AIIB takes another step towards debut bond offering
Basel Committee on Banking Supervision agrees on a zero risk weighting for AIIB bonds, in a move which takes the bank one step closer to its debut bond offering
18 Oct 2017 | Michael Marray

THE Basel Committee on Banking Supervision (BCBS) has agreed that supervisors may allow banks to apply a zero risk weighting to claims on the Asian Infrastructure Investment Bank (AIIB), in accordance with its International Convergence of Capital Measurement and Capital Standards. The AIIB will now be included in the list of multilateral development banks as set out in footnote 24 of the standards.

A zero risk weighting for investors holding the bonds on their books is important in order to allow issuers to achieve the tightest pricing. The zero risk weighting applies to sovereign bonds, but supranationals and agencies such as the Asian Development Bank or European Investment Bank require a ruling from the BIS.

The debut offering from the AIIB in international bond markets is expected in the coming months. In preparation, in June and July of this year, the AIIB received Triple A ratings from Moody's, Fitch and S&P.

The AIIB hopes to become a core holding for high grade bond portfolios, and achieve tight pricing on large benchmark offerings similar to the Asian Development Bank. The ADB was in the market on September 13 with a US$4 billion offering, with the five-year fixed rate bonds paying 1.75%. Joint lead managers were Bank of American Merrill Lynch, BNP Paribas, Mizuho Securities and TD Securities.

Meanwhile an imminent decision from the BCBS on capital weightings for loans has important implications for Chinese bank balance sheets, and other banks around the world.

Over the past year there has been a fierce battle at the BCBS about how banks can use their own internal models (the Internal Ratings Based or IRB approach) to calculate risk weighted assets, which in turn determines how much capital they have to set aside for loans on their balance sheets.

On one side, countries led by the United States have been taking a hard line and trying to push banks in the direction of the standardized approach, with little flexibility for internal models. But a group led by Germany have strongly opposed this direction, and want to see a continuation of flexible rules for internal models. The compromise has been so-called “output floors”, which will set a limit on the difference between the risk weighted assets calculated via the standardized approach, versus with internal models.

The Group of Governors and Heads of Supervision (GHOS), which consists of the central bank Governors and non-central bank heads of supervision from BCBS member jurisdictions, oversees the BCBS, which is the primary international standard-setting body for banking regulation and supervision. The People's Bank of China and the China Banking Regulatory Commission are both represented on the BCBS.

In May, BCBS chairman Stefan Ingves sent a confidential letter to all GHOS members, saying that a compromise output floor level of 75% was supported by “a vast majority of Committee members”, and called for a final agreement to be reached as soon as possible. But the wrangling has continued, and there is now talk of a 72.5% output floor. Even at this level, German banks are still saying that it is an unacceptable.

For many banks around the world, including Chinese banks and banks in EU countries such as Germany and Italy, a relatively high output floor will significantly raise their risk weighted asset numbers, though the BCBS does envisage a gradual phase in of the output floor, gradually increasing to 72.5%.

Germany has many thousands of small savings banks and co-operative banks, and German regulators argue that their low risk business models (such as mortgage lending) allow them to calculate lower risk weightings on loans, and a lower risk weighted assets number for the entire balance sheet.

The row over calculating risk weighted assets has held up the entire package of changes to capital requirements known as Basel III. The BCBS felt that it was close to final agreement last year, at its meeting in Santiago, Chile. But German opposition delayed agreement, and there were yet more delays as the new Trump Administration put its negotiating team in place.

Photo: AIIB.org

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