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Basel to Set Rules on Debt Securities for Bank Rescues

Updated on

Global banking regulators may decide as soon as this week on criteria that debt securities must meet to count as capital, ensuring they contribute to rescuing international lenders on the brink of failure.

The Basel Committee on Banking Supervision is seeking to ensure the instruments can absorb losses or be converted to common equity to aid a bank in distress when they are counted as part of a lenders’ capital. The proposals are scheduled to be published “in the next few days,” the Basel group said in an e-mail today.

Regulators are aiming to avoid a repeat of the financial turmoil that followed the 2008 failure of Lehman Brothers Holdings Inc. and resulted in European governments alone setting aside more than $5 trillion of public money to save their banks. 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.

“We reached an agreement in principle” on the measures at a meeting from Nov. 30 to Dec. 1, Jonas Niemeyer, who represents the Swedish central bank at the Basel committee, said in a telephone interview. It’s “a likely outcome” that this month’s proposal will include the main ideas of a draft version that was put out for consultation last August, he said.

About to Fail

The committee’s draft proposals in August concern securities other than common stock that banks can count as capital against their credit risks. It says that the instruments, such as term and non-term subordinated debt and some types of preference shares, should be written off or converted to ordinary shares when regulators decide that a lender is about to fail.

Banks including Bank of America Corp., Deutsche Bank AG, and Barclays Plc have told the Basel committee that investors may by unwilling or unable to buy shares and bonds targeted by the proposal. Regulators may have too much discretion when deciding whether a lender is on the brink of collapse and that a write-off or conversion is needed, they argue.

Investor appetite “will be extremely limited for instruments that can be written off on a completely discretionary basis,” Bank of America said in a note to the Basel committee in October.

“Converting debt into equity could be a highly effective way of staving off a potential bank failure without recourse to taxpayers,” Gilbey Strub, managing director for the Association for Financial Markets in Europe, said in an e-mailed statement.

‘Fixed Criteria’

Banks and regulators now need to resolve whether triggers for converting debt into equity should be in both bond contracts and regulators’ rule books, the AFME, and industry group that represents lenders, said in its statement.

“I can see from banks’ point of view that investors want to know what type of criteria might be used” to judge when a bank is at the point of failing, Niemeyer said. “On the other hand, from the regulatory point of view it is very difficult to set fixed criteria.”

The Basel committee brings together regulators from 27 countries including Brazil, China, India, Germany the U.K. and the U.S. to co-ordinate banking regulation.

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