Regulatory limbo hinders Asian lenders
* Regulators yet to unveil details on subordinated debt
* Banks cannot replenish capital ratios with bonds
* Lack of clarity prompts lending slowdown
By Christopher Langner
Feb 15 (IFR) - Asian banks are stuck in a regulatory limbo that is making it impossible for them to issue capital-eligible debt. This is forcing them to slow their rate of lending with potentially negative consequences for economic growth.
Basel III rules covering bank capital requirements came into effect in most of the region on January 1 but most local regulators still have not ruled what makes a subordinated bank bond eligible to be treated as capital.
Banks do not know what instruments they need to issue to be compliant. Consequently, there has not been a single subordinated bond from a bank since the start of the year outside Australia, which has already outlined full details of capital eligibility.
"It does not make sense to come out with a subordinated bond when you don't know if it will count for capital," said a syndicate banker in Hong Kong.
The total lack of subordinated bank debt issued this year contrasts with the US$540m-equivalent of such debt issued in local markets in comparable first six weeks of 2012, according to Thomson Reuters data. By the end of the first quarter last year local and dollar markets had absorbed US$1.7bn and US$746m in subordinated bank bonds respectively.
A comparison to 2011 shows even more clearly how dire the situation is: in the first quarter of 2011 subordinated bank debt issuance was US$57.9bn in local currencies and US$1.75bn in dollars.
Unless regulators make clear soon what subordinated debt they will allow to be counted as capital, this quarter could end up being the first in many years without a single subordinated bank bond from Asia.
Bankers said that banks in the region still had plenty of capital so could afford to wait a while but that some would probably slow their lending to avoid depleting their capital ratios until they know exactly what they need to do to replenish them. Every loan a bank makes now could eat into its capital ratio.
"The pace at which lending can increase will be moderated," said a structuring banker in Singapore.
That effect may already be playing out. Year-to-date Asian syndicated loan volumes stand at US$49.2bn, versus US$62.6bn in the same period last year and US$112.9bn for the equivalent period in 2011, according to Thomson Reuters data.
Less lending could affect the growth prospects in several countries just when China is seen slowing and Europe's largest economies and the United States have slipped back into contraction.
While most regulators across Asia have stopped counting subordinated debt issued under Basel II regulatory requirements as capital, they are all at different stages of implementing their new Basel III rules.
Some, such as Malaysia's Bank Negara and the China Banking Regulatory Commission, have issued broad guidelines but none has come out with details on how a subordinated bond has to be structured to be counted as capital.
The details that banks are waiting on from regulators include the so-called triggers, or the common equity Tier 1 ratio at which subordinated debt is converted into equity or written down, and whether they will require bail-in clauses, something which even European regulators cannot agree on.
The Bank for International Settlements, which is responsible for the Basel regulation, has issued guidelines on trigger levels, but banks in Asia will not issue any subordinated bonds until they have a ruling from local regulators.
Given that banks will have to pay considerably more to get investors to buy bonds that include loss-absorption clauses and may have open-ended maturities, banks in Asia will not want to risk paying such high coupons - 300bp-plus over senior debt yields based on recent deals elsewhere in the world - unless they are sure that it will count as capital.
As credit is one of the ways to help economies grow, regulators in Asia need to do something about their Basel III regulations soon or they will start feeling the bite.