GLOBAL REGULATORS have imposed tough requirements on the bonds that banks can count towards their regulatory capital in a bid to kill off a funding technique that has been blamed as a key contributor to the banks’ need for taxpayer bailouts.
The changes affect so-called hybrid securities which sit between equity and debt and were intended as a buffer to soak up unexpected losses. However, during the crisis they failed to take losses, leaving those investors unaffected even as banks accepted hundreds of billions in rescue funds from governments.
The Basel Committee on Banking Supervision said yesterday that banks would have to make sure that hybrids include a mechanism for taking losses, known as a “bail-in”, that allows them to be converted into equity or written off.
The committee said any hybrid capital issued after 2013 would either have to be issued in a country that automatically imposes bail-ins or the bond must include a formal trigger.
A bail-in would be initiated by an injection of taxpayer money or a decision by the bank’s main regulator that “a write-off, without which the firm would become non-viable, is necessary”.
Bankers have warned the tough new restrictions, signalled by the committee last August, would raise the cost of bank capital, potentially reducing the amount they can lend. – (Copyright The Financial Times Limited 2011)
