hamper the economic natural selection mechanism. at present, firm - bank relationships have not weakened to this extent. however, if the competition among banks continues to intensify due to chronic stresses, how this will affect the efficiency of the financial system going forward warrants attention. v. macroprudential approach to chronic stresses i have explained that the chronic and common stress of a decline in population and the number of firms has exerted downward pressure on financial institutions'profits, adversely affecting both the stability and efficiency of the financial system by creating a highly competitive environment. this is a serious problem from a macroprudential perspective. how should we tackle this problem? this problem can be understood in the context of " market failure. " asymmetric information between a firm as a borrower and a bank as a lender can be resolved by long - term relationship and banks'information production capacity. however, if banks'loan interest rates decline to a level that cannot compensate for their information production costs, firm - bank relationships will weaken. in other words, the poor functioning of the loan market will leave the market failure arising from asymmetric information unresolved. on the other hand, if a bank ultimately can transfer a firm's credit risk to the public sector, the bank may be able to continue extending loans. in this case, however, taxpayer money will be used to bear the firm's credit cost in the end. therefore, lending by banks that do not engage in information production activities entails negative externalities. this situation also causes a market failure. unfortunately, it is difficult to solve this problem by utilizing the traditional macroprudential policy tools. if further bullish expectations of firms and households and banks'risk - taking operated in tandem and a higher degree of overheating was observed in the financial cycle, capital regulation such as the countercyclical capital buffer ( ccyb ) and credit regulation such as the loan to value ( ltv ) limit would be effective. 15 however, as i have already mentioned, we do not face such a situation at this moment ( chart 2 ). in addition, in the case where financial institutions'low profitability is caused by chronic and common stresses, capital regulation that requires banks to accumulate capital is not an appropriate prescription. as accumulation of capital under such measures is expected to further reduce the profitability ( roe ), it seems difficult for financial institutions with low profitability to increase their capital in the financial market

deposit and lending margins ( stagnation scenario ) - 0. 5 fy 16 17 18 19 20 21 22 23 24 25 26 methodology for decomposing and forecasting deposit and lending margins a panel estimation is conducted from fiscal 2001 to 2016 for regional financial institutions ( fis, covering 105 regional banks and 255 shinkin banks ), regressing deposit and lending margins on the following explanatory variables : market interest rate : due to the zero lower bound on deposit interest rates, a decline in the market interest rate leads to the narrowing of deposit and lending margins. moreover, when government bond yields decline, fis further compete on loan interest rates to increase their loans. we use 5 ‐ year jgb yields, taking into account the average maturity of bondholdings by regional fis. 3 ‐ year backward moving average is taken for the market interest rate to match the fact that both the deposit interest rate and the loan interest rate are calculated based on the amount outstanding. population growth in business areas of each fi : when the population declines, sales of and loan demand from small enterprises ( especially non ‐ manufacturing ones ) are expected to decline, which exerts downward pressure on the loan interest rate. population aging in business areas of each fi : in areas where the population is aging, deposits tend to increase while the demand for housing loans decreases. this leads to the intensification of competition among fis, lowering the loan interest rate. number of branches in business areas of each fi : the higher the number of branches in the business area, the lower the deposit and lending margins. nonperforming loan ratio of each fi : fis with high nonperforming loan ratios tend to offer higher loan interest rates, reflecting their higher credit costs. two different scenarios of the future market interest rate market interest rate ( 5 ‐ year jgb yields ) is regressed on the nominal gdp growth rate, and using the estimated results, we assume that the market interest rate is 1. 6 % when the nominal growth rate is 2 %, and 0. 8 % when the nominal growth rate is 1 %. recovery scenario : the economy follows a sustainable growth path with a nominal growth rate of 2 % from fiscal 2019, and the market interest rate gradually rises to 1. 6 %. stagnation scenario : the nominal growth rate remains lackluster at around 1 %, and the market interest rate rises only to 0. 8 %. note : 1. contributions of population growth effect, population aging effect,