The Bank of Japan’s Special Deposit Facility: 94% of Regional Banks Eligible for Support, with Total Special Remuneration Over Five Years Expanding to Approximately 200 Billion Yen

Under the Bank of Japan’s support scheme, the ‘Special Deposit Facility to Enhance the Resilience of the Regional Financial System,’ for which the application period expired at the end of March 2023, the total amount of additional interest, i.e., special remuneration paid by the Bank of Japan to regional financial institutions such as regional banks and shinkin banks will amount to approximately 250 billion yen over a period of about five years from the fiscal year (FY)2021 to 2026. Among these, the total amount of special remuneration to regional banks and second-tier regional banks has expanded to approximately 200 billion yen, as estimated from financial statements of individual banks.

Commencing in September 2023, based on the FY2022 financial statements, interest payments will begin for one year, with 94% of all regional banks and second-tier regional banks, totaling 93 institutions, eligible for special remuneration. Among these, 91 institutions have met the ‘OHR (Over Head Ratio) requirements,’ which call for reducing cost and strengthening profitability, while 16 institutions have fulfilled the ‘Integration requirements,’ which necessitate mergers and business integrations. Based on calculations derived from the financial statements for the March 2023 and recent excess reserve balances held at the Bank of Japan, the special remuneration payments from the Bank of Japan for the one-year period until August 2024 will amount to 58.3 billion yen. This corresponds to slightly less than 4% of the core business net profits of regional banks and second-tier regional banks for the FY2022. However, the effect of boosting profits is expected to dissipate in the first half of the FY2024 for the majority of regional financial institutions.

This program, designed as a temporary measure lasting for three years until the end of the application period in March 2023, allows regional financial institutions that meet the ‘OHR requirements’ for three consecutive years to extend their eligibility until the end of March 2023, provided they also fulfill the ‘Integration requirements.’ In such cases, they can receive special remuneration from the Bank of Japan for a maximum duration of 4 years and 8 months. The highest amount granted under this program, approximately 18 billion yen for a major regional bank, rivals the capital injections with public funds announced by the Financial Services Agency in September 2023 for Kirayaka Bank, second-tier regional bank located in Yamagata prefecture.

Since the introduction of the program, the OHR of regional banks and second-tier regional banks has significantly improved. For regional financial institutions, the challenge going forward is whether they can sustain their financial strength beyond the FY2024. Fundamentally, the premise of this program’s special remuneration was based on the principle of ‘being comitted to contributing to sustainable development of regional economies.’ In the future, there will be a need to assess whether the support provided to regional financial institutions, amounting to a total of 250 billion yen, has contributed to the development of local economies.