CashNews.co
(Bloomberg) — Japan’s financial regulator plans to examine banks’ lending to private equity and other funds in the US and elsewhere to determine whether they have proper risk management.
Most Read from Bloomberg
Toshinori Yashiki, a senior official at the Financial Services Agency, said the business has attracted attention because the country’s largest banks are increasing so-called subscription finance and lending to funds that provide equity or credit to private companies.
“It’s necessary to check if there is effective governance and risk management that’s appropriate for rapidly expanding products,” Yashiki, director-general of the agency’s strategy development and management bureau, said in an interview.
Subscription financing involves providing bridge loans to investment firms so they can clinch time-sensitive deals without waiting for money from their limited partners. Japan’s biggest banks have more than $25 billion in such loans to companies in the Americas, Bank of Japan figures show.
Overseas business makes up a large chunk of Japanese megabanks’ operations following years of expansion abroad, prompting the regulator to pay close attention to their exposure to swings in the global economy and financial markets. Mitsubishi UFJ Financial Group Inc. and its peers are trying to win more mandates from institutional clients in the US, in addition to ties with traditional blue-chip corporations.
“Subscription finance is relatively low-risk, but we might be looking at things such as whether the duration of lending is getting longer or not,” Yashiki said. “It’s also important that they have contingency plans for sudden shifts in economic and market conditions.”
On the domestic front, the FSA is also paying close attention to leveraged buyout financing by the country’s regional banks, Yashiki said, noting that some don’t even have rules and manuals for such lending.
“It’s desirable for the local economy that regional banks actively provide LBO loans by responding to the needs of companies,” he said. “Effective risk management is a prerequisite for risk taking.”
Yashiki also said local banks need to secure talent, including experts from outside, if they are to pursue LBO finance as a growth business.
As a regulator in an economy that has just seen benchmark interest rates rise for the first time in almost two decades, the FSA is watching how unfettered lending during the years of rock-bottom borrowing costs may cause problems now.
One area of particular concern for both big banks and regional lenders, according to Yashiki, is sham accounting by corporate borrowers. He said there has been a string of cases in which years of window dressing by medium-sized companies came to light and their lenders suffered big credit costs as a result.
Banks apparently failed to keep lending discipline “in order to secure short-term revenues in an ultra-low interest-rate environment,” Yashiki said.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.