Basel III may hike costs for sub debt issues: SCB
Banks might bear higher costs from issuing subordinated debentures when Basel III is implemented on January 1 because the new standard requires sub debt, which is part of Tier 2 capital, not to offer redemption incentives or issue step-ups to buyers.
Yokporn Tantisawetrat, chief risk officer at Siam Commercial Bank (SCB), said yesterday that step-up subordinated debt, or that which offers incentives to redeem before the first five years, will not be Tier 2 under Basel III.
Subordinated debt ranks after other debts should a company fall into liquidation or bankruptcy.
Under the new standard, buyers must allow for absorption of losses from sub debt even though the issuer’s status has not collapsed or the bank’s Tier 1 capital to risk-weighted assets (RWA) is below 5.125 per cent.
According to Basel III, a global regulatory standard on bank capital adequacy, common-equity Tier 1 (CET1) to RWA is required to be 4.5 per cent, while the minimum ratio of Tier 1 capital to RWA will be 6 per cent, compared with the current requirement of 4 per cent. The minimum ratio of total capital to RWA of 8 per cent is unchanged from current standards.
Yokporn said banks that plan to issue subordinated debentures after this year will face higher costs because they must offer higher returns from sub debt to attract investors, who now must face the loss-absorption provision.
“The banks must also inform [clients on] the new conditions of sub debt before issuance, otherwise, the sub debt will be included in their Tier 2 capital,” he said.
Yokporn said the capital of local banks was sufficient to meet the new standard. SCB has total capital of 13-14 per cent, of which 10.5 per cent is CET1, higher than the 6-per-cent minimum requirement.
Still, banks will have to follow the additional capital-equity requirement of a maximum of 2.5 per cent if counter-cyclical buffers are imposed and an additional 2.5 per cent for systemically important financial institutions (SIFIs), those whose failure could trigger a global financial crisis. The imposition of counter-cyclical buffers, which can be implemented at times of high credit growth, and SIFIs depends on local regulators.
