Bloomberg News

CoCos to Stay on Basel Agenda as Option for Banks, Ingves Says

June 29, 2011

June 29 (Bloomberg) -- Contingent convertible bonds will remain an option for boosting capital at the world’s biggest banks even after the Basel Committee on Banking Supervision this month said it favored retained earnings and ordinary shares.

“That doesn’t mean that CoCos are off the agenda,” Stefan Ingves, the governor of Sweden’s central bank and newly appointed head of the Basel committee, said in an interview in Stockholm yesterday. “There remains more work to be done on the CoCo-side; one way or other CoCos will stay on the agenda but it will be sort of an evolutionary process.”

This weekend’s decision to require too-big-to-fail banks to meet extra capital demands as high as 2.5 percentage points without resorting to CoCos was a victory for U.S. regulators over their European counterparts. National regulators will still have the freedom to allow lenders to use the securities for meeting higher local capital standards, Basel said.

“When it comes to dealing with issues in banks, it remains a very interesting instrument but there is a lot of technical work that remains to be done,” Ingves said.

The securities, which convert into equity at a given trigger, have been criticized by Oswald Gruebel, chief executive officer of Switzerland’s biggest bank, UBS AG, for diluting regular shareholders’ investments.

Other market participants also remain skeptical. Bill Blain, co-head of strategy at broker Newedge Group in London said this month “supporters of contingent capital should be watching in open-mouthed horror” after Bank of Ireland Plc’s May 31 debt-for-equity swap resulted in a 28 percent share-price slump. The example shows how quickly equity value can be destroyed when bank bonds are converted, Blain wrote in a June 7 note.

Stricter Rules

Ingves, who in Sweden has argued in favor of imposing regulatory requirements on banks that are stricter than those set by Basel, will take over from European Central Bank Governing Council member Nout Wellink on July 1. The Riksbank governor, who was a key architect behind the resurrection of Sweden’s banks after the 1990s meltdown, has said stricter rules protect taxpayers and prevent banks from taking on risk they can’t afford.

Ingves signaled this stance is likely to shape his approach to heading the Basel committee. Banks that ultimately call on their governments to support them in times of financial stress should accept restrictions on their business set by the state, he said.

Public Sector Sway

“As long as the public sector backs up banking systems in one way or the other it’s the responsibility of the public sector to decide on how far banks can go and the banks themselves they have to live with that,” Ingves said.

Still, it remains “too early to tell” whether a bail-in construction, which would force bondholders to share losses in state-engineered resolutions, should be enforced, he said.

The decision to keep CoCos out of required buffers was part of the Basel Committee’s overhaul of rules on how much capital the world’s largest banks should hold so they don’t collapse during a financial crisis. The proposals will be reviewed by the Financial Stability Board and then be issued for public comment, the Basel group said. The FSB, which brings together finance ministry officials, central bank governors and regulators from the Group of 20 countries, is leading efforts to rein in systemically important banks.

The Basel committee didn’t identify which banks will be subject to the capital charges. About 28 to 30 banks, including as many as eight in the U.S., may face the surcharge, according to a person familiar with the situation, who declined to be identified because the talks are private.

--Editors: Tasneem Brogger, Anthony Aarons.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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