NEWS : Interbank rates surge as dollar shortage looms anew

August 10, 2016 TOKYO -- International financial markets face the prospect of another greenback crunch with upcoming U.S. regulations poised to hit a key source of short-term dollar financing and Japanese banks already feeling the heat.

The three-month dollar London Interbank Offered Rate has jumped nearly 0.2 percentage point over the past month, climbing above 0.8% Monday -- its highest since 2009, when markets were still roiled by the global financial crisis. The rate has remained elevated since the Federal Reserve raised interest rates late last year.

The surge owes to tighter regulations on American money market funds taking effect in October. Money market funds invest in short-term Treasury bills, commercial paper from financial institutions and businesses, certificates of deposit and similar instruments. They are popular as a safe and highly liquid investment. Money market fund assets totaled $2.73 trillion on Aug. 3, data from the Investment Company Institute shows.

The new regulations apply to prime money market funds, which invest mainly in commercial paper and account for about 35% of total assets. The changes will make redemptions more difficult if market liquidity dries up in a crisis. The aim is to avoid runs on funds like those seen during the financial crisis after net asset values dropped below $1, the level that money market funds try to maintain. With the implementation date drawing closer, the funds are steering clear of the short-term assets they usually buy, forcing borrowers to pay higher rates.

Many investors are pulling money out of prime funds, fearing that their cash could get locked in later. Prime funds held $967.1 billion in assets on Aug. 3, down more than 30% from last October's peak.

These outflows are hindering Japanese banks' access to dollars. The portfolios of prime funds include commercial paper floated by these institutions for dollar funding. Commercial paper issuers are being forced to procure greenbacks through other avenues, contributing to the problem.

The measures announced by the Bank of Japan after last month's policy meeting include an expansion of dollar lending. While this has eased banks' jitters for now, it has not allayed concern that the shortage will worsen as the October deadline for the new U.S. regulations approaches. Speculation that the Fed will hike interest rates again is not helping the problem.

"Procurement costs could get stuck at high levels, affecting Japanese banks' overseas business and profits from investment in foreign bonds," warned Kota Okada of the Nomura Institute of Capital Markets Research.

Nikkei

 


2016-08-09 20:42:13
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