Japanese bank equity portfolios

Japanese banks - Mitsubishi UFJ Financial Group (MUFG), Mizuho and Sumitomo Mitsui Financial Group (SMFG) - carry a significant amount of their clients' equity on their balance sheets. This relationship dates back to the Meiji era in the late 1800s when Japan began to industrialise. Capital was scarce and banks felt they had a role to support national industry; taking a stake in a borrower showed that their fates were united.

In 2002 the government capped the ratio of equities to tier-one capital at 100%. Now, as then, requiring banks to dump their shareholdings altogether—however laudable—would run the risk of turning a bear market into a rout. Banks own 5% of the value of the country’s stockmarket.

Japanese banks must deduct a percentage of certain unrealised losses from their shareholdings from their tier-one capital. According to UBS, every 10% drop in the Nikkei 225 Stock Average requires banks to raise from ¥13 billion to ¥190 billion apiece to replenish their tier-one ratios to around 7.5%.