Moody's: Issuance of Basel III securities in Asia to continue growing despite limited progress on resolution and bail-in regimes

Moody's Investors Service says 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 US and Europe.

"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 US$32 billion, including US$26 billion issued so far in 2014," says Gene Fang, a Moody's Vice President and Senior Credit Officer.

"Issuance 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," adds Fang.

At the same time, Moody's notes 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.

And 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.

While the US and EU have already adopted legislation that meet the Financial Stability Board's Key Attributes of Effective Resolution Regimes, Moody's notes that 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 crises of 2008-09 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.

As such Moody's says that as bail-in and resolution regimes eventually take shape across Asia, it will need to assess the implications for creditors of Asian banks. In Europe, for example, Moody's recently revised the outlook for 82 banks to negative, following EU Parliamentary passage of the Bank Resolution and Recovery Directive.

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.

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