Credit FAQ: Different Classes Of Regulatory Capital Instruments Under Japanese Bank Resolution Schemes

Since the problems at Credit Suisse in March, which saw AT1 bonds fully written off, market participants have raised questions about hybrid capital instruments. These questions have included: What would happen to different types of bank hybrid capital instruments under various stress scenarios? Are there circumstances in which hybrid investors could bear larger losses than common shareholders? What could drive different outcomes for hybrid investors in a crisis? With such market interest in mind, S&P Global Ratings explains financial institution resolution schemes in Japan and the features of Japanese banks' hybrid capital instruments. Japan's legal framework for facilitating resolutions of distressed financial institutions, outlined in the Deposit Insurance Act, focuses on contractual capacity in documentation to impose losses on instruments

...- The Japanese government would likely address bank distress through equity injections; this would not constitute a nonviability event in Japan and therefore would not trigger principal write-downs of bank hybrids. - Japanese bank hybrids can absorb losses in other situations. Japanese additional Tier 1 (AT1) bonds can bear losses when the bank's common equity Tier 1 (CET1) ratio falls below 5.125% or when the issuer decides to stop coupon payments. - In Japan, instrument documentation define a nonviability event based on measures the authorities can choose according to the Deposit Insurance Act; if a measure other than an equity injection is chosen, that would constitute a nonviability event for AT1 and Tier 2 instruments and lead to impairments for both and probably for total loss-absorbing capacity (TLAC) bonds. Since the problems at Credit Suisse in March, which saw AT1 bonds fully written off, market participants have raised questions about hybrid capital instruments. These questions...

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