(Bloomberg) — Japan’s financial regulator urged the country’s regional banks to pay closer attention to the risks of investing in so-called repackaged government bonds, which are gaining popularity, people familiar with the matter said.
Most Read from Bloomberg
At a regular meeting with regional bank heads on Wednesday, a senior official at the Financial Services Agency told lenders that they should make sure they have proper risk management in place for the financial instruments.
The regulator is specifically focused on these products, which typically bundle Japanese government bonds with derivatives to enhance returns and have been gaining traction from some banks because the buyers don’t have to mark them to market, thus avoiding the possibility of paper losses, the people said. In contrast, when the banks hold JGBs directly, they have to account for the declining value of the bonds as interest rates rise.
The FSA is concerned that depending on how the products are structured, the banks could suffer negative spread, according to the person who asked not be named since the matter is not public. That occurs when the yield curve flattens and the banks’ returns get smaller than what they pay for deposits and other funding. The FSA made a similar warning a year ago.
Investors purchase the products in the form of loans to a vehicle that houses the sovereign debt, according to the people. For banks this has the additional advantage of boosting their loan balances and is reflected as growth of their core lending business.
Returns on the repackaged JGBs are often lower than similar products when fees to originators are taken into consideration, according to the people. Still, some regional banks are buying them because of no mark-to-market need and being counted as lending, they said.
FSA officials were not immediately available for comment.
(Adds context on returns in fifth paragraph)
Most Read from Bloomberg Businessweek
©2025 Bloomberg L.P.
