Bank capital has long been a hot topic in Asia, but the asset class has so far failed to ignite the kind of excitement that the Basel reforms once promised – at least outside of Australia. That is all about to change.
When the global financial crisis hit in 2008, Asia’s banks were able to sit back and watch the mayhem unfold from afar. The vast majority of the region’s financial institutions boasted far healthier balance sheets than their US and European peers, with stable deposits and higher capital ratios. Systemic links were weak, too, since Asian lenders had been slow to embrace the structured products that got their global counterparts in so much trouble.
Fast forward to 2016, and it is Asia that is in danger of being left behind. While global lenders have topped up their capital multiple times since the unpopular bailouts of 2008-09, Asia has been slow to move on capital increases. The gap has all but disappeared.
Faced with the threat of being bailed in on loss-absorbing securities, international investors are looking far more closely at banks’ capital ratios, studying the distance to trigger events and the ability of even top global banks to meet coupon payments. In Asia, however, that level of analysis is lacking. The perception that governments will step in before their state-owned lenders run into trouble remains hard to shake.
What’s more, Asia’s mainly deposit-funded business model sits awkwardly with the new rules, where banks are required to hold bigger capital buffers to protect ordinary depositors. In some cases (notably in China), banks may need to issue wholesale funding that they do not need.
The biggest change since IFR’s latest roundtable on Asian bank capital in
late 2013 has been the arrival of new rules around the total loss-absorbing capacity (TLAC) of the world’s biggest banks, and it is no surprise that the implications of those rules dominated the debate at the latest event, held in June in Hong Kong.
The panel estimated China’s top four banks would need to issue perhaps as much as US$1trn of additional loss-absorbing bonds to meet the country’s TLAC obligations. Although they have until 2028 to meet that requirement in full, the scale of the challenge means that the mega Chinese lenders will need to put their plans in place as soon as possible.
Only China and Japan are directly affected by the TLAC rules, but the competition for bank capital investors means that other Asian lenders cannot afford to ignore the topic. Will a glut of Chinese issuance crowd out other lenders? Will other Asian regulators introduce TLAC rules for their domestic lenders?
Whatever format China’s capital raising takes, the roundtable made it clear that Asia’s bank capital market is about to get much, much bigger.
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