You never know until it happens where the first too-big-to-fail bank is coming from, but this one has suddenly emerged out of the fog.
Is the next big bank to collapse coming from Japan? One of those too-big-to-fail banks just announced it is plotting a crash course. It says it is a course, of course, to avoid a crash.
Japan’s biggest agricultural bank will dispose of the foreign bonds gradually during the fiscal year ending March, a company spokesman said in an email. It expects a net loss of 1.5 trillion yen for the year, triple the previous estimate of 500 billion yen.
As usual, this is wholely a case of “unrealized losses” on bonds the bank is holding as assets in reserve, many of which are US Treasuries.
Its unrealized losses have been reflected in its capital ratio and won’t affect the bank’s soundness, the spokesman added.
Yeah, sure. In America, that is the kind of statement we usually hear right before the “Monday open” when the bank doesn’t open because the FDIC put it in receivership over the weekend or the Fed fed all of its red meet to JPMorgan when no one was looking. I have no idea how these things work in Japan, but that’s how we do it here.
The fact is, the troubles look a lot more pernicious than the bank’s spokesman is letting on.
The fact is, there is, right off the bat, a problem of scale as with the United State’s too-big-to-fail banks:
With an investment portfolio equivalent to $357 billion, Norinchukin is one of the largest Japanese investors in international financial markets. Trading desks from London to New York were buzzing with speculation on Tuesday about where the bank might shift its holdings.
In other words, the amount of assets the bank is looking at selling off (which is when “unrealized losses” must become “realized losses,” is enough to move markets and drop yields (or raise yields on any particular assets it buys as replacements).
Interestingly, the bank is suddenly looking to start realizing its losses now because many of its assets are US assets, and the Federal Reserve has made it clear that its next rate cut is a ways off. Rate cuts would help save the bank by bringing down the yields on those bonds, which raises the value of the bonds. So, when a major bank like this decides to sell a whole slew of those assets, it is because it believes the losses will be greater later if they try to hang on longer. They are trying minimize their losses.
In other words, this major Japanese bank believes what US stock investors (and even bond investors) refuse to believe. It believes the Fed when the Fed says it is going to hold off a lot longer on rate cuts than the bank can withstand. In fact, it could even be fearing that the Fed’s failure all of this year in moving the needle on inflation may mean the Fed ultimately raises interest rates a tap.
So, the bank is gong to offload as many of these bonds as it can between now and next March because, when you have that much to move, like a large ship, you change course slowly. If the bank tried to move that much too quickly, it would destroy the value of its own bonds because it is such a big whale in the bond pool, making its own problems worse … which it might wind up doing anyway.
“Reallocating assets is difficult given the constraints of regulatory capital and profitability, as well as the difficult market environment,” said Eiji Kubo a director at S&P Global Ratings in Tokyo. “If you do it poorly, you could end up getting slapped back and forth.”
And everyone else with you!
Norinchukin was already hurt by believing the mantra that Fed interest cuts would be forthcoming long before now:
Norinchukin’s losses on bonds ballooned after it misjudged how long interest rates would stay elevated. A sharp rise in foreign-currency funding costs wiped out returns from bonds bought when their yields were lower.
The bank is now pressed to tap its members—agricultural cooperatives—for capital to make up the soon-to-be-realized reserve losses on those bonds. The last time it had to do that was back in 2009, and we all remember well what was happening to banks back then.
Perhaps the bank will do just fine.
Another Fed-funded failure
It might be worth noting that this bank was a big participant in the Fed’s Standing Repo Facility, which Zero Hedge describes as the Federal Reserve’s “bailout slush fund.”
One aspect of controlling the world’s reserve currency, as the Fed does, is that the Fed must work in major ways with the major US bonds that non-US banks hold. It has to keep the global currency, usually exchanged via bonds, lubricated.
You cannot run a reserve currency if you don’t do large enough operations with bonds to make bond transactions move as smoothly as if greased with butter for the largest banks of all other nations on earth. That is the requisite task as central banker of the global currency. That breadth in ability is one major reason why no major currency has so far been able to come close to competing against the dollar. To keep its manifold international banking partners happy, the Fed helps with their bailouts and lubricates their tight spots when they occur.
The Fed’s long tightening cycle, as it seeks to kill inflation, has been just as rough on a lot of foreign banks, as it has been on US banks, such as those banks that failed in the spring of last year. Norinchukin just got to where it did not seem a good risk to try to avoid major losses by holding out longer. Better to take them on the chin now because the Fed clearly has a lot more inflation fighting to go.
A problem of scale
Enter Norinchukin: according to the Nikkei, the company’s net loss for the year ending March 2025, which was previously forecast to top 500 billion yen, will rise to the 1.5 trillion yen level with the bond sales.
When you are talking trillions, that’s no small sum, even when measured in yen.
Facing a problem that is very familiar to all US banks, Oku said the bank “acknowledged the need to drastically change its portfolio management” to reduce unrealized losses on its bonds….
So faced with no other options, Nochu is doing the only thing it can: an orderly liquidation of tens of billions of securities now, when they are still liquid and carry a high price, in hopes of avoiding a disorderly liquidation and much worse, in a few months when the bond market freezes up.
Again, for a sense of scale, Norinchukin owns about 20% of all the foreign bonds held by Japanese banks. So, its big bond sale in the months ahead will move markets. That’s why it is starting now, and spreading the move out over a period of about nine months. It’s doing this because it believes the Fed will be holding interest rates where they are for lot longer.
Norinchukin plans to sell over 10 trillion yen in foreign bonds, in addition to its normal trading activities….
Once the selling begins, the bank will be lucky if it can get even a fraction of the proceeds it hopes for (because all the other banks won’t just be standing there twiddling their thumbs, as they wait to see how massively Nochu reprices the market).
And it’s not just banks: if and when the selling begins by a bank that holds 20% of all foreign bonds in Japan, the liquidation cascade will quickly spread to Mrs Watanabe. According to the U.S. Treasury Department, Japanese investors held $1.18 trillion of U.S. government bonds as of March, the largest slice among foreign holders.
So, yes, as the bank and the Mrs. Watanabes (and other average people in Japan) make this move to sell off, it will affect Treasury bond yields (upwardly) in the US (bond values downwardly).
“Massive sales by Norinchukin could have a sizable effect on the U.S. bond market.”
And since we now know what is happening, it is only a matter of time before everyone else frontruns Norinchukin.
As that snowball builds, Norinchukin may find its newly realized losses become bigger than it expected. There is no assurance the snowball won’t get out of hand as it rolls down the mountainside. Its realized losses are already expected to more than double the amount the bank lost back in 2009.
Seeing losses that big, it says a lot that this major bank wants to start realizing those losses now before many other banks start realizing theirs during the long wait still ahead for the Fed’s first turn on interest rates. Norinchukin wants to be one of the first heading for the exit, given how slow it has to move in order to avoid moving markets entirely, not the last. But, just seeing Norinchukin move might get others rushing to the exits, too.
No biggie: