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Banks refute case for market triggers on contingent convertibles

Bank of England executive director of financial stability Andrew Haldane’s recent comments on trigger mechanisms for contingent convertible (coco) notes have been met with a chilly response from banks.

In remarks published in late March, Haldane argued for a reconfiguration of banks’ capital structures, which “would bake-in the benefits of simplicity, robustness and timeliness”. Integral to this, he suggests, is the requirement to issue cocos alongside equity. These coco instruments should have triggers based on market-based measures of solvency and the triggers should be graduated, stretching up the bank’s capital structure with the coco converting to equity on triggering.

 Andrew Haldane, executive director of financial stability, Bank of England
Andrew Haldane,
executive director of
financial stability, Bank
of England

The first of these points would mark a radical departure for this nascent market. Those banks that have issued contingent convertibles so far (Lloyds, Rabobank, Credit Suisse and Bank of Cyprus) have set trigger levels based on the banks’ Basel III common equity tier 1 ratios. The earlier Lloyds and Rabobank deals set single triggers at 5% and 7% respectively, while the “Swiss finish” encapsulates both a high-strike trigger and a low-strike trigger. Credit Suisse’s recent $2 billion public regulation S buffer capital note trade, following Sfr2.5 billion and $3.5 billion private placements, incorporates three tranches of cocos that convert to equity at a 7% CET1 high-strike trigger (to recapitalize the bank back up to its 10% regulatory minimum).