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Bank capital - From a trickle to a flood

The conditions are right to transform this year's steady stream of European bank capital issues into a torrent. That is good news for firms who see these finely crafted products as one of the last areas of value in an increasingly low-margin bond business. Michael Peterson reports.

Who needs tier three?

Marks: surprised by European demand

Take the archetypal European bond investor, perhaps not the Belgian dentist of lore but a successful Italian fashion designer. She used to get a double-digit return on her Italian government bonds but, according to the story we have all learnt by heart, the introduction of the euro has brought yields on government bonds down to rock-bottom levels.

Add another entry to the long list of products - corporate bonds, high-yield bonds, municipal bonds, asset-backed securities, convertibles and so on - which can give her a yield pick-up. Subordinated bank debt, say its supporters, is the perfect asset for Europe's yield-hungry, but conservative, investors. Buy the subordinated debt or preference shares of a bank you know and trust and you will get higher returns without the need to bet on the fortunes of some unknown telecoms company or distant emerging market.

The growing enthusiasm of European investors for bank capital issues is one of the reasons for a big increase in issuance this year. In the first three-quarters of 1999, according to Capital Data, issuance of bank subordinated debt was already greater than the total for any previous year.