Against the backdrop of these positive developments in financial intermediation, from the macroprudential perspective, their effects on financial stability must be carefully monitored.
To earn profits in a sustainable manner under a highly competitive environment, financial institutions need to differentiate the financial intermediation services they offer and make efforts to utilize their core competence.
The regional financial institutions need to strengthen their business bases in order to carry out the financial intermediation function in a stable manner to facilitate the development of regional economies.
While financial institutions have retained the financial intermediation function accordingly by increasing lending, the environment surrounding financial institutions has become increasingly severe due to the stock price plunge and the domestic economic downturn.
Risks borne by financial intermediaries At financial institutions such as banks and shinkin banks, capital adequacy ratios as a whole have been rising recently, and these institutions have ratios well above regulatory levels.
The Bank also recognizes the risk that continuing powerful monetary easing will cumulatively affect financial institutions' strength, mainly through a decrease in their lending margins, and thus the functioning of financial intermediation will be stagnant.
How to Mitigate the Adverse Effect on Financial Institutions' Earnings Regarding the negative interest rate policy, the potential adverse effects on financial institutions'earnings and their functioning as financial intermediaries are of utmost importance.
The reason I said'in certain respects' is because middle and retail banking, which meets the financial needs of individuals as well as small- and medium-sized firms, continues to be supported by financial intermediaries indigenous to each country.
The first injection, however, was not sufficient to dampen the"adverse feedback loop," and a number of additional measures and years were required thereafter for the financial intermediation function and economic conditions to recover fully.
If, however, financial markets are unstable or financial institutions and investors become excessively cautious in taking risks, financial intermediation will not function properly, and the effects of the reduction in the policy interest rate will not spread to the whole economy as intended.
I believe these new measures to be part of this de-facto normalization, the aim being to lessen the side effects of quantitative easing-namely the low liquidity in the bond market and the decline in financial intermediary functions-by allowing for greater fluctuation and for a rise in long-term interest rates.
Active financial intermediation-- particularly bank lending-- has contributed to an improvement in the real economy. However, if excessive risk taking spreads across financial intermediation activities, the real economy could undergo significant adjustment pressure in the future.
In particular, behind the extremely severe recession from the end of 1997 to 1998 was a decline in confidence on the part of both the corporate sector and the household sector stemming from financial system instability and the deterioration of the financial intermediary function which has often been termed a credit crunch.
Furthermore, when the real economy deteriorates considerably-- in other words, when a tail risk materializes-- unless financial institutions have sufficient stress resilience, they could face difficulty in maintaining their financial intermediation function, which could in turn exacerbate the real economy through a negative feedback loop.
Financial institutions carry out financial intermediary functions with a certain amount of capital, raising funds with short-term debt instruments and investing in long-term assets, and provide value added through the provision of liquidity and settlement services.
As Japan's economy has significantly deteriorated and the financial environment has continued to be severe, it has become increasingly important for financial institutions to have a sufficient capital base and carry out properly their financial intermediation function.
Insurance and financial services(% of service imports, BoP) cover various types of insurance provided to nonresidents by resident insurance enterprises and vice versa, and financial intermediary and auxiliary services(except those of insurance enterprises and pension funds) exchanged between residents and nonresidents.
As I mentioned, the Bank has been working to exchange views with and advise financial institutions through on-site examinations, off-site monitoring, and seminars about risk management and ways to enhance the institutions' capabilities for financial intermediation and business reconstruction.
However, the ratio of losses to capital exceeds a certain critical point, there is a possibility that the financial intermediary function will become significantly impaired; in other words, the relationship between the scale of capital and the financial intermediary function is nonlinear.
On the other hand, if the number of financial institutions whose loss-absorbing capacity declines due to a continued weakening of its profitability increases, the financial intermediation function of financial institutions as a whole could weaken, adversely affecting the real economy.
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