Basel III contractual PONV securities will still dominate APAC banks

How loss absorption will occur in practice remains to be seen.

The use of Basel III contractual point-of-non-viability (PONV) securities will stay dominant in major banking systems in Asia Pacific for the foreseeable future, given the slow progress in adopting resolution regimes, Moody's Investors Service reports.

"Since the adoption of Basel III capital rules in 2013, APAC countries have made varying degrees of progress in introducing resolution regimes that meet the Financial Stability Board's guidelines, but most jurisdictions still lack statutory powers to bail in creditors," says Moody's analyst Rebaca Tan.

"In this context, banks in APAC have led the issuance of Basel III contractual PONV securities globally since 2014, with Chinese and Australian banks dominating within the region," says Tan. "But so far, Hong Kong has been alone in the region in having a resolution regime, with only Singapore close to enacting one."

Here's more from Moody's:

The Basel III contractual PONV securities of APAC banks have generally similar features.

It remains to be seen how loss absorption will occur in practice in APAC. Since Basel III was introduced in 2013, there have been limited instances of banks facing distress in the region, so it is uncertain how regulators will apply the terms of contractual PONV securities in practice.

For Tier 2 contractual PONV securities, in Moody's view, there is uncertainty over the timing of loss absorption, given potential regulatory discretion over the determination of the PONV.

For example, the securities may be forced to absorb losses before the PONV as a way for a bank to avoid bank-wide resolution. If regulators want to forestall a broad market disruption event, all banks within a system could be forced to trigger loss absorption at the same time.

At the end of November 2017, APAC banks accounted for 50% of Basel III securities issued worldwide, in terms of size.