The amount of capital notes issued by European banks is likely to fall as regulators seek rules increasing the securities’ ability to absorb losses, Standard & Poor’s said in a report today.
Investor demand for so-called hybrid capital products is “uncertain” as supervisors demand structures that that are more equity-like, including automatic conversion into stock in times of stress, S&P analysts led by Michelle Brennan in London wrote in the report.
“These regulatory moves are in response to the limited capacity” of the securities to “act as a material form of capital during the recent stresses,” the analysts wrote. “The potential investor demand for these newer hybrid structures is unclear.”
Regulators worldwide are seeking ways to increase banks’ ability to absorb losses after the global financial crisis shut down credit markets and governments were forced to bail out lenders. The Basel Committee on Banking Supervision proposed changes in December that will “encourage the development” of more flexible structures, S&P said.
Hybrid securities have features of equity and debt and were designed to count toward banks’ government-mandated capital requirements to cushion against losses.
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