The “hot topic” being watched by Japanese securities regulators is deleveraging by European banks and the potential for credit tightening in Asia, says Toshio Oya, assistant commissioner for international affairs at the Financial Services Authority.
Speaking at a conference in Tokyo organised by AsianInvestor, Oya notes that foreign investors have become major investors in local-currency debt from many Asian countries, including Indonesia, Malaysia, South Korea and Thailand.
Should foreign investors be forced into a sudden unwinding, there would be a market impact, particularly in Indonesia (where about 30% of its market is foreign-owned) and Malaysia.
The FSA also keeps an eye on Asian corporate debt levels. Gearing is nothing like 1997 levels but it is on the rise and has now surpassed 2007 levels. Highly geared companies in markets such as Vietnam, the Philippines, Korea and India, where corporate borrowing is on the rise, could be vulnerable should European lenders suddenly pull out.
Foreign bank claims on Asian borrowers are rising, particularly in Malaysia, Taiwan and Korea, says Oya, although they are nothing like the very high exposures in Central and Eastern Europe.
Oya notes that capital requirements for European banks are going to force some asset sales. As of October, new European banking regulations require banks to hold up to 9% of their reserves in core tier-1 capital, going beyond existing Basel 3 commitments. Their deadline is June and collectively they must add another €114 billion to tier-1 capital by then.
To boost capital adequacy ratios requires increasing capital, via recapitalisation that would dilute shareholders; through boosting profits, which would be nice but is rather hard to achieve; or by reducing risk assets on the balance sheet.
Disposals are now hitting the market and there will be a drastic reduction in new lending by eurozone financial institutions. Oya, citing IMF statistics, says by the end of 2013, eurozone banks are projected to reduce leverage from 29% to 23%, forcing them to sell up to $2.6 trillion worth of assets.
That means a reduction in credit supply, particularly in Europe but also in Asia. The question for this region is to what degree. For now, Oya says the impact in Asia seems to be minor. But the FSA will continue to monitor the situation.