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Ingenuity pays off in tier-one capital

Despite jitters after the September 11 attacks, tier-one bank capital issues offering better returns than government bonds have continued to remain popular with investors, boosted by attractive new structures.

Damian Chunilal

September 11 was a stern test for all capital markets but none of them was more eagerly watched by financial regulators than the market in tier-one bank capital. This paper is a bellwether of investors' perception of the solvency of banks. It is also a young market, barely two years old in its present regulated form, and so prone to sharp fluctuation.

"This was the first test of the market," says David Marks, head of the financial institutions group at JPMorgan. Bank capital passed its first examination, say market observers, but not with distinction. According to Marks: "The investment banking community did not distinguish itself particularly well in providing liquidity in these instruments. September 11 put the cattle prod into the middle of the nervous system of many investors."

While some market makers melted away, for fear of getting loaded with subordinated bank paper in an illiquid market, investors bore the brunt as spreads widened.

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