RBNZ capital call upsets banks
Bonds D-SIBs could face 16% Tier 1 capital ratio requirementBY JOHN WEAVERSMajor New Zealand banks
and their Australian parents
have cried foul over the last
and most controversial of the
Reserve Bank of New Zealand’s
four capital review consultation
papers, titled “How much
capital is enough?”
The central bank received
161 submissions and reported
that many submitters,
particularly from the general
public, support higher capital
requirements to ensure a safer
banking system. However,
the country’s big four lenders- ANZ Bank, ASB, BNZ and
Westpac – balked at what they
say would be the huge cost of
implementing the proposals.
The RBNZ estimates the four
dominant banks would need
to raise a combined NZ$20bn
(US$13.43bn) of additional capital
over the next five years to meet
the proposals, a conservative
estimate given that Westpac and
ANZ project an extra NZ$12.5bn
or more between them.
The country’s biggest lender,
ANZ New Zealand, said a capital
requirement of this size would
require the bank to “review,
and reconsider the size, nature
and operations of the New
Zealand business”.
Westpac New Zealand
warned the “cumulative
imposition of such high levels
of regulatory capital on New
Zealand banks will increase
the cost to borrowers in New
Zealand by more than 100bp”.
It also suggested that
Australian parents may have to
consider shrinking, demergingor selling their subsidiaries
across the Tasman Sea if
their returns on equity are
significantly reduced.
The RBNZ consultation paper
called for the conservation
buffer that all banks are
required to hold to be raised
to 7.5% of risk-weighted assets,
from 2.5% currently, and for
the introduction of a further
1.5% counter-cyclical buffer,
alongside an extra 1.0% buffer
for domestic systemically
important banks.
Added to the existing
requirement of Tier 1 capital
equal to a minimum 6% of risk-
weighted assets, this would
translate to a new Tier 1 capital
ratio requirement of 16% for
D-SIBs and 15% for smaller
banks, up from a flat 8.5%
requirement at present.The regulator also proposed
to maintain the current 2%
minimum in Tier 2 capital that
all banks are required to hold,
though it is open to discussing
whether Tier 2 capital
should be dropped from the
framework altogether given the
expected hike in Tier 1 ratios.
The RBNZ said that, in
general, respondents “support
the Reserve Bank’s objective
to ensure that New Zealand’s
financial system is safe,
acknowledging the economic
and well-being impacts (social
costs) of banking crises”.
The proposals have been
welcomed by the International
Monetary Fund.
“The new requirements
would increase bank capital to
levels that are commensurate
with the systemic financial
risks emanating from the
dominance of the four
large banks with similar
concentrated exposure to
mortgages, business modelsInvestors shun HNA bond auction
Bonds High floor price complicates recoveries in blind auctionBY YANFEI WANG, DANIEL STANTONChina’s first auction of bonds
seized as a result of defaulted
repo transactions flopped last
week, dealing a setback to
efforts to create a market for
illiquid and non-performing
assets.
An unnamed seller last
Tuesday offered Rmb1.3bn
(US$189m) of 7% perpetual
notes and Rmb500m three-year
private placement notes due
October 2020, both issued by
HNA Group subsidiary TIANJIN
AIRLINES.
The auction, however, failed
to attract any buyers at the
floor price, which is set at 80%
of the average last traded price.
“The first auctions on the
Tianjin Airlines bonds failed
because of a lack of enough
willing buyers,” said a bond
trader.
Defaults on repo transactions
have become more commonin recent months, and
have accelerated since the
government takeover of
Baoshang Bank in late May
made it harder for smaller
banks to access funding.
China Foreign Exchange
Trading System introduced blind
auctions last year to help create
a market for illiquid securities,
but market participants do not
think the format will do much
to improve overall confidence
as investors have no appetite for
the underlying bonds.
The trader said there had
been few trades in the Tianjin
Airlines bonds ahead of the
auction and they were bid at
close to par before the auction.
Some defaulted bonds,
including two from Wintime
Energy, have been auctioned off
via blind auctions, but the floor
price rule may not reflect the
true market price for an illiquid
bond.
Tianjin Airlines is not indefault, but investors have long
been concerned about financial
troubles in the overstretched
HNA Group, which has already
defaulted on some overseas
loans.
“The discounted prices at
80% were still too high and it’s
not worth it,” said the trader.
“Defaulted bonds at steeper
discounts from face value look
more attractive.”A BETTER WAY?
A credit rating analyst said a
blind auction is not enough to
encourage counterparties to
take more low-rated bonds or
lower their standards for what
they accept as collateral.
“A better way to mitigate
credit risk is to build a specific
pricing scheme and risk
evaluation on counterparties
and bonds used as collateral,
respectively,” he said. “For
instance, counterparties with
high ratings but with low-ratedbonds can be accepted, or
counterparties with low ratings
need to use high-rated bonds as
collateral. It might take quite
long because of China’s long-
standing pricing distortion in
the bond market.”
An official with the National
Association of Financial Market
Institutional Investors said the
blind auction system would be
used for other types of illiquid
bonds, including subprime
asset-backed securities.
“Following the first two
by Tianjin Airlines, many
institutions are waiting in line to
auction bonds used as collateral,
many of which are bonds with
AA+ and AA ratings,” he said.
Auctions of bonds issued by
other HNA Group subsidiaries
are in the pipeline, according to
the official.
There is not much public
information on the number of
repo transactions or defaults
in China. In one case, HNANews