Bank capital and regulation: Damned if you do, damned if you don’t
The regulatory bombshell of Basle III has resulted in an almost complete halt to hybrid tier 1 issuance. Banks now need to decide whether they can afford to wait on the sidelines or whether they should issue and let the regulatory chips fall where they may. Louise Bowman reports.
WHEN HSBC CHAIRMAN Stephen Green recommended in mid-May that global bank regulators impose "quite swingeing increases [in capital requirements] that really do concentrate the minds of management and lead to a scaling back of inappropriate amounts of risk taking in the trading book" he was speaking in his capacity as chairman of the steering committee on regulatory capital for the Institute of International Finance. But his words might just as well have come from any member of the Basle Committee on Banking Supervision. Swingeing increases in capital requirements are very much on their agenda, along with swingeing changes to bank capital (in particular subordinated bank capital) instruments that simply failed to work when the debt crisis hit in 2007. "This is the new world of capital," Prasad Gollakota, head of capital solutions, EMEA at UBS Investment Bank, tells Euromoney. "We don’t yet know what the minimum capital requirements are or the final detail on the composition of such requirements, but we do know that regulators want hybrid capital to absorb losses in advance of taxpayer money being injected."
The new world of bank capital will be very different from the old. According to JPMorgan the average core tier 1 ratio of EU banks could be 6.4%