TOKYO (MNI) – The Bank of Japan warned of the possibility that the
Federal Reserve’s proposed single-counterparty credit limits (SCCL)
imposed on systemically important U.S. financial institutions could have
unintended impacts on non-U.S. financial systems.

The BOJ said on Monday that it sent a comment letter on April 28 to
the Fed regarding its call for public comments on the SCCL.

“As for the Single-Counterparty Credit Limits, we would like to
raise two specific areas of concerns: potential impact on the conduct of
monetary policy as well as on the payment and settlement via central
bank accounts; and potential impact on the market liquidity of non-U.S.
high-quality sovereign debts,” the BOJ said.

The BOJ also said, “Referring to the first point, as the exposure
to a foreign central bank might be counted as part of the credit
exposure to the central government under the proposed rule, U.S.
financial institutions subject to the rule might not be able to maintain
sufficient amounts of reserves in their current accounts with foreign
central banks.”

“In Japan, the counterparties of the Bank of Japan in conducting
money market operations include a number of U.S. financial institutions
with current accounts with the bank. The proposed rule therefore could
reduce the effectiveness of the bank’s monetary policy conduct, and
hamper the daily payments and settlements via the current accounts with
the bank,” it said.

The BOJ also noted, “On the second, extending the scope of credit
limits to non-U.S. sovereign debts could have a significant adverse
impact on sovereign debt and related funding markets outside the United
States, even if such debts are of high quality.”

“Any consequent withdrawal, triggered by the breach of the limit,
of U.S. financial institutions from the activities in those markets
could reduce market liquidity with incremental effects. It in turn would
hinder the money market operations of central banks, especially the
operations using sovereign debts as safe and liquid collateral assets.”

“As the Federal Reserve must be fully aware, high-quality foreign
sovereign debts play an important role in the local markets as do in the
U.S. markets U.S. Treasuries, which are exempt from the proposed rule.
We are all the more concerned with this issue, because U.S. financial
institutions are also the bank’s counterparties in the money market
operations using Japanese government bonds,” the BOJ said.

tokyo@marketnews.com
** MNI Tokyo Newsroom: 81-3-5403-4833 **

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