Moody's: Progress in Asia Pacific on bank resolution and bail-in varies across region

Moody's Investors Service says that the progress that Asia Pacific (APAC) banking systems have made in implementing bank resolution and bail-in regimes as prescribed under the Financial Stability Board's (FSB) framework continues to vary significantly and lag behind Europe and North America.

"In most APAC jurisdictions, authorities still lack statutory powers to bail in creditors, but public discussions on the design of such regimes are taking place in several markets," says Christine Kuo, a Moody's Senior Vice President.

"In those few systems where authorities have such powers, due to policy inertia and the still-small scale of outstanding junior securities, they will continue to favor the use of traditional tools to resolve bank distress, such as through the provision of government support," adds Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer.

In APAC, Hong Kong has made the most significant advance by introducing a bank resolution regime in July 2017, while Japan and New Zealand already have broad powers to deal with ailing banks.

Meanwhile, Singapore will introduce a resolution regime in the coming months, although this will exclude all deposits and senior debt from bail-in. Reforms are also under way in India, while other markets have made less progress on this front.

Furthermore, another practical consideration is the authorities' reluctance or slow progress to introduce buffers of loss-absorbing liabilities similar to TLAC or MREL for domestic systemically important banks, which makes bank resolution unworkable without public support.

Basel III contractual securities remain the only type of bail-in-able instruments in most markets. In this context, only the Hong Kong, Japan and New Zealand authorities have the power to bail in senior creditors, and only TLAC bonds in the case of Japan.

Only Hong Kong and New Zealand authorities have the power to bail in depositors, and only unprotected depositors in the case of Hong Kong.

In addition, the amount of outstanding instruments with contractual bail-in clauses is very small relative to bank assets, making other arrangements necessary in the event of a bank failure. Basel III securities represent only up to 2% of bank assets in APAC banking systems.

In general, the relative absence of bail-in tools is credit positive for the creditors of major Asian banks because Moody's expects government support to continue to be relatively high. On the other hand, Asian banks apart from G-SIBs are likely to lag European and major North American banks in terms of building up additional loss-absorbing buffers (TLAC, MREL).

In practice, Moody's has found that these buffers can form meaningful protection, especially to depositors and senior bank creditors, offsetting reduction in government support.

Moreover, Moody's assessments of the progress in bank resolution regimes among APAC markets suggest that their impact on bank ratings remains limited. In terms of reforms in the area of bank resolution globally, Moody's considers how such changes can alter the balance of risks for different classes of bank creditors through bail-ins, and how Moody's public support assumptions might change once authorities have broad resolution powers.

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