Basel IV, anyone?

IFR Asia - Outlook for Asian Credit 2015
2 min read

The biggest long-term capital funding consideration for Asian banks could be whether or not the concept of total loss-absorption capacity (TLAC) gains traction.

The Financial Stability Board, an international advisory body, outlined the concept of TLAC in a consultative document on November 10. The idea is that global systemically important banks (G-SIBs) earmark a set of instruments over and above their Tier 1 and Tier 2 capital for loss absorption in the event of financial disarray without having to turn to depositors or seek a government bailout. The FSB has proposed summary terms for the instrument and released proposals on the entity from which the TLAC should be issued.

Under the proposal G-SIBs must have a TLAC equivalent to 16%–20% of risk-weighted assets, which potentially rises to 20%–25% after the various buffer levels are included, according to one senior origination banker familiar with the proposals.

Applicable instruments to meet TLAC include T1 and T2 regulatory capital, plus long-term unsecured debt issued in the names of holding companies that is explicitly subject to bail-in or debt resolution regimes. However, as many Asian banks do not have holdco structure, it is possible they will need to issue short-term subordinated debt at the operating bank level, a type of deal the market has started referring to as “Tier 3”.

Currently, few of them have to worry. TLAC is meant to apply only to the world’s top 30 G-SIBs, which includes China’s top four and Japan’s top three banks in Asia. However, the G-SIBs in China are currently exempt in large part because Beijing argues that its top banks are state-owned and, therefore, are its responsibility. No other Asian banks are GSIBs.

However, this could change. TLAC is likely to get increasing traction in Asia as it is introduced across the US, Europe and Japan. Also, conservative bank regulators may decide to define local institutions as domestic systemically important banks (D-SIBs) to ensure they meet the more stringent standards. If that happens Asia’s financial watchdogs may be forced to implement the measures to their own D-SIBs, prompting another round of bank capital issuance in 2016 and 2017. A fourth iteration of the Basel rules may not be too far off.

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