TOKYO: Japan’s banks are bracing for a potential rise in British peers’ counterparty risks after Britain voted to leave the European Union, banking industry sources said, with the departure reportedly set to trigger a downgrade in the country’s top-notch credit rating. Banks engaged in derivatives and other trades are exposed to risks of counterparties failing to meet contractual obligations, risks that grow if the counterparties’ ratings are cut in moves that increase borrowing costs.
Ratings agency Standard and Poor’s said Britain’s “AAA” sovereign credit rating is “untenable” after the result of Thursday’s referendum, the Financial Times reported on Friday, citing Moritz Kraemer, chief ratings officer for S&P. A sovereign downgrade is usually accompanied by cuts in ratings at that country’s banks. The S&P comment came as ratings agency peer Fitch said it will review Britain’s sovereign rating shortly, and that the country’s status as a major banking hub could be damaged as some business lines shift to the E.U.”
A senior official at Japan’s Financial Services Agency – the industry watchdog – said the banks are seriously studying counterparty risks at Britain’s banks. The person declined to be named since he was not authorised to discuss the matter publicly. “We need to review contracts when they come due for renewal,” said a senior official at one of Japan’s top three banks, who declined to be identified as he was not authorised to discuss the matter publicly. “Otherwise, we might face bigger risk assets and thus bigger capital must be set aside.”
Officials said Japanese banks had been stocking enough dollar and pound liquidity in days before the vote to weather possible market turbulence were Britons to vote to leave the E.U. “There could be unexpected market moves, but we have taken necessary measures,” said a spokesman at Sumitomo Mitsui Banking Corp, a core unit of Sumitomo Mitsui Financial Group, Japan’s third-biggest bank by assets.
Privately, senior officials at the top banks have expressed concern that measures set in place might not prove sufficient should major unexpected developments take place. “If big fire breaks out, can the Bank of England and European Central Bank really put it out?” said one executive at one of the top banks, speaking on condition of anonymity. Another senior banker said he was worried about the potential impact on hedge funds and other non-banking financial sector players. “If liquidity troubles happen among them, we could face something far bigger than the Lehman crisis,” he said, referring to the problems on Wall Street that triggered the 2008 global financial crisis. The banker declined to be identified because he was not authorised to discuss the matter publicly.
