Find out what supports Japanese mega banks' overseas operations

Foreign-currency liquidity and certificates of deposit are on the list.

According to Moody's, when compared to their ample levels of domestic liquidity, the mega-banks’ foreign-currency liquidity profiles are modest and constrained by their approach to funding their overseas businesses.

Here's more from Moody's:

The mega-banks have been increasing their overseas activities in recent years. They have largely followed a conservative approach so far, and have managed their overseas loans in line with their foreign-currency deposits

However, they are also increasing their reliance on certificates of deposit (CDs) or non-deposit funding sources, such as commercial paper (CP) and bonds, to support their overseas operations.

From a credit perspective, this latter approach entails risks because CDs and CPs are less stable sources of funding, given their short-term nature and high sensitivity to changes in market confidence.

At the same time, the mega-banks’ large JGB holdings – which vastly exceed their outstanding foreign CD and CP issuance – represent a mitigating factor, because the mega-banks can use their JGB as collateral to access foreign-currency liquidity through venues such as the BOJ’s foreign currency loan facilities and the US Federal Reserve’s discount window, in the event of potential disruptions in normal funding channels.

Separately, the mega-banks are unlikely to move beyond their current foreign funding mixes and increase their use of foreign-exchange swaps to the point where they become a significant source of funds.

This expectation is based on our consideration that the banks have learnt from the mistakes of the 1990s, when their strong reliance on such funding led to difficulties once market confidence declined, and they had to pay a so-called “Japan premium” to fund their positions.

Accordingly, our view is that the Japanese mega-banks will continue their current selective approach, as they keep their expansion overseas in line with their ability to secure relatively stable funding sources. From a credit perspective, this approach is more sustainable.