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Opinion

Bank capital: Banks suffer on the RAC

New S&P ranking claims serious shortfalls at Credit Suisse, Deutsche Bank and Morgan Stanley.

The brave new dawn of bank capital was ushered in at the end of January with Rabobank’s $2 billion non-call 5.5-year perpetual deal, underwritten by Bank of America Merrill Lynch, Credit Suisse, Morgan Stanley and Rabobank. The hybrid deal was the first to incorporate a permanent write-down feature and is the future of hybrid issuance under Basle III. The deal has jumped the gun somewhat, taking place before regulatory certainty that it will be Capital Requirements Directive 4 compliant. But the Dutch bank forged ahead anyway, cognizant that market conditions could deteriorate before that clarity emerges.

The deal is a clear sign of the priority that banks are placing on coming up with funding options that will meet the tougher capital requirements under Basle III. That the $2 billion deal attracted $7 billion of orders cannot be hailed as evidence of healthy appetite for the new hybrid structures – this is triple-A rated Rabobank after all. Second-tier institutions will find it much tougher to attract buyers for instruments such as this with bail-in type features.

If the banks do not consider meeting their tier 1 capital ratios a sufficient challenge, rating agency Standard & Poor’s recently published research claiming that 75 of the largest global banks could need an additional €577 billion to meet the final 7% minimum common tier 1 ratio.

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