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Capital Markets

Squeezing more into tier one

It must be perpetual but it doesn't have to be for ever. It has to feel like equity but look - to tax authorities - like debt. Defining banks' core capital is one of the thorniest issues facing bank regulators. Antony Currie reports on the squabbles over what fits in the tier-one category.


It's hardly been the best year for banks to raise capital. The fallout from last year's Asian crisis scared off investors concerned that the banks might have overly high exposure to some of the affected markets, and so drove out spreads and hit share prices. Then, just as confidence was beginning to return, the Russian crisis hit, and deals either had to be restructured - Fortis, for example, switched from a straight secondary equity issue to a convertible bond to aid in its acquisition of Belgium's Generale Bank - or deals were pulled entirely, the most high-profile one being the cancellation of the Goldman Sachs flotation.

But, barring a few notable exceptions, what this year proved in contrast to earlier crises - especially the Latin American debt crisis of the early 1980s - is how much better capitalized the major international banks are, and therefore how much more able they have been to deal with the last 12 months. One of the chief reasons behind this is the adoption, first by the G10 countries, and then others, of the 1988 capital adequacy rules laid down by the Bank for International Settlements (BIS), based in Basle.

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