Bangkok--22 Aug--Fitch Ratings Fitch Ratings has reviewed the exposures of most of its rated Asia-Pacific banks to US subprime-backed structured securities and found that direct exposures are low, generally amounting to just a few percent of the investing bank's equity capital. "Losses on such investments will put a dent in annual earnings but do not pose a systemic risk as they are not a serious threat to the soundness of the banks we have surveyed," commented David Marshall, Managing Director and Head of Fitch's Financial Institutions Group in Asia-Pacific. "Banks in Japan and Australia also sponsor and provide liquidity facilities to conduits but in Fitch's view, the key issue here is the need for them to provide liquidity, rather than adding materially to their subprime exposures," he added. Fitch expects the banks to be able to meet these commitments given the modest size of the conduits relative to the banks' own balance sheets. Fitch notes that subprime exposures are threatened by both mark to market valuation losses and real, economic losses. Mark to market losses will reflect the sudden drop in market values for these securities, to the extent these can be reliably identified; such charges could be increased or reversed depending on the ultimate level of economic losses on the underlying securities. The extent of these economic losses is not yet clear: 'AAA' and 'AA' rated securities are unlikely to incur losses but those at the lower end of the investment grade spectrum and below are likely to see significant losses.Given the volatility in credit markets, Fitch acknowledges that there are risks to Asian banks beyond their subprime exposures. They may have to book accounting losses on marking to market other structured products, whose market values may be depressed by poor market sentiment and low liquidity. However, if they continue to hold the securities, these accounting losses should eventually be reversed and the banks should incur significant economic losses only if there is a material change in the default and loss rates on asset classes, other than on securities backed by US subprime mortgage exposures (in particular the more problematic 2006 vintage). Australia: The banks have published few details but from our discussions with the Australian banks we rate, their potential exposure to the US subprime mortgage market through investments in structured credit instruments such as asset-backed securities (ABS) and collateralised debt obligations (CDOs), are limited, and any subprime element very small. Most of their holdings are of higher rated tranches ('AAA' and 'AA'). Similarly, their exposure through asset-backed commercial paper (ABCP) conduit programmes appears limited, although some banks do provide liquidity back-up facilities for these programmes. The larger banks have sponsored and/or provided liquidity back-up facilities to conduits and could be called up to provide liquidity. We understand that the banks are making preparations in case they are called on to meet these commitments. While Fitch believes that exposure to the US subprime mortgage market will not produce significant losses for the Australian banks, market conditions for credit have tightened in recent weeks. Australian banks are typically reliant on wholesale funding for a large part of their total funding requirements. The cost of accessing the wholesale market has also increased. If prolonged, the current liquidity crunch could impact the ability of Australian banks to do business through higher funding costs and, potentially, result in difficulty refinancing debt as it matures, particularly commercial paper. The latter is likely to be more of an issue for the smaller institutions; however Fitch has not seen anything to indicate this has occurred substantially in the banking sector thus far and the underlying condition of banks is good, thanks to the buoyant Australian economy . Japan: The larger banks have disclosed the following information: * Sumitomo Mitsui Financial Group (SMFG) sold the bulk of its holdings exposed to US subprime mortgages earlier this year, realising a loss of several billion yen. It currently has about JPY100bn (