S&P doubts resolve over bank rescues

Ian Rogers All
CEC x DFA results in CLAPTRAP on 'deposit bail-ins'
CEC x DFA results in CLAPTRAP on 'deposit bail-ins'

There is still "no clear framework for loss absorption by senior creditors" during a wind-up or resolution of a failing Australian bank, S&P Global Ratings said yesterday, in a lively commentary responding to market interest on the impact of APRA's drive to raise big bank capital ratios toward 19 per cent.

“There does not exist a clearly laid out framework for loss absorption and recapitalisation capacity by senior creditors, or indeed any other class of creditors (excluding holders of regulatory capital instruments) positioned to absorb losses ahead of or instead of a capital injection by the government,” S&P advised.

“Consequently, government support is likely to be a more feasible option in a financial system crisis, in our view.”

APRA, in its November 2018 discussion paper on “Increasing the loss-absorbing capacity” of banks navigates its way around any assumptions based on global practice that its new approach might copy “frameworks that include, for example, the creation of additional types of contractual instruments or a statutory bail-in power.”

Sticking with the intent of The Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 that it helped devise, APRA pointed to the industry and their depositors that they “do not have a statutory power to write-off or convert the interests of other creditors, including depositors of a failing ADI, whether in, or leading up to, a resolution.”

These facts have so far made no difference to the animated protests that the absolute opposite is the truth, that claim being a passionate belief of the eccentric campaigners from the Citizens Electoral Council – one often endorsed by their publicist at one banking industry blog.

In short, there is no bail-in power of any type provided for under Australian law, with APRA placing “an ADI’s own financial resources” at the centre of coping with a failure or many of them.

APRA said in its late 2018 consultation that it “proposes the prepositioning of capital for the purposes of resolution, utilising the capital adequacy framework.”
S&P’s analysis on the topic seeks to help the debt market to reach an informed guess on where S&P’s own thinking may end up on the degree of “government supportiveness”, commonly known as ‘too big to fail’.
Sharad Jain, S&P's primary analyst for local banks wrote that “in our base case, we expect the Australian government will remain highly supportive toward the systemically important private sector banks.

“At the same time, we see some ambiguity in future policy direction on this matter.”

One more downgrade in the credit ratings of the four major banks will lump them in the “single A” credit rating basket, most likely A-, down from AA- now.

“Our opinion of Australian government supportiveness is a complex assessment dependent on a number of factors,” Shain said in a long FAQ.

With S&P and other ratings agencies waiting on APRA’s deliberations on its resolution schema, AA- ratings may be safe until sometime in 2020.