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BOJ Says Banks Piling Into CLOs Are Vulnerable to Price Drop

  • Says Japanese banks now hold about 15% of outstanding CLOs
  • Prices of top-rated credit products ‘could fall substantially’
CLOs Surge
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Japanese banks have rapidly expanded their exposure to packages of risky corporate loans abroad, making them vulnerable to a steep drop in prices if the global economy deteriorates, according to the central bank.

The ratings and market prices of even top-rated collateralized loan obligations held by Japanese banks “could fall substantially” if economic and market conditions change significantly, the Bank of Japan said Thursday in its semiannual financial system report. Major Japanese banks’ CLO holdings jumped 80% to 12.7 trillion yen ($117 billion) in the year ended March, the report showed.