Law stated as at 06 Apr 2010 • International |
"Securities which, on the date of their issue, are legally in the form of debt but are convertible into common equity and which are designed to provide loss absorbing capital. The precise nature of the conversion trigger will depend on the type of regulatory capital benefits that the issuer seeks, including which bucket within the various limits for Tier 1 capital it wishes the instrument to fall into."
"One of the now widely accepted problems in the pre-crisis world was the concept of procyclicality, which caused banks to end up with dangerously low levels of capital at the top of the market. When conditions took a turn for the worse, many banks found themselves with insufficient capital to shield them against the downturn. Regulators now want to impose countercyclical obligations on banks, to cushion the impact of potential future crises on the financial sector. In this context, contingent capital can become an important countercyclical tool because of its ability to display loss-absorbing and equity-like qualities if an issuer reaches a specific regulatory trigger point."
"Hybrid capital has suffered twin body blows recently. On the one hand, the market for hybrid instruments has been battered by coupon deferrals and restrictions on nationalised banks. On the other hand, there is a huge deal of uncertainty surrounding the future regulatory treatment of hybrids. This uncertainty began with the adoption of the CRD and has been made worse by current regulatory proposals under consideration by institutions such as the BCBS".
"In circumstances where GBP39 billion worth of hybrid instruments will need to be refinanced, where regulators are going to require increased levels of capital and where there will be selling pressure in the equity markets at roughly the same time as European governments try to sell down their equity stakes in rescued banks, one would expect there to be an important ongoing role for hybrid instruments."
"If a bank wanted to issue a convertible instrument that qualified as Tier 1 under the CRD II definition within the 50 per cent bucket upon issue, it would have to structure it so that conversion was mandatory during emergency situations and could be triggered at the initiative of the competent authorities at any time. This could create a potential trigger based on the discretion of the competent regulatory authority. Although CRD II suggests that the exercise of the regulator's discretion would be based on the financial and solvency situation of the issuer, it remains to be seen whether an instrument containing this feature would find favour with investors given that, based on recent statements, it clearly does not appeal to one of the rating agencies."