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Singapore bail-in proposals make senior bond holders breathe easy

Holders of senior debt from Singapore's banks will have reason to breathe easy if the Monetary Authority of Singapore implements proposals to limit its statutory bail-in framework to subordinated debt.

[SINGAPORE] Holders of senior debt from Singapore's banks will have reason to breathe easy if the Monetary Authority of Singapore implements proposals to limit its statutory bail-in framework to subordinated debt.

The proposal, part of a set of proposed enhancements to the bank resolution regime, will turn Singapore into one of the most investor-friendly nations for senior bank debt, as opposed to the approach favoured in Europe and elsewhere.

Many countries have introduced legislation that forces senior bondholders to share losses if a bank becomes no longer viable, adding another buffer to protect taxpayers and depositors.

Instead, Singapore is limiting the use of bail-in powers to subordinated debt, which is already loss-absorbing under Basel III, effectively pledging to support senior bondholders if a bank fails.

"In Europe and the US, where taxpayers were tapped to bail out banks during the global financial crisis, it is now the bail-in approach that is preferred in case banks run into difficulties," said Eugene Tarzimanov, Moody's vice president and senior credit officer.

"In Asia, where governments are supportive of the banks, we think the bail-out approach is still preferred."

The MAS is concerned that bailing in a bank's senior creditors will lead to contagion across the financial system and increase the affected bank's funding costs. On the other hand, Singapore-incorporated banks are extremely well capitalised and are already subject to very strict capital standards, which mitigate the risks of loss-absorption.

The central bank currently requires Singapore lenders to maintain a common equity Tier 1 of 9.0 per cent by 2019, which is 2.0 per cent higher than the level that the Basel Committee requires under the new-style bank capital framework.

In practice, Singapore-incorporated banks have an average common equity T1 ratio of 12 per cent-13 per cent, says Moody's.

In view of these, the MAS is proposing that the statutory bail-in regime be applied to unsecured subordinated debt and loans issued or contracted after related laws come into force. No effective date has yet been disclosed.

This means senior unsecured debt, legacy subordinated debt and deposits will be excluded from the bail-in regime.

This is in contrast to other existing and planned bank resolution regimes in the rest of the world. In Hong Kong, the bail-in proposals from Hong Kong Monetary Authority are more aligned with regimes seen in Europe and the US, in that only customer deposits are immune from bail-in rules.

Hong Kong, however, is mainly concerned with regulating banks with parents in developed countries that have more stringent resolution regimes, in contrast to Singapore, where three home-grown banks - DBS, OCBC and UOB - are dominant. Moody's called the Singapore plans credit positive for senior bank creditors. "The proposed bail-in regime excludes all existing and prospective senior debt, deposits, and interbank liabilities, making it one of the most investor-friendly in the world for non-subordinated debtholders," said Mr Tarzimanov.

The MAS proposals also call for bail-in to be effective only on subordinated debt issued after bail-in laws are implemented. This means all existing sub-debt instruments will be exempt from statutory bail-in powers - whether or not they already carry loss-absorbing features.

That may encourage Singapore banks to issue more Basel III sub debt before funding costs increase to correspond with higher regulatory risks of a statutory bail-in. "This does provide a material incentive for banks to raise sub-debt as soon as needed to potentially benefit from the lower pricing due to the aforementioned exemption," said Deutsche Bank's research analyst Viacheslav Shilin in a credit note.

Although other observers are not expecting a rush to the market under the current rules, issuing more sub debt now will also put banks in a better position to prepare for potential total loss-absorbing capacity (TLAC) requirements.

"Whether there is additional issuance or not will depend on whether the MAS increases capital requirements following the current TLAC proposals for global systematically important banks (SIBs)," said Pramod Shenoi, head of Standard Chartered's capital solutions.

The advent of TLAC rules in Europe for global SIBs is expected to make its way into Asia. Singapore is expected to adopt similar proposals for its domestic SIBs to align its policies with the Financial Stability Board's international standards.

The FSB is calling for banks to create additional buffers of bail-in liabilities to minimise the costs of bank failures to taxpayers.

Given that senior debt will not be loss-absorbing under local rules, Singapore's will have to issue more subordinated debt to maintain a TLAC buffer.

There is plenty of headroom for Singapore banks to issue sub debt. According to Moody's, Singapore banks have issued around US$5 billion of Basel III-compliant securities, representing just 0.6 per cent of their consolidated assets.

Bankers do not see any major challenge in selling subordinated paper. "The Basel III instruments have wide investor acceptance, but the effect of the change will be additional risks, which make the paper more expensive," said one head of DCM. "Still, I don't see any difficulty in selling it as there will be price discovery, and the market will find price equilibrium."

Investors often take the view that Asian governments will make preemptive moves to save a troubled bank before it reaches the point of non-viability, the trigger event for subordinated bondholders to share losses.

The MAS is the latest regulator in the Asia-Pacific region to propose a bank resolution regime. Japan, Australia and Hong Kong are among other Asian nations that have already put in place or have drawn up proposed bank resolution regimes.