MNI INSIGHT: BOJ Mulls Expanding Collateral Lines To Aid Banks

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is considering increasing the types of

eligible collateral that commercial banks can hold at the central bank, with the

hope they can reduce their reserve holdings of government bonds and help boost

the functioning of the JGB market as they recirculate, MNI understands.

     Commercial banks have to leave a certain amount of collateral at the

central bank for daily financial transactions and government bonds have long

been seen as the most convenient to hold. Along with BOJ bond holdings, those

obligations have hampered liquidity levels in the JGB market. 

     However, banks are struggling to leave the necessary level of JGBs against

reserves as their bond holdings have fallen sharply in the wake of the large

purchases by the BOJ.

     --NEW INSTRUMENTS

     The BOJ is now considering introducing additional eligible collateral in

order to make it easier for commercial banks to meet their requirements. In

December 2015, the BOJ added mortgage loans as acceptable collateral, which has

already somewhat helped banks.

     The BOJ already accepts various loans on deeds -- such as those to

companies, the government and municipal governments, providing the instrument

has a credit rating of single 'A' or higher -- as eligible collateral and is

looking to accept other loans on deeds.

     If commercial banks' duty of gathering and leaving eligible government

bonds at the BOJ drops, volume of circulating JGBs in the secondary market

increases, which in turn will contribute to increasing the functioning in bond

markets.

     --BOND HOLDINGS HALVED

     The share of government bonds held directly by the BOJ increased to 42.99%

at the end of December 2018, up sharply from 15.31% at the end of June 2013,

boosted by the introduction of quantitative and qualitative easing (QQE) in

April 2013.

     That has had the effect of pushing the share of JGB holdings by commercial

banks to 15.07% at the end of December, down more than half from 35.65% at the

end of June 2013.

     As of February 28, the total eligible collateral held by the BOJ was Y91.83

trillion against Y110.36 trillion at the end of April 2013.

     The total of government bonds held by commercial banks fell to Y22.65

trillion, or 25% of the total collateral, at the end of February from Y75.45

trillion, or 68% of the total collaterals, at the end of April 2013.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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