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
similar contractual securities issued in many other jurisdictions.
This situation arises because
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.
bank is on the brink of failure and not earlier. As a result, Moody's
concludes that it is unlikely that in
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
The report follows an announcement on
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
subordinated bonds, which qualify as Tier 2 capital under Basel III rules
as implemented in
Among the questions covered in the Moody's FAQ are:
Â€¢ What is different about the loss-absorption triggers of
III-compliant securities in
Â€¢ What are the triggers of Basel III-compliant subordinated debt in
Â€¢ How do we rate Basel III-compliant securities in
Â€¢ How do we view loss severity for Basel III securities issued by Korean
Â€¢ What would cause us to change our view?
With its ratings approach, Moody's notes that although
III-compliant Tier 2 capital securities in
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
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
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
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
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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