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Moody's: Korea's resolution framework for non-viability subordinated debt differs from others

May 18, 2014

Moody's Investors Service says that investors in Basel III-compliant securities that are subject to principal write-down at the point of non-viability (PONV) and are issued by Korean

banks face a somewhat different resolution framework and legal structures

than in many other countries.

In this context, Moody's notes that non-viability securities have less

uncertainty in Korea about the timing of their loss absorption than

similar contractual securities issued in many other jurisdictions.

This situation arises because Korea's Regulation on Supervision of

Banking Business and the Act on Structural Improvement of the Financial

Industry outline the specific circumstances under which the securities

will be subject to principal write-down.

In Korea, the law stipulates that non-viability can only occur when the

bank is on the brink of failure and not earlier. As a result, Moody's

concludes that it is unlikely that in Korea the regulators could

differentiate between contractual non-viability securities and those

subject to a resolution framework in terms of timing to loss absorption.

Moody's conclusions were contained in a just-released credit focus,

titled: "Non-Viability Subordinated Debt in Korea: Answers to Frequently

Asked Questions".

The report follows an announcement on 22 April 2014 by Woori Bank (A1

negative, C-/baa2 negative) of the first issuance by a Korean bank of

Basel III-compliant securities subject to principal write-down at the

point of non-viability.

Moody's has assigned a rating of Baa3 (hyb) to Woori Bank's non-viability

subordinated bonds, which qualify as Tier 2 capital under Basel III rules

as implemented in Korea.

Among the questions covered in the Moody's FAQ are:

€¢ What is different about the loss-absorption triggers of Basel

III-compliant securities in Korea from most other countries?

€¢ What are the triggers of Basel III-compliant subordinated debt in Korea?

€¢ How do we rate Basel III-compliant securities in Korea?

€¢ How do we view loss severity for Basel III securities issued by Korean


€¢ What would cause us to change our view?

With its ratings approach, Moody's notes that although Basel

III-compliant Tier 2 capital securities in Korea take the form of

contractual non-viability subordinated debt, we treat such securities as

equivalent to subordinated debt subject to a resolution framework for the

purposes of positioning the associated ratings.

With loss severity, Moody's ratings of Basel III-compliant subordinated

debt in Korea are positioned one notch below the baseline credit

assessment (BCA) to reflect the risk subordination, but we do not deem it

necessary to subtract additional notches.

Moody's notes that Basel III subordinated debt in Korea is subject to

full principal write-down, rather than partial write-down.

However, we do not subtract an additional notch for the high level of

loss severity in the case of Woori Bank's bonds because it is mitigated

by the probability of impairment being no higher than and quite possibly

lower than the probability captured by the BCA. In addition, the

subordinated debt is issued by the operating bank, not the holding


The report concludes that the current consensus in Korea is that

pre-emptive capital injections funded initially using public monies

represent the cheapest method to maintain financial stability.

However, if this consensus breaks down, increasing the political pressure

for burden sharing by bank creditors, then the resolution framework could

undergo changes that would necessitate a rethinking of Moody's current

logic and result in downward ratings pressure.

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Source: EMBIN (Emerging Markets Business Information News)

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