Capital ratio regulation - so-called the Basel Accord
With regard to the capital ratio regulation of banks, the Basel Committee on Banking Supervision, whose Secretariat is located at the Bank for International Settlements in Basel, Switzerland, adopted a uniform international standard (so-called "Basel Accord"), in order to enhance the stability of the international banking system, maintain the soundness of individual banks, and equalize the competitive conditions among the financial markets of different countries, in the midst of the progress toward the deregulation of banking business and the internationalization of financial markets.
The Basel Accord, originally presented in 1988, was thereafter revised to the new standard (Basel II) in 2004 to accommodate the increased complexity of international banking businesses.
However, due to the global financial crisis triggered by Lehman Brothers Holdings Inc.'s bankruptcy in 2008, the Basel Committee reached an agreement to impose a more stringent regulation (Basel III) in 2010. In Japan, the so-called Basel III has become effective in phases starting from April 2013.
Distinctive features of Subordinated Bonds
Subordinated bonds are bonds with a subordination clause attached.
- Subordination Clause
The clause where it is specially contracted that, in the event a certain subordination event occurs, the principal amount and interest of the subordinated bonds never be paid unless any senior liabilities are reimbursed.
- Subordination events
At the present time, the following three events are subordination events for the subordinated bonds issued by our bank:
1.Commencement of bankruptcy proceedings
2.Commencement of corporate reorganization proceedings
3.Commencement of civil rehabilitation proceedings
When a subordination event occurs, the principal amount and interest of the subordinated bonds will not be paid until the conditions for suspension are completed.
- Senior and subordinated relationship with priority claims, and conditions for suspension
The relationship with priority claims (deposits, senior bonds) is structured so that, upon occurrence of a subordination event, payment of the subordinated bonds will be suspended until the priority claims are paid in full. As long as priority claims are not paid in full, the principal amount and interest of subordinated bonds will not be paid, which results in the formation of the senior and subordinated relationship between priority claims and subordinated bonds.
The subordinated bonds with such conditions for suspension are, under the bankruptcy (or corporate reorganization or civil rehabilitation) proceedings, deemed "contractual subordinated bankruptcy (or reorganization or rehabilitation) claim" as set forth in the Bankruptcy Law (or the Corporate Reorganization Law or the Civil Rehabilitation Law) (*1), and in accordance with the provisions of such law, will be treated as being subordinate to the priority claims (*2)
- (*1)Article 99, Paragraph 2 of the Bankruptcy Law
Article 43, Paragraph 4 of the Corporate Reorganization Law
Article 35, Paragraph 4 of the Civil Rehabilitation Law
- (*2)On January 1, 2005, the new Bankruptcy Law (and the amended Civil Rehabilitation Law and Corporate Reorganization Law) took effect. The old Bankruptcy Law (and the pre-amendment Civil Rehabilitation Law and Corporate Reorganization Law) did not have the provision concerning the subordinated claims based upon the parties' agreement and therefore we had explained in this webpage to the effect that "except that conditions for suspension apply to the subordinated bonds in bankruptcy, corporate reorganization, or civil rehabilitation proceedings, there is no difference from priority claims;" however, with the implementation of the new Bankruptcy Law, etc., we have amended this explanation.
- Loss Absorption Clause
Under the Basel III regulation which has become effective in Japan since FY2013, a clause to absorb the losses incurred by the banks (the "Loss Absorption Clause") will be included in newly-issued subordinated bonds in addition to the Subordination Clause explained above.
The notice of Japanese Financial Services Agency (FSA), which prescribes how Basel III will be applied in Japan, requires that the terms and conditions of subordinated bonds must have the Loss Absorption Clause with the following contents:
In the case where a write-off or a conversion into common equity (hereinafter referred to as "Write-off, etc.") or a financial support or other similar measures taken by a public sector, without which the bank would become non-viable, is determined to be necessary (the "Point-of-non-viability" or "PONV") (*3), the Write-off, etc. shall be effected.
Subordinated bonds which have the Loss Absorption Clause will be subject to the Write-off, etc. at PONV of our bank and consequently, even where any subordination event has not occurred yet, no payment of the principal or interest will be made thereafter.
The subordinated bonds issued by our bank in or before FY2012 do not have the Loss Absorption Clause and therefore, the above-mentioned Write-off, etc. will not come into effect even in or after FY2013.
(*3)According to the Q&A concerning the above-mentioned notice released by the FSA, the FSA considers that due to the fact that Article 102, Paragraph 1, Item (2) ("Financial Assistance in excess of Pay-off Cost") and Article 102, Paragraph 1, Item (3) ("Special Crisis Management") of the Deposit Insurance Act are in place under the current Japanese laws and regulations as a framework for countermeasures against financial crisis which may be caused by the banks on the verge of failure, based on the current Japanese laws and regulations, it would be appropriate to understand PONV to be in line with such countermeasures, and the FSA, by taking into consideration the legal pre-requisites for such countermeasures, interprets that PONV occurs if:
- i) there is a risk that extremely serious impediments to the maintenance of orderly financial system in Japan or in the region in Japan where the bank is doing business would occur unless the crisis countermeasures stipulated under Article 102, Paragraph 1 of the Deposit Insurance Act are implemented; and
- ii) the Japanese authority acknowledges the fact that, in light of the condition of the bank's businesses or assets, the bank is at the risk of suspending repayment of its deposits, etc. or has suspended repayment of its deposits, etc. or is unable to pay its debts in full with its assets.