HONG KONG/LONDON, January 28 (Fitch) The large increase in
US prime money market funds' (MMF) exposure to Japanese banks is
driven by an increasingly active offshore expansion strategy by
three major Japanese banking groups, Fitch Ratings says.
However, the rising exposure does not have a material impact on
the banks' funding profiles as an increase in other sources of
foreign currency funding constrains significant reliance on
short-term money market funding.
Allocations to Japanese banks by ten largest US prime MMFs
have increased by roughly 140% since end-May 2011, according to
our analysis. The Japanese banks represented 13.2% of these
funds' assets at end-2012, the largest single country exposure
within our sample.
Mitsubishi UFJ, Sumitomo Mitsui, and Mizuho have expanded
their overseas earning assets to about 20% to compensate their
stagnant domestic operations. Their main focus is emerging Asia
and the US, resulting in their market shares of cross-border
claims in these regions growing subsequently, particularly in
The major Japanese banks' limited deposit franchise outside
of Japan means that overseas business growth has been funded by
the capital markets instruments and converting excess yen
liquidity. The banks' reliance on short-term certificates of
deposit, commercial paper and repos (including funding from
MMFs) are higher in their offshore than domestic operations.
Liquidity pressure could therefore arise in their overseas
operations in a stress situation if US funds withdraw financing
rapidly from the Japanese banks and swap counterparties have
less appetite for yen. However, liquidity risk is ultimately
mitigated by very comfortable loan-to- deposit ratios of below
80%, meaning there is abundant liquidity in Japanese yen that
can be readily converted to foreign currencies if necessary.