The Financial Services Agency has compiled the results of monitoring conducted on major banks and regional banks, considering the expansion of the domestic LBO loan market and the broadening of market participants, presenting important points for enhancing and strengthening risk management systems.
Key Points
1. Market Background and Current Trends
- Active corporate restructuring aimed at enhancing corporate value, primarily among large companies
- Increased M&A activity for business succession purposes, mainly among small and medium enterprises
- Expansion of LBO loan market participants from major banks to include regional banks
- Diversification of market participants responding to corporate needs
- Growing sophistication of transaction structures and financing arrangements
2. Scope and Implementation of FSA Monitoring
- Conducted in accordance with the FY2024 Financial Administration Policy
- Targeted major banks and regional banks actively engaged in domestic LBO loans
- Comprehensive monitoring including on-site inspections
- Assessment of current status and challenges in individual cases and system development
- Evaluation of risk management frameworks and governance structures
3. Purpose and Structure of the Report
- Organized findings on cases and current status of system development identified through monitoring
- Presented important considerations for implementing measures to enhance risk management systems
- Published as "Monitoring Report on Domestic LBO Loans (2025)"
- Provided in two formats: executive summary and full report
- Designed to serve as practical guidance for financial institutions
4. Key Findings and Risk Management Considerations
- Credit Risk Assessment:
- Importance of thorough due diligence processes
- Need for appropriate evaluation of business plans and cash flow projections
- Critical assessment of sponsor capabilities and track records
- Portfolio Management:
- Concentration risk management across sectors and sponsors
- Stress testing methodologies and scenario analysis
- Early warning systems and monitoring frameworks
5. Regulatory Expectations and Flexibility
- No requirement for uniform responses from financial institutions
- Positioned as reference material for risk management tailored to each bank's scale and characteristics
- Expectation for creative and effective credit risk management systems using this report as reference
- Respect for institutional autonomy while promoting sophistication in risk management
- Principle-based approach allowing for proportionate implementation
6. Implementation Guidelines for Financial Institutions
- System Development:
- Establishment of specialized teams or expertise
- Clear approval processes and authority matrices
- Integration with overall risk management framework
- Operational Considerations:
- Regular training and skill development programs
- Documentation standards and information management
- Post-lending monitoring and covenant tracking
7. Market Development and Future Outlook
- Expected continued growth in LBO loan market
- Increasing importance of regional banks in supporting local business succession
- Evolution of market practices and standards
- Need for continuous adaptation of risk management approaches
- Potential for market consolidation and specialization
8. International Context and Best Practices
- Comparison with global LBO loan market developments
- Incorporation of international regulatory standards and guidelines
- Lessons learned from other jurisdictions
- Cross-border transaction considerations
- Alignment with Basel III and other international frameworks
9. Stakeholder Communication and Transparency
- Importance of clear communication with all stakeholders
- Regular dialogue between regulators and market participants
- Industry associations' role in promoting best practices
- Public disclosure considerations
- Market discipline and transparency initiatives
10. Contact Information and Resources
- Published Materials:
- Monitoring Report on Domestic LBO Loans (2025) Executive Summary (PDF format)
- Monitoring Report on Domestic LBO Loans (2025) Full Report (PDF format)
- Published on June 30, 2025
- Contact Details:
- Financial Services Agency, Policy and Markets Bureau, Risk Analysis Division, Major Banks Monitoring Office
- Financial Services Agency, Policy and Markets Bureau, Risk Management Inspection Office
- Phone: 03-3506-6000 (main) ext. 2706, 2212
The report is intended to serve as a guideline for financial institutions to establish appropriate risk management systems according to their business characteristics, with the aim of ensuring sound development of the LBO loan market and maintaining financial system stability.