Watchdog reveals UK banks’ £136bn exposure in tragedy-hit Japan

The estimate from the Financial Services Authority (FSA) comes as the country battles to stave off a nuclear meltdown following its devastating earthquake and tsunami.

But the FSA said it was “too soon” to estimate the scale of losses for insurers from the disaster.

Its comments follow fears over a mammoth claims bill for insurers, which has sent shares in the sector plunging since last Friday’s events.

News of the banking exposure also comes at a difficult time for the sector, which was left reeling on Wednesday on concerns over vulnerability to debt-laden Portugal – which suffered a credit ratings downgrade this week.

The FSA said it was trying to establish the total impact Japan’s disaster will have on the UK’s financial sector.

The £136 billion bank exposure estimate, which is based on Bank of England figures, includes loans to Japanese firms in Britain and holdings in Japanese government debt.

David Rule of the FSA’s prudential risk team, said: “The risk we think is manageable on the banking side. On the insurance side it’s early days.”

One estimate earlier this week put the potential claims bill from just the earthquake at as much as £22 billion.

Reinsurers – which insure insurers – are thought to be most at risk, with concerns 2011 profits could be completely wiped out as the Japanese tragedy adds to a series of recent natural disasters, including the New Zealand earthquake and Australian floods.

Shares in Catlin, a Lloyd’s insurer, have fallen eight per cent in the past week, while fellow groups Beazley and Hiscox have slumped nine per cent and four per cent, respectively, since last Friday.

The financial sector is also in the spotlight as the FSA’s Prudential Risk Outlook, which was outlined yesterday, revealed that a number of firms will need to strengthen their balance sheets in order to meet stringent incoming EU rules, called Basel III.

Banks are also undergoing stress tests, with the European Banking Authority due to publish its test criteria today for some 88 banks across the EU.

But the FSA said the UK’s own bank stress tests are tougher than those at a European level.

The UK tests will take into consideration the potential impact of sovereign debt restructuring in the eurozone, although they will be conducted behind closed doors.