By Steve Garton
Fri Dec 5, 2014 11:02am EST
LONDON, Dec 5 (IFR) - China's latest bank capital benchmark has answered some questions over the depth of the investor base for the product, but it says more about the gulf in approaches to Basel III capital that exists between Europe and Asia.
ICBC, the world's second biggest bank by market value, has become the second Chinese lender to make waves in the bank capital market with a jumbo offer of Additional Tier 1 capital .
While the slightly smaller Bank of China had relied heavily on Greater China investors for its US$6.5bn debut in October, ICBC's deal had a much more global flavour, adding a euro and Dim Sum tranche, and securing more orders from fund managers.
Still, this was far from a regular bank capital issue - at least in the European definition.
For one thing, 40% of the euro tranche went to central banks. That would be a bizarre allocation in Europe, where strict selling restrictions are in place to minimise systemic risk.
German authorities, for example, do not even allow insurance companies to invest in AT1, while retail buyers are barred across the continent for fear that individual investors would make it harder for governments to enforce loss-absorption triggers.
If AT1 is to function as a capital cushion, bolstering banks' balance sheets with debt that can be written off in times of trouble, then central banks have no place investing in these securities.
In Europe, where banks are mostly privately owned, imposing a write-down on a government would defeat the purpose of a product that was conceived to protect taxpayers from unnecessary bank bail-outs.
But in China, as in much of Asia, many financial institutions are state-owned, and some rely regularly on government injections to continue policy-directed lending. The line between public and private investments is far more blurred.
True, BOC and ICBC carefully designed their AT1 securities to resemble the western model as closely as possible. But that is where the similarity ends. A global standard remains a long way off. (Reporting by Steve Garton, Editing by Matthew Davies)
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