The write-down of Basel III Tier 2 securities of the erstwhile Lakshmi Vilas Bank’s would be credit negative for holders of junior securities because they would lose their investment, Moody’s said in a report on Tuesday.
But it was credit positive for bank depositors and senior creditors because of the loss-absorption capacity provided by Tier 2, it said.
On November 26, LVB announced that it had written down in full its Basel III Tier 2 securities because the Reserve Bank of India (RBI) had deemed the bank to be non-viable or approaching non-viability. Terms and conditions of Indian Basel III compliant AT1 and Tier 2 securities specify that such securities will be written down before authorities can step in to support a bank.
“This marks the first time that an Indian bank has written down Basel III Tier 2 securities and follows Yes Bank Ltd.’s write-down of Basel III Additional Tier 1 (AT1) securities earlier in the year for the same reason,” Moody’s said.
The write-down is consistent with the approach regulators use globally to minimise the cost of a bank bailout to taxpayers, it said. “However, before these two cases, the regulator had never imposed losses on junior creditors; it has now set a precedent,” it added.
Previously, the RBI had protected junior creditors by allowing weak banks to service their contractual obligations on those securities. Also, in 2017-18, the RBI permitted several weak banks, which were under prompt corrective action plan, to buy back AT1 securities to lower the risk of a trigger event occurring under Basel III rules.
The RBI rescued the troubled LVB and Yes Bank by invoking Section 45 of India’s Banking Regulation Act 1949 because the banks experienced a significant deterioration in their solvency and liquidity.
