The European Banking Authority's blueprint for hybrid bank debt, part of efforts to help shore up shattered investor confidence in the bank sector, may determine the chances of a deal on similar rules at the global level, a senior regulator said.
The EBA may publish as soon as Wednesday its ground rules for banks to issue contingent capital or CoCos, a form of hybrid debt or bond that turns into equity if a bank gets into trouble.
The EU wants banks to hold capital cushions of at least 9 percent of risk-weighed assets by mid 2012 -- some 2 percent of which could be in the form of hybrid debt, sitting on top of a 7 percent core Tier 1 pure equity buffer, Lars Frisell, chief economist at the Swedish FSA regulator, told Reuters on the sidelines of an industry conference.
Frisell also sits on the global Basel Committee on Banking Supervision and said the EBA blueprint and the potential CoCo activity it triggers will be an experiment that will be closely watched by Basel.
The committee is still deliberating what going concern role contingent capital could play in helping a bank that is starting to get into trouble to improve its finances, Frisell said.
I don't expect anything in the short term on definitions and technical issues from the Basel Committee which will continue work into 2012, Frisell said on Monday.
First we will see the EBA initiative and the capital raising exercise to mid 2012. That is the first thing that we will see in this area and the Basel Committee after that maybe, Frisell said.
The committee is so far not very positive about using CoCos in going concern capital and the EBA initiative could shape that mood, he said.
In the past meeting it has not been a priority. The priority is really monitoring implementation of Basel III in the jurisdictions, Frisell said.
Global regulators are more in favour of using hybrid debt that is converted into capital when a bank is a gone concern, that is it has passed the point of no return and has to be wound up. The use of hybrid debt here would shield taxpayers from having to rescue banks again in the next crisis, regulators argue.
The EBA said in October only new issuance of very strong convertible capital will be accepted if in line with strict and standardised criteria it will define by the end of November.
Frisell's comment are unlikely to please banks who want global guidelines on CoCo issuance, which has but all dried up as lenders wait in limbo, one conference delegate said.
We do want a common approach to this... We are stuck at the moment, Simon Hills of the British Bankers' Association told the conference.
Frisell is unconvinced CoCos would work in a going concern situation and thinks they should only have a gone concern role when regulators have to push the nuclear button on a bank that is no longer viable.
We don't see the advantages, we just see the potential problems. The more people say this is the new world, the more nervous I get... The solution is much much higher capital requirements, Frisell said.
Sweden's government said last week its banks must have a core Tier 1 equity of 12 percent from 2015 -- which includes no hybrid debt -- a level already reached by nearly all the main lenders and well above of agreed global requirements.
Lars Nyberg, Deputy Governor of the Swedish Central Bank, said hybrid debt has not worked well in the past.
We have to build up a new idea of hybrids that is more credible than the old one. Hybrids are not bad in themselves but the old hybrids were certainly questionable, Nyberg told the conference.
Other speakers said there is still disagreement over key elements such as when CoCos conversion would be triggered, whether they would be cheaper than pure equity and if investors will buy them.
(Reporting by Huw Jones; Editing by David Holmes and David Cowell)