TOKYO (Reuters) – Japan plan to conduct stress tests on its five major financial institutions this year that look into how the coronavirus pandemic could affect their earnings and capital, the central bank said on Tuesday.

Unlike many Western nations, where regulators stress tests many banks simultaneously based on standardised risk scenarios, Japan had relied on stress tests conducted individually by each bank.

As prolonged ultra-low interest rates prod major banks to diversify operations in search of yields, however, Japanese authorities decided to align their approach to that of their overseas counterparts, the Bank of Japan (BOJ) said in a report.

For the first time, the BOJ and banking regulator Financial Services Agency (FSA) conducted joint stress tests on five major financial institutions in December, it said.

The regulators presented its findings to the five institutions – Japan’s three megabanks plus Norinchukin Bank and Sumitomo Mitsui Trust Holdings – with feedback in July.

The BOJ and FSA will conduct such stress tests regularly, with the one this year likely to scrutinise how resilient the financial institutions are to risks posed by COVID-19, the report said.

“The biggest challenge would be on how to set the baseline and ‘tail event’ scenarios that take into account the impact from the coronavirus pandemic,” the report said.

The findings of the stress tests will not be published and used mostly as a basis for communication between the regulators and financial institutions, it said.

(Reporting by Leika Kihara. Editing by Gerry Doyle)

Copyright 2020 Thomson Reuters.

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(Bloomberg) — Volatility eased in U.S. equity futures as optimism over President Donald Trump’s medical prognosis and hopes for fresh economic stimulus put a brake on selling that whipped up Friday.

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Dip buyers showed up at the 6 p.m. New York open, bidding up December contracts after Trump’s doctors insisted he’s doing well and could be discharged as soon as Monday. Markets fell on Friday after Trump’s diagnosis. They remained up for the week as some traders speculated the president’s illness raised the odds for aid to the economy from Congress and data showed job gains slowed in September and many Americans quit looking for work.

“The dramatic turn of events may be a catalyst for a stimulus agreement – or it may not; we wait for bills to be put to Congress and votes to be taken,” said Julian Emanuel, chief equity strategist for BTIG, wrote in a note. “With key economic data extending its run of disappointments versus expectations and high-profile corporate layoffs, additional aid would seem imperative.”



chart: Stock futures gain Sunday evening


© Bloomberg
Stock futures gain Sunday evening

U.S. shares have stayed relatively resilient since Trump’s positive test, in part because of speculation Congress will move toward an aid package after large parts of the current bill expired at the end of July. While the president urged lawmakers to get stimulus passed in a weekend tweet, little new progress was reported since Friday.

Futures on the S&P 500 gained 0.7% at 8:41 p.m. in New York. The underlying gauge rose 1.5% last week, though Friday saw a 1% selloff. Contracts on the Dow Jones Industrial Average added 0.7%, while Nasdaq 100 futures climbed 1%.

The yen fell against all Group-of-10 currencies as traders shunned haven assets. It dropped 0.3% against the dollar to 105.55 yen. Risk assets including the

“Risk comes from not knowing what you’re doing.” – Warren Buffett

One upcoming catalyst for bank stocks is a second round of stress tests. Usually only one round per year is needed, but with continued uncertainty, further scenarios will be examined. After the second round, the Federal Reserve plans to publish firm-specific results, a deviation from standard policy where only aggregate performance is released, proving to be an interesting catalyst for the bank stocks.

June 2020 release

Recall the Federal Reserve released the results from the first round of stress tests in June 2020. The results indicated all banks had sufficient capital to withstand the scenarios considered at that time.

However, the possibility of large losses could not be overlooked and the Federal Reserve felt it was prudent to take actions to preserve capital. As a result, share repurchases were disallowed and bank dividends were capped at the current level. The prohibitions were put in place through the third quarter, though I expect them to be extended until the second round of stress tests is completed.

Second stress test scenarios

Two hypothetical scenarios will be considered in the upcoming round of stress tests. The first scenario is shorter, but harsher, as by the end of 2021 unemployment has jumped to 12.5%. A partial improvement comes sooner as unemployment falls to 7.5% in 2023. The GDP decline is roughly 3% through 2021. This is the “severely adverse” scenario.

In the “alternative adverse” scenario, the economic metrics do not worsen as much but stay lower for longer. Unemployment rises to 11% by the end of 2020 and then only declines to 9% in 2023. The GDP decline is lower at 2.5%. In the chart below, the unemployment rate for each scenario is shown.

Source: Federal Reserve

For comparison purposes, note the most