Japanese bank’s US$61bil CLO binge reaches politicians’ radar

TOKYO: A Japanese agricultural bank’s US$61bil spending spree on bundled leveraged loans abroad has begun to attract the attention of the nation’s politicians.

Government officials answered questions from an opposition party lawmaker yesterday about Norinchukin Bank’s purchases of collateralised loan obligations. The lender is among the biggest buyers of the structured securities, which have been compared to securitized products that soured during the global financial crisis.

The agricultural ministry and the Financial Services Agency, which both oversee Norinchukin, are urging the bank to ensure it has an appropriate structure to manage risks tied to its securities investments, Agriculture Minister Takamori Yoshikawa told a Diet panel. Any losses on those investments could have a “significant impact” on the group’s banking units, which depend on returns being generated using their customers’ deposits, he said.

Norinchukin has led a charge by Japanese banks into CLOs in recent years as they search for returns to make up for rock-bottom interest rates at home.

The nation’s banks have grown more vulnerable to global credit markets as they increase investments in products overseas that could sour if the economy worsens, the Bank of Japan said in its semiannual financial system report on Wednesday.

Tokyo-based Norinchukin’s holdings of collateralized debt obligations - a grouping that includes CLOs - jumped about 80% in the nine months through December to 6.8 trillion yen (US$61bil), according to company figures.

While the bank buys the top-rated slices of the securities, FSA official Toshinori Yashiki said these could suffer losses depending on the performance of the underlying corporate loans.

“The FSA has been strengthening regulation to ensure that an expansion of CLO investments will not undermine the stability of the financial system by creating systemic risks,” Yashiki said.

“We will continue to closely monitor domestic and overseas economies and markets and take appropriate actions as necessary.”

The FSA this year introduced a rule that increases the obligations of CLO investors.

Norinchukin has been burned by investments in complex credit products before.

After booking losses on mortgage-backed securities during the global financial crisis a decade ago, it turned to its cooperative members for a 1.9 trillion yen bailout. – Bloomberg