US Treasury Bond-Held Japanese Regional Banks Also Face Bankdemic Risk... Estimated Bond Losses Double

SVB Liquidity Crisis Leads to 17% Drop in Japan TOPIX Bank Index
Massive US Treasury Holdings Pose Risk... Maximum Loss Amount 2.29 Trillion Yen

The global banking crisis, which began with the bankruptcy of Silicon Valley Bank (SVB) in the United States and toppled Credit Suisse (CS) in Europe, is now raising warnings that it could spread from Germany's Deutsche Bank to regional banks in Japan. The fear of a "Bankdemic" (a portmanteau of bank and pandemic) is rapidly spreading worldwide.

[Image source=Reuters Yonhap News]

According to the global stock market on the 27th, the TOPIX bank index on the Tokyo Stock Exchange fell 17% from the 9th to the 24th, since the SVB liquidity crisis emerged. During the same period, the U.S. Standard & Poor's (S&P) 500 bank index and Europe's Euro Stoxx 600 bank index dropped by 13% and 16%, respectively, making Japan's decline even steeper.

The massive holdings of U.S. Treasury bonds by Japanese banks have emerged as a source of concern. Over the past decade, due to the Bank of Japan's ultra-low interest rate policy, Japanese banks have invested the large cash inflows from deposits not in Japanese government bonds but in U.S. Treasury bonds. With high savings rates and economic stagnation driving Japanese people to seek safe assets like deposits, banks purchased U.S. collateralized loan obligations (CLOs), European mortgage bonds, and other securities, becoming major players in the global bond market.

However, last year, the Federal Reserve's (Fed) aggressive tightening caused bond prices to plummet, leading to a simultaneous decline in the valuation of U.S. Treasury bonds. According to the Bank of Japan (BOJ), the maximum potential loss amount (Value at Risk, VAR) from dollar-denominated bonds held by major Japanese banks increased from 1.2 trillion yen in early 2014 to 2.29 trillion yen in the second quarter of 2022. For regional banks, the VAR is estimated to have doubled during the same period. The decline in U.S. Treasury bond prices was also cited as one of the causes of SVB's bankruptcy.

Additionally, the large proportion of assets whose valuation losses must be directly reflected in accounting books according to market conditions is also a burden for Japanese banks. According to JP Morgan, the amount of available-for-sale securities (AFS) among Japanese government bonds held by Japanese banks is about 109 trillion yen. JP Morgan's analysis suggests that half of these are in a loss state, meaning unrealized losses could grow, especially among smaller banks.

There are also forecasts that the shock to Japanese banks could increase if the massive monetary easing that has lasted for 10 years ends after the inauguration of the new BOJ Governor Kazuo Ueda on the 8th of next month. Rie Nishihara, JP Morgan's Chief Japan Strategist, said, "It is important whether Japanese regional banks and the financial system can withstand shocks when Japan raises its benchmark interest rate in the future due to inflation and wage increases." She added, "If the (government bond) yield is 1%, Japanese banks are safe, but if the yield rises to 1.5-2%, many smaller banks will face capital problems."

However, the Japanese government and some experts argue that the debt situation and capital liquidity of Japanese banks are sound, making their financial condition qualitatively different from the recently failed SVB. There is also analysis that the fear of Japanese banks is exaggerated, given that their domestic asset investment ratio is much higher than that of foreign bonds.

This content was produced with the assistance of AI translation services.