Moody’s to review sub-debt ratings of 11 banks for possible downgrade

Among the 11 banks include Axis Bank, Bank of Baroda, Bank of India, Canara Bank, HDFC Bank, ICICI, IDBI Bank, Indian Overseas Bank, SBI, Syndicate Bank and Union Bank

June 03, 2013 10:01 IST | India Infoline News Service
Moody's Investors Service announced today its decision to review for downgrade the subordinated debt (subdebt) ratings of 41 banking groups across eight banking systems in the Asia Pacific that currently benefit from a rating uplift due to systemic support.

Moody said this in its latest report, Reconsideration of Support for the Subordinated Debt of Asia-Pacific Banks.

Moody’s rating action follows a change -- which was announced separately -- to its methodology with respect to the incorporation of such support in rating “plain vanilla” subdebt.

The affected banking groups are domiciled in Australia (8), Hong Kong (5), India (11), Korea (8), Philippines (2), Singapore (3), Taiwan (1) and Thailand (3).

Among the 11 banks include Axis Bank, Bank of Baroda, Bank of India, Canara Bank, HDFC Bank, ICICI Bank, IDBI Bank, Indian Overseas Bank, State Bank of India, Syndicate Bank and Union Bank of India. 

In Asia Pacific, there has been little evidence that the systemic support paradigm has evolved in a way similar to Europe and North America, where bold measures have been implemented to empower regulators to impose losses on subdebt holders when dealing with ailing banks. In contrast, regulators in Asia Pacific have focused more on ensuring that Basel III-compliant capital securities designed to absorb losses at the point of non-viability can achieve this outcome contractually, Moody’s report added.

While regulators in Asia have not had to respond to the types of stresses faced by the banking sectors in other parts of the world, they have shown little interest in broader forms of resolution that could mean, from a legal perspective that the risks to legacy subdebt are likely to change in the short run. Such a scenario therefore implies the possible emergence of different probabilities of default between legacy subdebt and some of the new forms of bail-in securities.

Nevertheless, various other factors point towards a reduced likelihood of support, leading us to conclude that the probability of support for subdebt holders in Asia has likely diminished, and therefore necessitating a formal review of Asian bank subdebt. Some governments in Asia Pacific have either formally adopted “burden sharing” principles as part of their membership of the G-20, or have made like-minded policy statements.

At the other end of the spectrum, some regulators in the region have been reluctant to develop new resolution powers, but we are also mindful that such a stance has emerged in the context of an absence of banking crises or bail-outs. The politics of bank resolution could change materially in times of stress, and the region’s regulators may then be more inclined to borrow tools deployed elsewhere, including coercing subdebt holders to enter into a distressed exchange. Such an action does not require any special power.

Moody’s expects to conclude the review within the next three months.

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