REFILE-Mizuho deal to put focus on Japanese reading of Basel III
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* Upcoming bond puts spotlight on laws allowing government support
* Japan's interpretation of Basel III at odds with Western Europe, US
* Mizuho could set tight precedent
By Frances Yoon
HONG KONG, March 14 (IFR) - Mizuho Financial Group is set to bring Japan's first overseas new-style bank capital instrument, testing investors' stance on the country's unique interpretation of loss-absorption rules.
Unlike other jurisdictions, where regulators prioritise investor bail-ins before injecting public money into a bank, Japan has legal provisions that could reduce the possibility of bondholder losses in the event an institution gets into trouble.
Mizuho's transaction is the latest from Asia and adds to uncertainty over the application of Basel III rules across the region, where many countries have a history of supporting their financial systems.
Mizuho is set to meet investors on a roadshow in the US, Europe and Asia that starts on March 17. It joins Singapore's United Overseas Bank and Australia and New Zealand Banking Corp, which issued debut Tier 2 US dollar bonds this week.
As with other Basel III-compliant capital issues, Mizuho's notes will expose investors to the risk of principal losses if regulators decide the bank is no longer viable.
However, bankers say the risk of this happening is lessened by Japan's Deposit Insurance Law, which was introduced in the wake of the country's banking crisis in the late 1990s. That law allows lenders to receive a capital injection to prevent them from becoming non-viable, effectively reducing the possibility that creditors will be bailed in.
This option is even factored into how Fitch rates the country's financial institutions.
"The key difference in how we rate Japanese deals and others that could potentially come to the market, like Singapore, is that there is a framework to deal with the failing problem, which allows for pre-emptive support of systemically important banks or institutions," said Mark Young, head of Asia Pacific financial institutions at Fitch Ratings.
"We've taken the stance that this pre-emptive support means that point of non-viability will not be triggered, in particular for the three megabanks," he added.
Injecting public funds without harming investors, however, goes against the spirit of the Basel III regime, which was intended to reduce the need for a repeat of the public bailouts that followed the collapse of Lehman Brothers in 2008.
"Mizuho will be saved in any case, which raises the issue of moral hazard for financial institutions. This is what we had experienced in the financial crisis, with the so-called 'too big to fail' banks," said a Japanese banker specialising in financial institutions. "This is exactly what the Basel III philosophy would like to get rid of."
The public may question the validity of using tax funds to prop up banks in the future, but the banker added that previous capital injections have helped stabilise the country's financial system.
"We had a good experience in the past in the sense that the total social cost was less when we injected money to save them in an early stage rather than wait for them to fail."
Japan stepped in to rescue a number of failing financial institutions after the country's asset price bubble burst. The country deployed a total of ¥47.1trn (US$463bn) through the Deposit Insurance Corporation of Japan. Mizuho and the two other megabanks also received public funds for recapitalisation, and repaid them before end-2006.
While Japan has since signed up to the Basel III framework, bankers believe the country's depositor protection law means Mizuho's capital securities should be seen as less risky than similar Basel III-compliant issues from its peers in Europe, where regulators have already forced subordinated creditors to take losses on several occasions.
If investors share that view, Mizuho's landmark issue could set a tightly priced precedent, allowing other Japanese lenders to top up regulatory capital in the overseas markets at an attractive cost.
Such an approach would also put Japan's major banks on a par with the biggest state-owned lenders in other Asian markets, such as China and India, where investors - and some rating agencies - expect governments to continue to support their financial systems without triggering non-viability clauses.
Mizuho has the weakest capital standing relative to other megabank peers Mitsubishi UFJ and Sumitomo Mitsui Banking Group.
As of September 2013, Mizuho's common equity Tier 1 capital was 7.86%, versus SMBC's 8.4% and MUFG's 9.9%, according to a Moody's report released last December.
Bank of America Merrill Lynch, Goldman Sachs, JP Morgan and Mizuho Securities are managing Mizuho's issue. (Reporting by Frances Yoon, additional reporting by Neha D'silva; editing by Christopher Langner, Steve Garton)