Moody's: Asia Pacific advances cautiously on bank resolution and bail-in

Moody's Investors Service says that, while the authorities in Asia Pacific have plans to implement bank resolution and bail-in regimes, they are proceeding more cautiously than their counterparts in the US and EU, where progress with the agenda is more advanced.

"The political impetus and perceived need for the kind of reforms being adopted in the West, particularly those relating to bail-in regimes, have been weaker in Asia Pacific," says Stephen Schwartz, a Moody's Senior Vice President.

"Having undergone successful recapitalization programs and financial sector reforms in the wake of the 1997-98 Asian financial crisis, the region's banks were well-capitalized and able to withstand the global turmoil associated with the global and Euro crises with minimal stress," says Schwartz of the Credit Policy Department in Hong Kong.

 

The report summarizes current resolution and bail-in regimes in nine banking systems, of which eight are members of the Financial Stability Board (FSB): Australia, China, Hong Kong, India, Indonesia, Japan, Korea, and Singapore. It also includes New Zealand which, though not a member of the FSB, has adopted policies consistent with many of its "Key Attributes of Effective Resolution Regimes", which FSB member countries are committed to implementing by end-2015.

Notwithstanding Asia Pacific's caution in adopting "Western-style" resolution and bail-in regimes, pressure is building on the region's governments and regulators through the G20 process and, in some cases, the need to align local regimes with those outside the region in order to cooperate with overseas regulators in recovery and resolution planning for global systemically important banks.

However, in the view of Moody's, the emphasis of authorities in Asia Pacific remains on crisis prevention through sound supervision, macro prudential measures, and the implementation of stringent capital and liquidity requirements consistent with Basel III.

Regulators in the region tend to view early action as preferable to addressing banking stress, rather than waiting for resolution and bail-in regimes to be triggered.

In the meantime, a number of the region's banks are already well advanced in issuing Basel III-compliant capital instruments with point of non-viability clauses. However, it remains to been seen whether individual countries will allow triggers to be breached in the event of banking stress or, as seems more likely, various forms of public support would be forthcoming to prevent losses from being imposed on investors.

Going forward, a critical question in evaluating the implications for creditors of Asia Pacific banks will be not only whether new statutory bail-in regimes will be adopted, but whether they will be used in practice.

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