TOKYO: Some of Japan’s largest banks have increased their holdings of US deposits in an effort to offset incoming rules that will limit their ability to raise dollars through short-term debt markets. Between March and June 2016 Mizuho has increased foreign currency deposits by $13.8bn to $182.2bn, and Sumitomo has increased its foreign currency deposits by $28bn to $149bn between June 2015 and June 2016, according to public documents. The shift comes as non-US banks are looking for alternative sources of dollar funding as incoming regulations for money market funds (MMF) has reduced outstanding US commercial paper from $1.1tn earlier this year to $950bn on September 28. That has also pushed borrowing costs higher.
New money market rules take effect on October 14 and some investors have exited prime funds due to concern of being subjected to fees for withdrawing their cash or being prevented from redeeming money altogether. Prime funds, a traditionally big investor in commercial paper, have seen assets fall by $667bn since the start of the year to $583bn. US prime funds have reduced their holdings of commercial paper issued by Mitsubishi UFJ from $13.1bn to $700m this year, according to Moody’s data. They have also increased their use of time deposits at the bank, from $100m to $4.2bn.
MUFG said it had already diversified the way it raised funds, using a strategy that included acquiring foreign-currency deposits. “With the introduction of MMF regulations, we imagine that [Bank of Tokyo-Mitsubishi’s] CD procurement from MMF will decrease under a situation where capital is expected to outflow from prime MMF,” an MUFG spokesperson said. However, based on this expectation, the bank is already working on diversification of procurement sources so that the impact from MMF regulation introduction on the bank’s procurement is considered to be limited.
Banks analysts at Jefferies said that the three megabanks had made it clear that their strategy was to raise foreign currency deposits as their “main overseas funding tool”, and that they seemed quite confident of that as their current funding structure. A spokeswoman for Mizuho confirmed that Mizuho had been increasing its foreign currency deposits steadily for years.
“Of course we have also realised Fed would launch MMF reform in October, and it might affect the market situation for funding,” she said, adding that the bank would “continue to take any measures for stable funding such as customer deposits”. Managers of prime funds have also shortened the duration of the assets they hold ahead of the deadline for fear of further redemptions, with a Moody’s report released on Wednesday estimating that a further $350bn could still leave prime and tax-exempt funds.
Foreign institutions’ search for dollars has also contributed to big movements in foreign exchange derivatives as banks and investors tap the “cross-currency basis” market, where currencies such as yen and euro can be lent in exchange for dollars. “In euro-dollar and yen-dollar basis markets we have seen a strong impact,” said Camille de Courcel, an interest rate strategist at BNP Paribas. “Foreign banks have to pay more to get dollar funding and investors are using it more than in the past as well.”
A three-month swap exchanging yen for dollars tied to the benchmark borrowing rate Libor has a basis of minus 75 basis points, meaning it costs the investor about 0.75 per cent over the three months to borrow dollars. This stood at just minus 30 bps at the start of the year. The increasing cost of accessing the basis market appears to be taking its toll, with volume in the yen-dollar market in September 2016 falling to its lowest level since June 2014, according to data from ClarusFT.