The Financial Services Agency says that when interest rates move, how far deposit and lending rates follow market rates can affect financial institutions' earnings and balance sheets, and asks for closer attention to risk management that looks at assets and liabilities together1.

Consider a hypothetical example in which a bank whose deposit rate is reset each year to the level of that year's benchmark rate funds a 10 billion yen loan at a 2.0% fixed rate with deposits. Without an interest rate swap, its interest margin in a year when the benchmark rate rises to 2.5% is a loss of 50 million yen. If it has entered into an interest rate swap with a notional amount of 10 billion yen, paying a 1.5% fixed rate and receiving the benchmark rate, it receives a net 100 million yen on the swap and its margin is 50 million yen a year. Conversely, in a year when the benchmark rate falls to 0.5%, it would have earned a margin of 150 million yen a year without the swap, but it pays a net 100 million yen on the swap, so its margin stays at 50 million yen a year.

Notes

  1. Financial Services Agency, "預金取扱等金融機関モニタリング・分析レポート" (Monitoring and analysis report on deposit-taking institutions) (in Japanese), July 2026, page 11 (page 13 of the PDF), second paragraph of section II.4 "小括" (Summary). The expansion "asset and liability management (ALM)" follows the English version of the Bank of Japan's "Financial System Report (April 2026)," page 47 (page 52 of the PDF). ↩