TLAC pressures build for Asia banks

* Lenders study new forms of loss-absorbing capital

* Banks in region fear higher funding costs from 'bail-in' format

* Local regulators yet to adopt global proposals

By Frances Yoon

HONG KONG, IFR (April 2) - Asian banks are bracing for the impact of new capital adequacy rules, even if the region's regulators choose not to follow global proposals on total loss-absorbing capacity, or TLAC.

Lenders in Asia have been largely exempt from the debate raging in Europe and the US over TLAC capital buffers, which aim to prevent taxpayer-funded bailouts of banks deemed too big to fail.

Regulators in the region have yet to announce formal TLAC instructions, but many bankers say they expect Asia to adopt them in some form in the coming years to align their standards with the rest of the world.

"It may also trickle down to us here in Asian countries when our regulators are ready to adopt some of these practices," said Wong Yee Fun, head of capital management at Maybank. "We are definitely keeping ourselves in the loop to know what the potential impact would be for us."

The Financial Stability Board's proposed TLAC guidelines will force the world's most important banks to maintain a sufficient capital buffer to survive a stressed scenario. Common equity, Tier 1 and Tier 2 securities and senior bonds will count towards the capital requirement, but only if they are able to absorb losses.

The rules will initially apply only to global systemically important banks (G-SIBs) in developed markets, leaving Japan as the first Asian country needing to comply. In time, however, the three Chinese banks on the G-SIB list will also need to conform, and national regulators will be free to set their own standards for all major lenders.

Some Asian regulators are further ahead than others in enforcing higher capital buffers. Hong Kong designated Bank of East Asia, Bank of China, Hang Seng Bank , HSBC and Standard Chartered as domestic systemically important banks (D-SIBs) last month and will require them to hold higher T1 ratios than other lenders.

SENIOR COSTS

Whether or not local regulators adopt versions of TLAC, the global rules will set a new benchmark for the financial health of all banks. In order to lift their TLAC ratios, banks are likely to issue far more T2 capital and create a new class of loss-absorbing senior bonds in a move that raises serious questions for Asian banks.

Bail-in clauses on senior bonds threaten to increase funding costs for Asian banks, since they will receive no benefits under TLAC for generating a lot of their funding from deposits.

It also undermines banks in countries like Australia, which heavily rely on wholesale funding.

"When you are bailing in seniors, that could increase wholesale funding costs to an unviable level," said Shilpa Singhal, senior credit analyst at ING Investment Management in Singapore.

"It could backfire if regulators bail-in one bank's senior debt to save taxpayer money, but it negatively affects all banks, creating a bigger systemic risk."

So far, Asian regulators appear uncomfortable with the concept of bailing in senior debt. Australian banks see such securities as having a significantly destabilising effect on the financial system, according to a report the country's Financial System Inquiry released last December.

"Senior bail-in bonds may not be popular with securities regulators in Asia," said one FIG banker. "I think in Asia it might be implemented in a slightly different way like in places such as Hong Kong."

The FSB has proposed the use of holding companies to subordinate loss-absorbing debt structurally, but that could be difficult to achieve in Asia. Few Asian lenders, like their European peers, have holding companies, with the exception of a handful of banks in Singapore, Japan and South Korea.

Even Japanese and Korean banks have been selling senior debt from the operating level, which means a switch to issuing from the holdco would inevitably raise funding costs.

The TLAC regime, when it arrives, will challenge expectations of state support for Asian banks. Asian governments, such as Japan, have pledged support for their banks during insolvency. China's three G-SIBs - Agricultural Bank of China, Bank of China and ICBC - are all government owned.

Stres Wajah