Bank capital securities are among the most complex in the public debt markets – and the most controversial. Since the 2008 credit crisis exposed the flaws in the products that were designed to help keep the world’s banks solvent, regulators have enforced a number of changes to mixed responses across the globe.
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The Basel Committee on Banking Supervision now insists that bank capital securities must explicitly expose investors to losses if the issuing bank runs into trouble. The theory holds that writing down these subordinated instruments will protect senior creditors and ordinary depositors, thus reducing the need for any government bail-out.
So far, however, that theory remains untested. Critics argue that triggering these loss-absorbing clauses may have the opposite effect, sending equity investors and depositors fleeing and sending a struggling bank to the wall. Here in Asia, many argue that the concept is redundant when it comes to state-owned banks with taxpayers’ money already at stake, or whether the trigger points should be the same for a bank in an emerging economy as for one in a mature market.
Nevertheless, the Basel Committee’s actions have prompted the introduction of new breeds of subordinated bonds and hybrid securities, and the debate around these new instruments is no less intense than around the theory behind them.
It is perfect material, then, for an IFR Roundtable. The structuring experts, analysts and investors participating in IFR Asia’s Bank Capital Roundtable in September discussed the many challenges behind the new-look securities at a defining moment for the sector. Singapore’s UOB had just completed Asia’s first public issue of loss-absorbing Tier 1 securities, and ICBC Asia was on the road with the region’s first US dollar-denominated Basel III-compliant Tier 2.
The panel made it clear that a consensus on the format – and especially on price – of the new-look capital securities had yet to emerge. Investors, even from the booming private-banking sector, have become hesitant, particularly where instruments come with mandatory writedowns at a specific capital ratio, and a gulf is opening between the local and international markets.
While domestic investors may be the best placed to assess local credit risks, they are also the least concerned about price. As a result, the majority of the capital raisings completed under Basel III terms have come from Asia’s local markets, where issuers are able to command extremely attractive funding costs. International fund managers, meanwhile, need to weigh their returns on risk against other alternatives, and argue that the additional risks require additional compensation.
Whatever the right price might be for the new-style securities, the roundtable made it clear that the instruments were already attracting a great deal of debate. With so much attention on the sector, and numerous deals in the pipeline, a clearer picture is sure to emerge.