Japanese banks held ¥126 trillion in loans to and investments in foreign non-bank financial intermediaries in June 2026, against ¥8 trillion in March 2008. In its Financial System Report published on October 23, the Bank of Japan says a fall in AI profit expectations would be amplified mainly through portfolio adjustments at those foreign funds before spilling over to Japan.
The central bank’s overall verdict is that the system “has been maintaining stability on the whole”. Banks, it says, hold enough capital and funding to withstand a rise in oil prices, a fall in AI expectations and a substantial rise in interest rates at the same time.
The Funding Chain
US hyperscalers once financed data centres from internal funds. The report tracks five of them: Alphabet, Amazon, Meta, Microsoft and Oracle. They now borrow, mainly through corporate bonds, and take long-term leases on data centres owned by others. Operators raise project finance against those leases. Private funds buy the loans from the arranging banks, and some infrastructure funds invest as sponsors. Japanese banks lend to and invest in those funds, so risk a bank sells down can return through a separate credit line.
At the three major banks, foreign funds accounted for 9 percent of overseas lending at end-March 2026 and data centres for 3 percent. Loans to funds at those banks reached ¥12 trillion in the first quarter, up 29.2 percent year on year. Total loans across major, regional and shinkin banks grew 5.9 percent. The Bank of Japan says fund and data centre lending has become a focus segment for major banks, citing high interest rate spreads among the reasons. That group includes MUFG Bank, Sumitomo Mitsui Banking Corporation and Mizuho Bank.
Current credit quality is sound. Most fund lending is subscription finance backed by creditworthy limited partners, and the investment grade share is high. The report’s concerns lie elsewhere. Banks cannot always see in time what funds hold or what it is worth. Much of the lending is committed credit, and although utilisation on fund lines is unchanged, the report warns of rapid drawdowns in a large shock. It also cites concerns over data centre projects heavily reliant on single hyperscalers for rent, and over chips that could become obsolete within a short period.
Fund liquidity is already under strain. US non-traded business development companies have faced redemption outflows since the start of 2026. Retail investors drove most of the outflows, against a backdrop of concern over the software industry. The funds have taken new credit lines from banks to hold liquidity. In a statement to the IMF’s International Monetary and Financial Committee on October 17, ECB President Christine Lagarde said private credit funds were reporting outflows and reactivating redemption gates. She warned that shocks could expose vulnerabilities among non-bank lenders, notably from concentrated AI-related exposures. Euro area institutions have limited direct exposure to private credit, she said, but banks’ exposures to non-banks and vulnerable firms could expose funding and credit vulnerabilities.
The Stress Test
The scenario assumes AI-related stocks fall in line with the dot-com collapse. At the worst point, US equities sit about 50 percent below baseline and Japanese equities about 40 percent below. US BBB spreads widen about 1,100 basis points and fund prices drop about 35 percent. Long-term rates rise 1.5 percentage points, and WTI crude reaches $180 a barrel before holding at $140. Losses on loans to private credit funds and data centres come on top.
The average capital adequacy ratio of internationally active banks falls from 12.8 percent to 8.9 percent by the end of fiscal 2028. The Bank of Japan’s global financial crisis scenario takes it to 10.1 percent. Ratios overall remain above requirements. For internationally active banks, those start with a 4.5 percent CET1 minimum and a 2.5 percent conservation buffer, plus a further 1.0 to 1.5 percent for global systemically important banks. The heavier hit partly reflects valuation losses on securities, which count against these banks’ regulatory capital. Domestic banks excluding shinkin fall from 10.4 percent to 8.8 percent, and shinkin banks from 14.0 percent to 13.2 percent.
The IMF’s October Global Financial Stability Report reached a similar view. It found the banking sector resilient as a whole under combined AI, energy and bond market shocks. It also identified a tail of banks that would be undercapitalised, and said those banks are the most exposed to non-bank financial institutions.
The Question for Lenders
Japan’s banks can absorb the Bank of Japan’s scenario. Measurement is the harder problem. A fund book growing 29.2 percent in a year sits on committed lines that can be drawn quickly in a shock. It is secured on assets that are hard to value. That is where losses tend to surface late. Every bank lending to private funds should be able to say how much of that book depends on AI-related valuations holding up.
