Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

For all the complaints that American bank CEOs have about regulators, their Japanese and European counterparts now have reason to thank them. A rule change in the U.S. may be about to deliver an unexpected profitability boost to lenders in those markets.

The U.S. regulation, set to take effect on Oct. 14, makes money-market funds that invest in government debt such as Treasuries more stable, and therefore more attractive. As a result, billions of dollars are shifting out of short-duration corporate debt and driving up greenback interbank rates. Three-month dollar Libor hit the highest since May 2009 on Aug. 26 and is continuing to trend higher.

Since Libor is the benchmark used in virtually all dollar-denominated corporate loans, that means lending in the currency just became a lot more profitable. That's especially true if the bank can access cash in its home currency at negative rates, as is the case with Japanese and European banks. As long as they can mitigate the currency risk, those with large foreign corporate loan books stand to gain the most.

Diverging Paths
Three-month interbank rates in euros and yen have been dropping even as the dollar equivalent has risen
Source: Bloomberg

Some were in dire need of such a boost. Mitsubishi UFJ Financial Group, for one, has seen the margin on its domestic lending business eroded swiftly by the Bank of Japan's negative interest rate policy.

Margin Squeeze
The Bank of Japan's negative interest rate policy is eating quickly into the profits of Mitsubishi UFG
Source: Company filings

At this point, the same managers who a year ago were facing questions about the pace at which they were doling out cash in places from Myanmar to Brazil are probably being held up as heroes. MUFG, having been on the receiving end of such criticism, must be particularly happy. The bank has been growing abroad to the point that at the end of fiscal 2015 the amount of overseas loans was almost equivalent to what it had at home. The lender now has close to $400 billion of advances outside Japan.

MUFG has company both in Tokyo and across Europe. Here's a list of the 10 banks that operate in negative rate environments and have lent the most in U.S. dollars this year:

Lucky Strike
Some of the banks that have faced criticism for overseas lending are about to see higher margins
Source: Bloomberg

Those who watch bank stocks will recognize a lot of names, especially the one at the top, as some of the worst performers this year. With its shares down 42 percent in 2016, Deutsche Bank was in need of a pick-me-up. Few bankers would have predicted that a tonic would come from their dollar corporate loan book. In fact, lately the bank had been talking about retrenching back home. Luckily, it didn't do so fast enough. 

As these bankers pat themselves on the backs, they may want to raise a toast to the officials at the Securities and Exchange Commission who decided to change the money-market rules.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net