments in deposits," the report said.
In its inspections for the year beginning in April, the BOJ will increase scrutiny on whether lenders have a sufficient grasp on how their deposits, loans and securities holdings will be affected by rising interest rates, the report said.
"The BOJ will examine how financial institutions that are seeing deposits fall or rise at a slower pace analyse developments in deposits, and whether they are taking effective counter-measures," the report said.
The BOJ will also scrutinise whether financial institutions have policies in place to deal with risks of an outflow of deposits including via the internet, it said.
Such guidelines underscore the attention the BOJ is putting on various risks associated with its plan to continue raising interest rates to levels deemed neutral to the economy - seen by its staff as being anywhere from 1% to 2.5% on a nominal basis.
(Reporting by Leika Kihara; Editing by Christian Schmollinger and Edwina Gibbs)
