• Bloomberg


Japanese banks have more than doubled their borrowing and lending in dollars since 2007, leaving them vulnerable to funding shocks such as those that exacerbated the last financial crisis, according to the Bank for International Settlements.

Assets denominated in dollars on the balance sheets of Japanese banks surged to about $3.5 trillion by the end of 2016, the coordinating body for the world’s central banks said Sunday in its annual report about the global economy. Those exceed liabilities in dollars by about $1 trillion, creating a massive so-called long position in the currency. The report also noted that Canadian lenders are following a similar trend, almost doubling their dollar exposure since the crisis. Their net long positions reached almost $200 billion, the BIS said.

European firms, by contrast, have reduced exposure to dollars since the crisis, the report said. German banks, which had among the highest net dollar positions in 2007, now have matching assets and liabilities denominated in the currency after cutting dollar assets by about half.

During the financial crisis, European banks’ net dollar exposures, which peaked at $2 trillion, ended up causing several firms to collapse when funding sources dried up and their efforts to dump U.S. mortgage-related assets led to huge losses. Even though post-crisis regulation has strengthened banks’ capital resources to cope with such losses and some funding has shifted to more stable sources, risks haven’t been completely eliminated, according to the Basel, Switzerland-based group.

“Banks’ continued reliance on short-term U.S. dollar funding remains a pressure point,” the organization said in the report, referring to firms outside the U.S. “Questions remain about the resilience of funding under more stressed conditions.”

New regulations after the financial crisis led to a shrinking of U.S. money market funds, which provide short-term dollar funding to banks around the world. While banks worldwide have managed to shift dollar funding to other sources, they might have difficulty doing so if those funding sources disappeared quickly in the next crisis, the BIS said.

The 250-page report also highlighted difficulties banks face improving profitability in the low-interest-rate environment that has persisted since the crisis. An improving global economy and slowly rising rates should help banks in coming years, the BIS said. But there are still many countries where banks have high levels of bad debt, which will continue to weigh on profitability, the organization warned.

Japanese and Canadian banks have been expanding in the U.S. in recent years. Mitsubishi UFJ Financial Group Inc., Japan’s biggest lender, increased its U.S. assets by about a third in the past two years, according to Fed data. Canadian firms have been on a U.S. retail-bank buying spree. Toronto-Dominion Bank, Canada’s largest, now controls the seventh-biggest U.S. retail bank. Japanese and Canadian firms have also been boosting their capital-markets businesses, hiring investment bankers and traders away from U.S. rivals.

But the biggest portion of dollar funding for non-U.S. banks — $4.1 trillion — now comes from deposits outside the U.S., according to BIS data. That shift toward offshore dollar deposits also presents risks because the Federal Reserve’s funding backstop during the 2008 crisis wouldn’t be present in non-U.S. jurisdictions if dollar funds became scant, the BIS said. The Fed provided $538 billion of emergency loans to European banks that lost dollar funding from U.S. sources during the 2008 crisis, data compiled by Bloomberg show.

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