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Danish FSA Says Banks Could Use Contingent Bonds in Buffers

Denmark’s Financial Supervisory Authority proposed letting banks use contingent capital to help them meet regulatory requirements.

Conversion triggers should either fire at 7 percent core equity Tier 1, or if banks’ individual solvency requirements -- also called Pillar II standards -- are breached, the Copenhagen-based regulator said in an e-mailed statement today.

“Above all, the instruments must be loss-absorbing, meaning that the writedown must lead to a higher level of core equity Tier 1,” the FSA said.

The FSA is giving banks until June 19 to respond to its proposals, which the regulator says follow standards elsewhere in Europe.

“It’s a very sensible step,” Jesper Berg, senior vice president and head of regulatory affairs at Nykredit Realkredit A/S, said by phone. The Copenhagen-based lender is Denmark’s biggest issuer of mortgage bonds. “It’s crucial that the instruments will conform with practice elsewhere in Europe as we won’t be able to create a market for a product that’s only present in Denmark.”

For systemically important financial institutions, a government-appointed committee said in March that hybrid conversion triggers should fire once banks breach a capital threshold of 10.125 percent. Lawmakers have yet to approve the Sifi proposals.

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