Though the Japanese Ministry of Finance apparently is advising banks that it would be prudent to apply a 100% risk weight to mortgage-backed securities, American experts believe most Japanese banks will be able to go on using lower American risk weightings instead.
In the diplomatic world, where communication often takes the form of hints and other indirect modes, no one would dare lobby the MoF directly. But several sources have confirmed that there have been recent attempts to persuade the MoF that the American risk-weighting standards are appropriate for the MBS issued by the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
Under U.S. regulations, the par- ticipation certificates are risk-weighted at 20%, Ginnie Maes at zero percent and standard MBS derivatives are weighted at 50%. Some of the more risky derivatives, including principal-only and interest-only strips, are riskweighted at 100*/6. Most other countries appear to be following the U.S. standards.
'The issue did come up in our discussions at the MoF," said Charlotte Sterling, vice president of public relations at Fannie Mae. Sterling, who was part of a Fannie Mae delegation that recently returned from Japan, said, 'We explained the nature of our securities but we believe the risk weight is a regulatory matter and it is not our place to tell the regulators what to do.'
Gary L. Pertin, senior vice president and treasurer at Fannie Mac, who also made the trip to Japan, said it is his understanding 'that the type of guidance being given by the MoF is somehow regarded as provisional.'
His view was seconded by Michael R. McCabe, director of investor marketing at Freddie Mac. 'Most Japanese financial institutions continue to treat MBS as they are treated here,' he said.
The issue has been publicly discussed for months in Japan with no discernible market effect, according to Perlin and McCabe. Fannie Mae has estimated that it will sell up to 12% of its MBS abroad next year, most of them in Japan. That would come to between $18 billion and $24 billion. Freddie Mac has estimated that this year It has sold between 10% and 15% of its $415 billion in MBS in Japan.
According to Eric Davidson, vice president in the Tokyo office of the First Boston Corp., the Japanese earlier had indicated they would follow the American system. 'It% still not decided and there may never be an official proclamation,' he said. But, added Davidson, MoF officials have indicated in public statements that if a bank seeks written advice, the bank is told that it would be prudent to risk-weight MBS at 100%.
While this makes the cost of holding MBS relatively higher for Japanese banks, there are other factors that affect purchases of American MBS more heavily. Davidson said. On the one hand, the general decline of the Japanese economy has made the banks less interested in foreign investments, he explained.
On the other hand, the widespread downgrading of corporate bonds has made mortgage-related Instruments more attractive. He said 100*/6 risk-weighting of MBS makes them about equal in value to a triple-A corporate bond.
