Japanese financial institutions hold nearly 20% of the world's collateralised loan obligations (CLO), potentially exposing them to big losses if the coronavirus pandemic erodes the creditworthiness of debt, a survey showed on Tuesday.
CLOs are securities backed by a pool of loans taken out by firms with high levels of debt and typically a non-investment grade credit rating.
A rapid expansion of the CLO market was partly blamed for triggering the collapse of Lehman Brothers in 2008 that led to the global financial crisis.
Japanese financial institutions have steadily increased holdings of CLOs from early 2019 and currently hold 18% of the world's 82 trillion yen ($761 billion) market for the instruments, according to a joint survey conducted by the Bank of Japan and the Financial Services Agency.
Of total overseas loans and investment made by Japanese financial institutions, about 30% were those to companies with non-investment grade credit ratings, bonds issued by such firms or CLOs backed by such debt, the survey showed.
"Major Japanese banks have not incurred impairment losses on overseas credit investment as of end-March," the BOJ and the FSA said in a report unveiling the survey's findings.
"But there's great uncertainty over developments regarding the pandemic and how much pressure it applies to the economy," the report said, warning financial institutions against loading up too much on such risky investment.
The BOJ and the FSA conducted the survey on about 400 Japanese commercial banks, credit unions, securities firms and life insurers from August to September last year to grasp the size of overseas investment and how much risk they were taking.
Big Japanese banks have been boosting overseas loans and investment partly to offset dwindling margins at home due to years of ultra-low interest rates and a lack of demand for funds.
(Reporting by Leika Kihara; Editing by Raju Gopalakrishnan)
