Moody’s Investors Service commented that the local currency and foreign currency ratings of the Japanese banks will not be affected by the rating agency’s decision, announced earlier today, to unify the Government of Japan’s local and foreign currency issuer ratings at Aa2, raising its domestic currency bond rating (the JGB) from Aa3 and lowering its foreign currency issuer rating from AAA.

          Earlier this month, Moody’s commented on its global review of the support capacity of a government and a central bank for its banking system in the Special Comment titled “Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries.” Consistent with the analytical criteria specified in that report and in light of Japan’s current situation and future prospects, Moody’s has concluded that the systemic support input for Japan bank ratings should remain at the previous Aaa level, which is two notches above Japan’s local currency government debt rating (Aa2). Accordingly, Japanese bank ratings will not be affected.

          In Moody’s view, Japan has a highly supportive banking framework, one characterized by the complete absence of bank deposit defaults in the past several decades. This reflects the relative lack of bank dis-intermediation in domestic corporate finance and deposit flows. The government has also established two different types of re-capitalisation programmes for systemically important banks and other banks.

Furthermore, the Japanese government has been proactive in supporting the banking system in the current economic downturn by injecting preferred stocks into several regional banks to assist their credit functions in the local economy. The Bank of Japan’s support programme has also included subordinated loan facilities to large banks, equity purchase from banks, and expansion in the range of eligible collateral.

          In the Special Comment, Moody’s points out that the appropriate reference rating for the capacity of a national government to provide support to banks typically would be the government’s own debt rating — JGB at Aa2 for Japan. Moody’s also believes that, for the purpose of determining systemic support capacity, this rating should be adjusted, usually positively, to reflect the non-fiscally dependent measures that both central banks and governments can deploy to support banks.

          In deciding whether the local currency-denominated deposit of a bank can be rated higher than the local currency-denominated debt issued by the national government due to systemic support, Moody’s considers a number of factors for each banking system. These are the size of the banking sector relative to the government’s resources, the level of stress in the banking system and in the economy, the foreign currency obligations of the banking system relative to the government’s own foreign currency resources, political and historical patterns, and the possibility of any drastic shift in government priorities.

          With regard to Japan, the banking system is very large. System-wide deposits total approximately JPY1,000 trillion, loans outstanding, approximately JPY500 trillion. The Japanese government’s debt, although comparatively high relative to Japan’s GDP, is underpinned by the strong liquidity of the domestic banking and financial system, allowing the government a high degree of flexibility in extending support to the banking system through a number of ways, including liquidity and capital assistance, as exemplified in the past. As a logical corollary for such a system-wide profile, the banking system does not rely on the supply of foreign currency to fund its operations.

          The credit stress in the banking system rose during 2008 following the worldwide economic recession. Accordingly, banking system NPLs, particularly those relating to the SME sector, have been rising. However, Japan’s banking system loans have experienced no significant growth in the past ten years. The downward adjustment of assets, including Japanese equity and real estate, continues, but the degree of adjustment is modest in international perspective except Japanese equity.

          With regard to political and historical patterns, Japan has already experienced severe asset deflation. Accordingly, necessary procedures and policy instruments — including the government’s solvency assistance measures — to deal with banking system problems have already been established and tested. In Moody’s view, the support framework likely to be activated for problematic large banks will aim at the maintenance of ordinary banking functions without liquidating the bank. This is based on the importance — fully recognized in political circles — of the banking system in Japan’s economy.
 
          –www.theasianbanker.com (May 19 2009)–

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Asian Banker

REF:Thaipr.net

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