Asian banks are expected to continue issuing Basel III securities to comply with the stricter capital requirements, global ratings agency Moody’s Investors Service said.
In a statement released on Thursday, Moody’s said that Asia-Pacific banks have been active in issuing Basel III securities that contain contractual bail-in terms, even though the region has been cautious in implementing statutory resolution and bail-in regimes in comparison to more rapid progress in the United States and Europe.
Bail-in regimes are those in which bonds are issued with the agreement of investors that in the case of a financial failure of the issuer, a certain percentage of the bond may not be repaid. One effect of bail-in terms is to raise yields, as bondholders demand higher interest in exchange for their assuming greater risk.
“Moody’s expects Asian banks (ex-Japan and ex-Australia) to continue issuing Basel III securities in large volumes, noting that they have already issued more than $32 billion, including $26 billion issued so far in 2014,” said Gene Fang, vice president and senior credit officer at Moody’s.
Fang added that the issue of such securities has been driven by continued pressure on bank capital ratios, as implementation of Basel III imposes progressively higher common equity ratios, shifts deductions to common equity, and phases out the use of pre-Basel III capital securities.
At the same time, the ratings agency noted that despite the greater emphasis on equity capital under Basel III, non-equity Basel III securities continue to play an important role in the region’s bank capital structures.
Although the amount of eligible non-equity Basel III capital is lower under Basel III, the use of non-equity capital to meet minimum capital requirements releases equity capital for capital buffers, Moody’s said.
Moody’s also said while the US and European Union have already adopted legislation that meets the Financial Stability Board’s Key Attributes of Effective Resolution Regimes, the approach in Asia has so far been cautious.
“The political impetus and perceived need for the kind of reforms being adopted in the West have been weaker in Asia, given that the region’s banking systems weathered the fallout of the global financial crisis of 2008-2009 in relative good shape. But efforts are now underway due to G20 peer pressure and in some cases the need to align domestic regimes with those outside the region,” it stated.
As such, Moody’s said that as bail-in and resolution regimes eventually take shape across Asia, it will need to assess the implications for creditors of Asian banks.
“While adoption of bail-in regimes in Asia would also be credit negative, an important mitigating factor is the preference among regulators to take early action when stresses arise, rather than wait for resolution and bail-in regimes to be triggered,” the ratings agency explained.