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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 US.
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.