By Leika Kihara
TOKYO (Reuters) -Japanese financial institutions have sufficient capital buffers to absorb losses caused by various external factors, including risks caused by the collapse of U.S. lender Silicon Valley Bank, the Bank of Japan (BOJ) said on Tuesday.
They have continued to channel funds to borrowers smoothly even under various stress factors such as supply constraints and rising overseas interest rates, the BOJ said in an annual report that detailed the results of on-site examinations of financial institutions.
"Japanese financial institutions' direct exposure to Silicon Valley Bank is small, and thus the impact is likely limited," a BOJ official told reporters in a briefing on the report.
The collapses of Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) have stoked concern about contagion, sending shares of financial stocks - including those in Japan - tumbling.
In its report, the BOJ said many Japanese regional banks face challenges in risk management such as analysing impacts on their portfolios in times of heightened market volatility.
"Some regional financial institutions have suffered a substantial increase in valuation losses" and failed to adequately assess their risk tolerance against profits, it said.
It noted that Japanese financial institutions have actively taken on market risk in recent years amid ultra-low interest rates, though they have become "somewhat cautious" on their investments in light of rising global interest rates.
Some regional financial institutions have also not sufficiently ascertained how declining interest payments could affect their future earnings, the BOJ said.
"Thus, many regional financial institutions were found to have issues in terms of conducting effective risk management," the report said.