|
|
|
|
|
Newsletter | July 2016, Issue 2
|
|
|
|
|
|
|
|
SECURITIES
|
|
|
|
Korea’s National Assembly Passes the Amended Banking Act, Establishing a Legislative Framework for Contingent Capital Instruments during Financial Stress
|
|
|
|
After experiencing the unprecedented financial market meltdowns in the aftermath of Lehman Brothers’ bankruptcy, the financial regulators around the globe reexamined what could be deemed sufficient capital for banks.
|
|
|
|
Following this international trend, on March 3, 2016, Korea’s National Assembly passed the Amended Banking Act, providing a legal framework for Korean banks to issue contingent capital instruments, which would provide a buffer for them during times of financial stress. This law will become effective on July 30, 2016.
|
|
|
|
Background
|
|
|
|
Contingent capital instruments are hybrid capital securities that absorb losses when the capital of the issuing bank falls below a certain level. The most common type of contingent capital instrument is contingent convertible bonds (“CoCo Bonds”). Under the contractual terms of the CoCo Bonds, if a “trigger event” occurs (i.e., issuing bank’s capital falls below a certain level), the debt is reduced, and bank capital gets a boost owing to CoCo Bonds’ capacity to absorb losses by either: (1) automatically converting into common equity; or (2) by suffering a principal write-down, which helps to satisfy regulatory capital requirements.
|
|
|
|
Until now, Korean banks were able to issue debt instruments that suffer principal and interest write-downs when a trigger event occurs.
|
|
|
|
Key Aspects of the Amended Banking Act
|
|
|
|
The Amended Banking Act permits the banks to issue not only such write-down type CoCo Bonds, but also those that are convertible into stock. Under the Amended Banking Act, the converted stock can be that of the bank itself, for that of its 100% parent bank holding company.
|
|
|
|
CoCo Bonds that meet the requirements under the Detailed Regulation on Supervision of Banking Business would be treated, under BASEL III, as “Additional Tier 1” and “Tier 2” equity capital, respectively.
|
|
|
|
Potential Impact
|
|
|
|
This and other factors (heightened regulatory focus on capital conservation buffer, market conditions, etc.) may lead Korean banks to consider issuing CoCo Bonds as an alternative to other more conventional capital instruments.
|
|
|
|
Back to Main Page
|
|
|
|
|
|
If you have any questions regarding this article, please contact below:
|
|
|
|
|
|
|
|
For more information, please visit our website:
|
|
|
|
|
|
|
|