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Towards a common definition of hybrid capital

Proposals for establishing an EU-wide definition for bank capital have caused a stir in the arcane world of hybrid regulation.

The new rules will not come into effect until 2009, but what is proposed would substantially alter the nature of certain forms of innovative hybrid tier 1 capital in various European countries.

Notably, the UK’s Financial Services Authority has recently published its own paper that opened up a wider discussion on the definition of capital. In a world of joined-up thinking, the FSA’s exercise should be part of what the Committee of European Banking Supervision is canvassing opinion for. The CEBS’s exercise is ostensibly designed to tidy things up, although there are many bankers who would argue it is not doing so.

About 18 months ago, the CEBS was asked by the EU parliament to look at tier 1 capital with the aim of improving the quality of regulatory capital via the creation of a common definition for the whole of the region. The CEBS states that its intention is not to devise a completely new definition of hybrid debt but merely to clarify the rules set out by the Basle Committee for Banking Supervision in 1998.

At a basic level, hybrid capital is simply described as deeply subordinated, perpetual, loss-absorbing and non-cumulative securities, in fact a lot like common equity.

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