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* Upcoming bond puts spotlight on laws allowing government
* Japan's interpretation of Basel III at odds with Western
* 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
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
"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
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)