Increasing Portfolio Overlap of Japanese Regional Banks with Global Investment Funds and Its Financial Stability Implications

Yoshiyasu Koide, Yoshihiko Hogen and Nao Sudo
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Yoshiyasu Koide: Bank of Japan
Yoshihiko Hogen: Bank of Japan

No 22-E-15, Bank of Japan Working Paper Series from Bank of Japan

Abstract: While investment funds have grown rapidly in the global financial market, Japanese financial institutions have been increasing investments in foreign securities. This paper estimates the portfolio overlap - which we define as the correlation of changes in the market value of securities portfolios - between global investment funds and Japanese financial institutions in the last two decades and study the time series properties and the financial stability implications. There are three main findings. First, the number of financial institutions with a high portfolio overlap with investment funds has increased since before the Global Financial Crisis (GFC). The increase is particularly prominent for the portfolio overlap between bond funds and regional banks. Second, financial institutions with lower capital ratios, loan-to-deposit ratios, lending margins tend to have a higher degree of portfolio overlap with investment funds. Third, financial institutions with a higher degree of portfolio overlap with investment funds tend to see a larger decline in the market value of the securities portfolio in response to global market shocks such as redemption waves to investment funds, rises in U.S. interest rates, or disruptions in the U.S. bond market. Our results indicate that as secular changes in structural factors such as a decline in the potential growth rate of the home country weigh on the long-term profitability, Japanese financial institutions in particular regional banks have increased investment in foreign securities, making themselves susceptible to global market shocks that arise from the activities of global investment funds even without direct exposure to these funds. Moreover, an increase in the number of financial institutions with a higher portfolio overlap suggests that the impact of such a global market shock may extend over wide areas of the domestic financial system.

Keywords: Global Investment Funds; Regional Banks; Securities Portfolio; DCC-GARCH (search for similar items in EconPapers)
JEL-codes: G10 G11 G21 G23 (search for similar items in EconPapers)
Date: 2022-09-15
New Economics Papers: this item is included in nep-ban and nep-ifn
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