BOJ Tells Fed Credit Rules May Hinder Japan Monetary Policy

BOJ Pledges to Provide Foreign Currency in Emergencies
A pedestrian walks past the Bank of Japan headquarters in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

Federal Reserve plans for rules on credit risk may hamper monetary policy in Japan and have an “adverse impact” on the liquidity of high-quality sovereign debt, the Japanese central bank said in a letter to the Fed.

Single-counterparty credit limits “could have unintended impacts on non-U.S. financial systems,” Bank of Japan Executive Director Kenzo Yamamoto said in the letter dated April 28 and posted on the central bank’s website today.

It’s the second time since December that the central bank has expressed concerns about proposed U.S. financial rules, joining companies from Goldman Sachs Group Inc. to JPMorgan Chase & Co. The Fed curbs on counterparty risks for financial firms are aimed at containing the damage from the collapse of a bank or a government to prevent another global financial crisis.

“It’s a polite suggestion from the BOJ,” said Katsuhide Takahashi, Tokyo-based director of credit markets at Citigroup Global Markets Japan. “What the BOJ really means to say to the Fed is don’t make trouble for Japan’s financial system.”

Takahashi said the central bank could have been more explicit in asking the Fed to exclude Japanese government bonds and other developed nations’ sovereign debt from the rules, in the same way that U.S. Treasuries are exempted.

Hinder Money Markets

Under the rules, U.S. financial institutions could be unable to maintain “sufficient” amounts of reserves in their current accounts with foreign central banks, Yamamoto said. Limits relating to non-U.S. sovereign debt securities may reduce liquidity and hinder money-market operations that use them as collateral, the official said.

“The counterparties of the Bank of Japan in conducting money-market operations include a number of U.S. financial institutions with current accounts with the bank,” Yamamoto said. “The proposed rule therefore could reduce the effectiveness of the bank’s monetary policy conduct, and hamper the daily payments and settlements via the current accounts with the bank.”

Yamamoto added that the Bank of Japan believes the Fed will find a “creative and practical solution” and avoid unintended consequences through international talks.

The Fed plans to limit financial firms with at least $500 billion in assets from having credit risk to any other exceeding 10 percent of its regulatory capital plus excess loan-loss reserves. That is stricter than a 25 percent restriction that’s applied more broadly to banks in the Dodd-Frank financial-overhaul law.

Wall Street Leaders

Wall Street leaders joined in a closed-door meeting last week to lobby the Federal Reserve to soften proposed rules that they said could harm the economy. Chief executive officers including Jamie Dimon of JPMorgan, Bank of America Corp.’s Brian T. Moynihan and Goldman Sachs’s Lloyd C. Blankfein gave their views on Fed proposals to limit counterparty risk and proprietary trading.

Japan’s central bank and financial regulator told U.S. authorities in a letter in December that the so-called Volcker Rule restricting proprietary trading would hamper the market for Japanese government bonds. They asked for the country’s debt to be exempted and for the U.S. to refrain from applying the restrictions abroad.

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