Japanese regulators heightening scrutiny over high-risk trades after Archegos collapse
Japanese regulators are heightening scrutiny of high-risk trades by domestic financial institutions in the wake of the Archegos fallout, two sources familiar with the matter said, as concern grows over huge losses incurred by some big players.
Mizuho Financial Group Inc. last week emerged as the third Japanese bank to face losses stemming from the collapse of Sung Kook “Bill” Hwang’s Archegos Capital Management under the weight of billions of dollars in leveraged stock bets. Nomura Holdings Inc. has signaled it stands to lose as much as $2 billion (¥219 billion), while Mitsubishi UFJ Financial Group Inc.’s securities unit warned of a $270 million loss.
The Financial Services Agency and the Bank of Japan will scrutinize how financial institutions that incurred losses had been managing transaction risks, the sources said on condition of anonymity due to the sensitivity of the matter.
“We shouldn’t be too complacent about the potential fallout from the incident,” one of the sources said. “There’s a sense of alarm among policymakers this could be the tip of an iceberg.”
The Nikkei newspaper reported on Wednesday that regulators will investigate high-risk trading by domestic financial institutions including by conducting blanket checks to see whether any other entities had suffered losses.
The move underscores the FSA’s concern over the fact the nation’s major financial institutions faced a risk of losing several hundred billion yen, the Nikkei said without citing sources.
Japanese authorities plan to work closely with overseas counterparts to share information and ensure the spillover does not trigger global market turbulence, the sources said.
The BOJ declined to comment. FSA officials were not immediately available to comment.
The FSA and the BOJ have recently been enhancing cooperation in overseeing the banking sector to avoid overlaps in inspections and address new risks that emerge as markets become globalized.
While authorities have been scrutinizing incidents involving domestic financial institutions on a regular basis, they are still scrambling to gather information as the fallout from Archegos caught many of them off guard, the sources said.
“It was something completely off the radar until just recently,” said another source, who said it was difficult for the authorities to keep track of incidents like Archegos.
The losses announced by some Japanese banks from dealings with a U.S. client will test the robustness of their risk controls, especially overseas where they’re seeking to offset a subdued domestic market, according to Fitch Ratings Inc.
Banks “could face not only financial and reputational risks, but also regulatory scrutiny or redress if authorities determine there were material governance deficiencies or risk management weaknesses,” Fitch said in a statement on Wednesday.
Besides Nomura and Mitsubishi UFJ, other domestic financial institutions also could face similar losses, though their exposure may vary, Fitch said.
Although Nomura is yet to confirm exactly how much it will lose from Archegos, SMBC Nikko Securities Inc. analysts led by Masao Muraki this week said that the country’s biggest brokerage may post a ¥95 billion loss in the fourth quarter as a result of the trades.
Such losses “also bring into focus these institutions’ risk appetite while in search of profit and whether they are adequately compensated for the risks involved over economic cycles,” Fitch said.
Fitch last week placed the bbb+ Viability Ratings of Nomura and its wholly owned subsidiary, Nomura Securities Co., on rating watch negative, due to the potential losses.
The agency said it doesn’t expect a substantial impact on MUFG’s financial profile, but warned that the losses could affect the bank’s “long-term earnings contribution from its securities business should it revise its risk appetite in the overseas securities business.”
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