Asia Banks May Gain From Structured Notes Omission From Rules

  • Regulatory proposals prompt some suspension of issuance
  • Lenders not subject to new rules may benefit from lower costs

Banks in the Asia-Pacific region may get a window of opportunity for cheaper funding through structured notes as capital rule proposals elsewhere prompt some suspension of issuance among U.S. peers.

The Financial Stability Board, which consists of regulators and central bankers from around the world, said last week that structured notes wouldn’t be counted towards lenders’ total loss-absorbing capacity, or TLAC, which seeks to increase banks’ capital buffers. The U.S. Federal Reserve released a similar proposal last month that excluded most structured notes while seeking to cap the amount of such securities a holding company can issue.

In light of the proposed rules on bank capital, some U.S.-based banks have been restricting the issuance of certain structured notes as they await more clarity, according to people familiar with the matter. In the Asia-Pacific region, lenders have responded by using other issuing entities, through either subsidiaries or third parties, the people said.

"There is going to be a window, a period of time before local authorities come up with their own equivalent," said Keith Pogson, a senior partner for Asia-Pacific financial services at Ernst & Young LLP. Pogson was speaking in reference to regulatory arbitrage, including the opportunity for lenders in the region not subject to the new rules to issue structured notes at lower costs. "But the window won’t last long."

Regulatory Differences

The regulatory gap will likely close as local authorities adopt their own version for banks that are considered large domestically, according to Pogson.

Commonwealth Bank of Australia, which has issued structured notes as a third party in the region, has sold $145 million of the products in November following three months without any, according to data compiled by Bloomberg.

The bank issued a 10-year callable note linked to U.S. swap rates on Nov. 12 that pays a 4.7 percent annualized coupon for each day that certain conditions are satisfied. A note by the bank with the same terms sold on July 13 pays 5.4 percent. Both securities were arranged by Morgan Stanley.

There was no immediate reply from CBA to e-mailed questions about its issuance.

"The take up of TLAC by Asia-Pacific regulators won’t go the same way as the west as the drivers don’t exist the same way they exist there,"according to Ritesh Maheshwari, lead analytical manager of financial services at Standard & Poor’s.

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