The Danish Financial Supervisory Authority said banks may use contingent convertible bonds to meet solvency requirements so long as they begin absorbing losses early enough.
The instruments must convert to equity, or be written down, once a threshold of 7 percent of a lender’s own core equity is breached, the Copenhagen-based agency said today. The level is consistent with thresholds set elsewhere in Europe, including Switzerland and the U.K., the FSA said.
Danish banks, led by Danske Bank A/S, have said they welcome the option of issuing convertible debt to build up reserves. Yet the industry has warned that setting the trigger too high would make the securities prohibitively expensive. As a starting point, Danish banks are required to fulfill individual solvency standards that exceed the regulatory minimum of 8 percent by using core capital, according to the FSA.
“With these guidelines, banks now have the option of using different capital instruments,” the FSA said.
The watchdog said in June it probably would recommend a 7 percent conversion level, based on feedback from the financial industry. Today’s announcement follows a public hearing process.