Dollar Bailout: In a surprising move, the New York Federal Reserve recently added Norinchukin Bank to its list of Standing Repo Facility Counterparties, effectively making it a recipient of the permanent $500 billion bailout facility. This development raises several questions about the role of the Fed as the lender of last resort to Wall Street and foreign banks. In this article, we will delve into the background of Norinchukin Bank, explore the history of the Standing Repo Facility, and analyze the potential implications of this decision.
Norinchukin Bank: An Introduction
Norinchukin Bank, a relatively unknown Japanese financial institution, has suddenly found itself in the spotlight due to its inclusion in the New York Fed’s bailout facility. Despite its obscurity, Norinchukin Bank boasts an impressive $708 billion in assets, making it the fifth-largest bank by assets if it were a U.S. bank. The bank’s stated mission is to support the advancement of Japan’s agriculture, fishery, and forestry industries through financial services. However, recent developments suggest a shift in focus towards asset management and alternative investments.
The Standing Repo Facility: A Brief History
The Standing Repo Facility (SRF) was established by the Federal Reserve and is operated by the New York Fed. It serves as a permanent bailout facility, providing liquidity to Wall Street trading houses and deposit-taking banks, commonly referred to as “primary dealers.” The SRF was introduced as a successor to the emergency repo loans that the Fed had to inject into the financial system in the fourth quarter of 2019.
The 2019 Emergency Repo Loans
In September 2019, the Fed was forced to intervene in the repo market as overnight repo loan rates spiked unexpectedly. This sudden increase in rates indicated that Wall Street banks were becoming hesitant to lend to questionable borrowers. To address the liquidity crunch, the New York Fed established its own repo facility, offering tens of billions of dollars in loans to trading houses on Wall Street at low interest rates. These emergency repo loans were the first of their kind since the 2008 financial crisis.
The Role of Nomura and Other Banks
During the 2019 repo market turmoil, Nomura, a Japanese bank, emerged as the largest recipient of the Fed’s emergency repo loans. Borrowing a cumulative total of $3.7 trillion, Nomura exceeded even JPMorgan Chase in the amount borrowed. The fact that JPMorgan Chase and Goldman Sachs were also heavy borrowers suggests that these banks were likely counterparties in each other’s derivatives transactions.
Norinchukin Bank’s Involvement in CLOs
While Norinchukin Bank may not have a significant derivatives exposure, it has been heavily involved in Collateralized Loan Obligations (CLOs). These CLOs often include high-risk debt, which could potentially expose the bank to significant risk. In 2019, Norinchukin Bank, as the world’s largest CLO investor, halted its buying activities, indicating a cautious approach to this type of investment.
Norinchukin Bank’s U.S. Treasury Holdings
One possible reason for the New York Fed’s interest in ensuring Norinchukin Bank’s access to liquidity is its significant holdings of U.S. Treasury securities. As a large buyer of these securities, any financial distress faced by Norinchukin Bank could potentially impact the U.S. Treasury market. In a recent interview, Norinchukin Bank’s Chief Investment Officer mentioned that the bank had sold a substantial amount of U.S. government bonds due to unrealized losses and expectations of rising interest rates.
The Challenges Faced by Norinchukin Bank
Similar to major U.S. banks, Norinchukin Bank is grappling with heavy unrealized losses on its government debt securities, resulting in a significant negative impact on its financial statements. At the end of fiscal year 2023, the bank reported unrealized losses of $20 billion on its investment securities, leading to a net loss of $10.76 billion after adjustments.
The Faustian Bargain of the Fed
The inclusion of Norinchukin Bank in the New York Fed’s bailout facility raises important questions about the role of the Fed as the lender of last resort. By unilaterally deciding to provide liquidity to Wall Street and foreign banks without congressional approval, the Fed has assumed significant power. This move also begs the question of how long Americans will tolerate the private New York Fed usurping power from elected members of the legislative branch.
Dollar Bailout Conclusion
The Dollar Bailout recent addition of Norinchukin Bank to the New York Fed’s Standing Repo Facility has brought attention to the role of the Fed as a bailout provider and lender of last resort. While Norinchukin Bank may not be a familiar name, its substantial assets and involvement in CLOs and U.S. Treasury holdings make it an important player in the financial system. As we navigate the complexities of the global banking landscape, it is crucial to monitor the actions of central banks and their impact on the stability of the financial system.