(Bloomberg) — Japanese banks should consider loans backed by expected growth among new approaches for shoring up profits, according to a former chief financial regulator seen as a potential candidate for a leadership role at the Bank of Japan.
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“Monetary policy isn’t decided by what’s solely good for the banks, so naturally the banks should try various methods to support their business within the environment they find themselves in,” said Ryozo Himino, the former head of Japan’s Financial Services Agency in an interview this week. “One option is to use expected-growth backed loans.”
Himino is among a number of people considered to be a potential candidate for deputy governor at the central bank when the top three positions at the Bank of Japan are replaced next Spring. But he declined to speak in detail about his views on monetary and currency policy.
Japan’s banking system currently favors tangible assets such as real estate for loans collateral. Himino expects an upcoming era of deglobalization, shifts in supply chains and global demands. To keep up with that time of change, the former FSA head argues for a new type of loan that can be backed by both tangible and intangible assets, including expected growth.
“It’s a method that requires ability on the financial institution side too,” said Himino, explaining it would require banks to accurately judge firms’ growth capacity. “But banks that engage in this kind of loans business would be more attractive, and would attract talent too.”
The suggested type of funding would help firms such as startups that don’t own a lot of tangible assets, but may have high growth potential. So far Prime Minister Fumio Kishida has included the idea in his new capitalism manifesto.
“If it’s used well, it could be a game changer,” said Himino, who is currently Executive Fellow at NLI Research Institute. “Money should go to the type of risks that create returns – the important thing is to achieve a financial capital market that’s rewarding.”
For the former watchdog head, Japanese banks’ ability to seek returns with this kind of loan is especially important given the expectation that the BOJ’s ultra-low rates policy is likely to continue for some time.
While banks in the US are forecasting better earnings due to expectations of higher interest rates going forward, Japanese banks will need to keep diversifying their efforts to secure profits amid continuing low yields, Himino said.
“Not every bank in Japan may be able to utilize this,” said Himino. “But it would be great if those who do see growth.”
–With assistance from Toru Fujioka.
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