* 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
"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
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
"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
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.