Below, we excerpt from an interview that appeared in the October issue of our flagship Money Fund Intelligence newsletter, when we decided to get an issuer's perspective on the money markets. We interviewed members of SMBC, Sumitomo Mitsui Banking Corporation, the second largest bank in Japan, to discuss their thoughts on recent developments in the cash marketplace, including funding strategies, ultra-low yields, and changes in money funds. Our discussion follows.
Q: How long has Sumitomo Mitsui been issuing in the money markets? Nobuyuki Kawabata, General Manager, Planning Department, Americas Division, tells us, "We've been issuing in the U.S. money markets for several years and have become more active since the liquidity crisis of 2008. The U.S. money markets are the largest in the world by a far margin and institutionally we've always felt that it's important to be a major player here. We've also been able to increase our presence recently as a result of the European sovereign crisis. During this time, we saw that investors withdrew a great deal of funding from Southern European names to be deployed into those credits perceived to be safer, like the Japanese banks. I believe that investors recognized the inherent stability of the Japanese banks and diversified their investments accordingly. In fact, the crisis turned out to be a good business chance for us."
Hideo Kawafune, Senior Vice President of the Planning Department adds, "Here in New York, we've taken a step-by-step approach to increase our presence in the market. Starting a few years ago, we made the decision to greatly increase our CD issuance. Additionally, last November, we also successfully began our USCP program which was a first for a Japanese mega-bank. In this fiscal year, we took further steps and created an Institutional Investor Team within the Americas Division in order to enhance relationships with our investors and to acquire market intelligence in the money market space. These steps have allowed us to solidify our existing relationships and create new ones as well."
He continues, "Expanding our presence in the U.S. money market also has an important strategic benefit. Given the size of the mutual fund industry in the U.S., I think based on some of your past issues almost $7 trillion with some $2.8 trillion in money markets, it's important for a truly international bank to be an active and complementary participant. The previous crisis has shown us that the mutual fund industry often reacts as a leading indicator, and it's critical that we be deeply involved, not just as an issuer but also as an active voice in the dialogue."
Q: What kinds of short-term debt do you have outstanding? How much? Yasuyuki Takeda, General Manager, and Takao Kanetani, Senior Vice President, of the International Treasury Department, New York, tell MFI, "Well, SMBC has more than enough deposits, especially in our domestic market. SMBC New York currently concentrates on CD and CP, as well as Time Deposits, which we've had great success with. We also have a separate ABCP conduit called Manhattan Asset Funding here in the U.S. Without getting too much into the specific amounts, we like to keep our outstanding size within the $30 billion to $50 billion range for our U.S. operations. As we mentioned before, accessing the U.S. money markets is more strategic than simply to acquire funding; feeling out the market and participating in the dialogue is incredibly important as well."
Q: How have your funding patterns changed over the past two or three years? Takeda explains, "Clearly Japanese banks have had ample liquidity on the balance sheets. However, the past two years have reminded us of the importance of liquidity control. At that time, making the right management adaptations, particularly from a funding perspective became critical to ensure stability in an unsure and unstable environment. To that end, SMBC created a USCP program to complement our existing CD program. Our reasoning was that while we don't need the funding specifically, we could seize the opportunity to offer supply to the marketplace and in the process, create new relationships."
Q: Are you concerned about possible regulatory changes to the money fund space? Kawabata tells us, "From an issuer standpoint, it seems clear that the SEC is pushing the money funds to invest in shorter, more liquid securities, and at the same time Basel is pushing issuers to fund longer. This creates a gap that many of our internal economists fear will lead to decreased issuance and higher funding costs."
Q: How important are money market funds to the short-term funding markets? Kawafune answers, "We believe that money market funds are integral to the U.S. short-term funding markets.... Understanding the importance of money market funds, we have worked closely with them in order to bring to the market structured paper that both fits with their new regulatory requirements and matches with our desire for longer and cheaper funding. Last year, we were the first Japanese mega-bank to do a putable CD.... We believe relationships are built through innovative transacting, communicating, and deal-making as exemplified with our putable CD that we worked hard to provide to our investors." (For the full article, contact Crane Data.)
