Can Japanese banks plug the void left by retreating US lenders?

Cross-border exposure of Japanese banks have surged to $3.7t in March.

As the aftermath of the 2008 financial crisis cut short the global aspirations of Western banks, Japanese lenders have responded to the challenge by stepping up lending in their stead and effectively cementing their growing role in the global financial arena, reports Nikkei Asian Review.

Whilst cross-border loans and investments by US-based banks have been on steady decline after falling 20% from a decade earlier to $2.8t as of end-March, the cross border exposure of Japanese banks have been anything but negative after surging 40% to $3.7t over the same period, according to data from the Swiss-based Bank of International Settlements (BIS).

Similarly, the foreign bond holdings of European banks have crashed 30% from ten years earlier to $15.8t as of end-2017, according to data from McKinsey Global Institute.

Their global dollar assets have plunged 42% in 2017 following a decision to deleverage after the Great Financial Crisis and eurozone crisis erupted. 

In stark contrast to the declining Western trend, Japanese banks have steadily become the largest non-US player in dollar banking with BIS data estimating their dollar-denominated assets to have ballooned by 88% to $2.5t in 2017.

“Japanese banks’ dollar exposures have not only become the largest in size but are also longer term and harder to scale back,” BIS said in a report. "Japanese banks collectively form the largest branches and agencies in the United States, with a large loan book on the asset side that by its nature is longer term."

As Japanese banks continue to cement their status in the global financial services arena, they are also taking in more risk with their growing dollar-denominated borrowing and lending. Only time will tell, however, if their foreign forays may slide to an imminent meltdown but as of the moment, banks are flush with liquidity.