Opinion

Japanese banks and US$ liquidity: Squeezed between expensive deposits and the BoJ

For the last few years, Japanese banks have aggressively expanded their assets overseas, which has helped increased their stubbornly low profitability even after the introduction of negative interest rates by BoJ. Such a successful overseas strategy, profitability-wise, may be at risk due to US$ liquidity developments at a global level.

By: and Date: November 28, 2016 Topic: Global Economics & Governance

This op-ed was originally published in Asian Banking & Finance.

asian-banking-finance

In fact, US$ liquidity has been ebbing towards tightness, partially because of the reform of the US money market fund and more is to come as the FED hikes rates.

The major source of US$ funding for Japanese banks used to be the US money market funds (MMF), but with its reform last year, the liquidity has dried up massive so that Japanese banks have turned to other sources of US$ liquidity. The reason for the increase in the cost of funding is not only that the LIBOR is already discounting incoming FED hikes but also that the cost of Yen-US$ cross-currency swaps has surged.

The most important source of US$ liquidity for Japanese banks now is wholesale US$ deposits but the cost of funding has also gone quite rapidly. Against such background, the Bank of Japan has been offering limited amounts of US$ liquidity through different facilities.

The first one is the BoJ’s Growth Program, which is designed to offer US$ liquidity to Japanese banks to expand their overseas operations but within a limit and only for growth-enhancing lending. The demand has been so large that the BoJ has had to double the ceiling of US$ to be granted since July 2016.

The second program is the US$ Funds Supplying Operations, under which Japanese banks can borrow US$ up to three months, which is funded through a US$-JP¥ swap agreement between the BoJ and the Fed. In July 2016, the BoJ even introduced a new securities lending facility so that banks can borrow JGBs from the BoJ to use them as collateral for the US$ Funds Operations.

Although the outstanding amount is clearly lower than the peak of the European debt crisis in 2011, banks have actively borrowed US$ from the BoJ before the US MMF reform took place.

The outlook is certainly not brighter for Japanese banks, not only because of the expected tightening by the FED but their liquidity requirements will become tighter with the introduction of the Net Stable Funding Ratio by 2018. Beyond the liquidity issues, there are two additional risks related to their overseas asset growth strategy, namely maturity and interest rate risks.

In conclusion, the combination of tighter liquidity regulations together with higher US$ funding costs, Japanese banks might be forced to review what has so far been quite a successful business model to push a stubbornly low profitability, namely that of expanding their US$ assets.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article
 

Opinion

Relaunching transatlantic cooperation with a carbon border adjustment mechanism

The best way for the EU and the US to jointly introduce carbon border adjustment would be to form a ‘climate club’.

By: Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, Global Economics & Governance Date: June 11, 2021
Read article More by this author
 

Podcast

Podcast

A transatlantic climate alliance

When Joe Biden visits Europe for the first time as US president, he should begin forging a transatlantic green deal.

By: The Sound of Economics Topic: Energy & Climate, Global Economics & Governance Date: June 11, 2021
Read about event More on this topic
 

Past Event

Past Event

Form a climate club: United States, European Union and China

Can the three biggest economies agree a carbon tax on imports to catalyse climate action globally?

Speakers: Simone Tagliapietra, Sheldon Whitehouse and Guntram B. Wolff Topic: Global Economics & Governance Date: May 3, 2021
Read article More on this topic
 

External Publication

Form a climate club: United States, European Union and China

If the three biggest economies agree a carbon tax on imports, it will catalyse climate action globally.

By: Guntram B. Wolff and Simone Tagliapietra Topic: Energy & Climate Date: March 23, 2021
Read about event More on this topic
 

Past Event

Past Event

Declining competition: a transatlantic challenge

Join us for a discussion of transatlantic competition with Kristalina Georgieva, Margrethe Vestager and Amy Klobuchar among others.

Speakers: Romain Duval, Kristalina Georgieva, Greg Ip, Amy Klobuchar, Nancy Rose, Tommaso Valletti, Margrethe Vestager, David Wessel and Guntram B. Wolff Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 15, 2021
Read article More on this topic More by this author
 

Opinion

Central banks don’t have to pick winners and losers to fight climate change

Disclosures and financial regulation don’t get enough respect as tools to reduce emissions.

By: Rebecca Christie Topic: Finance & Financial Regulation Date: March 11, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Low interest rates: a transatlantic phenomenon

Structural factors are putting downward pressure on rates: is it time for macroeconomic policy to play second fiddle in managing demand?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 10, 2021
Read article More on this topic More by this author
 

Opinion

Central banking’s brave new world

Ever since the 2008 financial crisis, central bankers have been busy developing new policy instruments to fight fires and ward off emerging threats. Nonetheless, many secretly dreamed of returning to the good old days of cautious conservatism (with financial stability taken seriously).

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: February 24, 2021
Read article More on this topic More by this author
 

Blog Post

US separates climate concerns from financial oversight in contrast to EU activism

Different EU and US supervisory approaches to climate risk may hamper efforts to work together and risk fragmenting global markets.

By: Rebecca Christie Topic: Finance & Financial Regulation Date: February 18, 2021
Read about event More on this topic
 

Past Event

Past Event

Prospects for the US climate policy under the Biden Administration

How US climate policy is likely to evolve, and which international impacts can be expected?

Speakers: Jason Bordoff, Kate Marvel, Michael Mehling, Robert N. Stavins, Leah Stokes and Simone Tagliapietra Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 17, 2021
Read article More on this topic
 

Blog Post

Carbon border adjustment in the United States: not easy, but not impossible either

President Biden has promised to implement a levy on carbon-intensive imports, albeit without a federal domestic carbon price. The measure faces a number of difficulties, but could feasibly be implemented. The route chosen by the US will have important implications for the EU's own plans.

By: Ben McWilliams and Simone Tagliapietra Topic: Energy & Climate Date: February 11, 2021
Read about event More on this topic
 

Past Event

Past Event

The geopolitics of the Green Deal

Join us to mark the launch of the eponymous paper co-written with the European Council on Foreign Relations.

Speakers: Stefano Grassi, Mark Leonard, Simone Tagliapietra, Jennifer Tollmann, Marc Vanheukelen and Guntram B. Wolff Topic: Energy & Climate Date: February 3, 2021
Load more posts