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Hybrids still on the menu

Hybrid capital may no longer be welcome in the US and Europe but it is playing a valuable role in the emerging markets.

So decoupling is not a myth. While regulators in the US and Europe are pressing banks to operate under a stricter capital regime – essentially raising more equity funding – in the emerging markets hybrid debt is still proving to have an important role.

In Russia, for example, where banks are struggling under the growing weight of bad debt, the government’s recapitalization plan includes the provision of subordinated loans. Last month Alfa Bank became the first local privately owned bank to benefit when it received approval for a subordinated loan of Rb29.9 billion ($960 million).

The 11-year loan increases Alfa’s holding company’s tier 2 level and follows legislation that allows for the state to give capital support of up to three times the amount already provided by a bank’s shareholders. Alfa’s holding company, which received a $320 million capital injection from shareholders in June, consequently granted a 16-year subordinated loan to the bank.

Also last month the European Bank for Reconstruction and Development supported three subsidiaries of Raiffeisen International in eastern Europe through a €150 million financing package. The loans, which went to Raiffeisen’s banks in Ukraine, Romania and Russia, can be classed as tier 2 capital.

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