Last updated: June 12, 2013 10:52 am

Private investors to be forced to pay for Japan’s bank failures

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Japan is to force losses on investors in troubled banks, brokers and insurers, leading efforts by regulators around the world to lighten the burden on taxpayers.

Under new legislation cleared by Japan’s parliament on Tuesday, holders of new types of preferred shares or subordinated bonds will face losses, or mandatory conversion to common stock, if the Financial Services Agency deems the issuer insolvent.

The FSA will gain its powers to trigger so-called “bail-in” clauses on these instruments – which are compliant with new Basel III rules on bank capital – as early as next spring, assuming that the bill becomes law.

Spreading the pain of bank collapses has become a hot topic for discussion among global banking regulators keen to see ailing institutions propped up by private investors, rather than having to be rescued by governments using tax receipts.

In the EU, for example, a commission has called for the creation of a specific class of debt that could be converted to equity in case of trouble, while in the UK, Sir John Vickers has proposed forcing banks to hold loss-absorbing debt equal to 7 to 10 per cent of their assets, adjusted for risk.

The move by Japan’s FSA puts it at the forefront of that global push, said Graeme Knowd, an analyst at Moody’s in Tokyo.

He described the new system as “clean and logical” and satisfying the guidelines on bank resolution set down in October 2011 by the Financial Stability Board, the Basel-based body that co-ordinates financial watchdogs.

“No one knows if it will work in practice, as there could be social pressure [on the government] to bail in early. But the way this has been constructed meets best-practice guidelines and allows investors to make decisions based on risks and returns,” said Mr Knowd.

So far, just one Japanese institution – Nomura Securities – has issued bonds with bail-in clauses. But as more banks move to adopt Basel III standards on capital, more issuance of such securities is expected. Under the new standards, new issues of preferred shares and subordinated bonds without bail-in clauses cannot be counted as capital.

Regulators’ desire for a “smooth entry into the Basel III world” is one reason why the JFSA has decided to tweak regulations now, said a senior banker in Tokyo. An FSA spokesperson confirmed that it had sought the changes “as a part of orderly resolution of financial institutions”.

At banks’ annual general meetings later this month, some will ask shareholders for permission to change their articles of incorporation to allow them to issue the new kinds of securities, while stressing that they see no immediate need to do so.

Mizuho Financial Group, for example, said last month it was aiming to meet Basel III standards mainly by accumulating retained earnings and improving asset efficiency.

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