Financial sector examination priorities for fiscal 2026

The Bank of Japan has published its on-site examination policy for fiscal 2026. The policy outlines key issues identified in fiscal 2025 and priorities for monitoring financial institutions' soundness and risk management.

Integrated oversight and hybrid examinations

The Bank of Japan (BOJ) has formulated its annual on-site examination policy for fiscal 2026, emphasizing swift and continuous assessment of financial institutions' soundness and risk management.

The Bank conducts integrated operations of on-site examinations and off-site monitoring, deepening coordination with the Financial Services Agency (FSA) through joint surveys on topics like stress testing, foreign currency liquidity, cybersecurity, and climate scenario analysis.

In fiscal 2025, the BOJ examined 66 financial institutions, including 21 domestically licensed banks, 41 shinkin banks, and 4 other institutions.

The Bank continued its focus on hybrid-type examinations, combining on-site and remote methods, a practice initiated in fiscal 2023.

This approach aims to timely monitor changes across the financial system and address various challenges faced by institutions.

Profitability shifts and diverse risk exposures

In fiscal 2025, financial institutions maintained adequate capital, though profitability varied.

Major banks strengthened domestic lending and inorganic growth.

Regional banks benefited from rising yen rates but faced structural pressures and higher IT/human capital costs, impacting profit estimation.

The BOJ identified credit risk issues in assessing borrowers and ensuring effective support for low-performing firms, noting insufficient screening in promoted areas.

Market risk saw increased valuation losses on domestic bonds, particularly for regional banks, with some raising loss limits without adequate deliberation.

Liquidity risk management struggled with stress testing and adapting to changing deposit stickiness and foreign currency funding.

Operational risks highlighted inadequate cybersecurity and third-party oversight.

Balancing vigilance with evolving threats

The Bank of Japan's 2026 examination policy demonstrates a necessary evolution in supervisory focus, adapting to higher interest rates and digital transformation.

While comprehensive, it underscores persistent vulnerabilities, particularly for regional banks grappling with structural issues and complex risk exposures.

Effective implementation will hinge on the BOJ's ability to translate these broad priorities into targeted, impactful interventions.