Basel Sets New Rules for Hybrid Securities to Count as Capital

National authorities must be able to activate triggers in hybrid debt securities to bolster capital and save lenders from failure during a crisis, according to global regulators.

The Basel Committee on Banking Supervision decided last year to stop counting most hybrids as Tier 1 capital because they didn’t provide a buffer for losses in the 2008 financial meltdown. New rules announced today by the committee require such securities to include triggers that force banks to convert hybrids into common stock or write them off to avert collapse.

Regulators such as the U.S. Federal Deposit Insurance Corp. have voiced concern about the usefulness of hybrid securities for shoring up banks. The idea behind them is to avert government bailouts by providing capital buffers that can fund a “bail-in” by stakeholders if a bank gets into trouble. Investors have said they may hesitate to buy such securities because of the potential damage from conversions.

“Handing over the trigger’s control to regulators is supposed to make this stuff act more like capital,” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC, a Washington-based company that advises on financial rules. “But what it will do is make these decisions more political, so now the pricing of the instruments will have to incorporate politics.”

European Bailouts

European governments alone have set aside more than $5 trillion of public money to save their banks since 2008. The European Commission on Jan. 6 proposed that authorities may be allowed to write down senior debt before relying on the taxpayer to save a failing lender. While the Basel committee’s bail-in standards aren’t about how senior bondholders are treated, the logic behind the actions is parallel, Matthews said.

“All classes of capital instruments” must “fully absorb losses at the point of non-viability before taxpayers are exposed to loss,” the committee said.

Today’s rules will apply to securities issued on or after Jan. 1, 2013, the committee said. Securities issued earlier that don’t meet the rules will need to be phased out of banks’ capital between 2013 and 2023.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net: Yalman Onaran in Washington at yonaran@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net. David Scheer in New York at dscheer@bloomberg.net.

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