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Banking

Lower tier 2: Basle tier 2 capital ruling could be investors’ dream

Creditor bail-ins mooted; Survival of LT2 in question

The August release of the Basle Committee’s consultative document on loss absorption underscored the regulator’s determination to punish the subordinated debt market for not shouldering its fair share of the pain since mid-2007. The means by which the Basle Committee plans to do this – permanent write-off, conversion to equity or a combination of the two – had already been well flagged up in its December 2009 capital adequacy proposals (see Bank capital and regulation: Damned if you do, damned if you don’t,  Euromoney June 2010). But the August proposals seek essentially to wipe out lower tier 2 bondholders in the event that the bank becomes a gone concern – a big increase in the degree of subordination that makes these instruments more akin to contingent capital (Cocos).

Prasad Gollakota, head of capital solutions, EMEA, at UBS

"Market participants were surprised by the proposals, although we expected that T2 was likely to include some sort of going-concern loss absorption"

Prasad Gollakota, UBS

"Some market participants were surprised by the proposals, although we expected that T2 was likely to include some sort of going-concern loss absorption," says Prasad Gollakota, head of capital solutions, EMEA, at UBS in London.

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