Denmark’s Financial Supervisory Authority delivered banks a victory as the regulator proposed following industry recommendations on trigger levels that govern contingent convertible bonds.
Banks will be able to choose between a threshold of 7 percent core equity Tier 1 and an individual solvency requirement, which includes Tier 2 capital, the regulator said June 12. That matches European standards and is well below the 10.125 percent a government-appointed committee in March recommended be applied to systemically important banks.
According to Anders Balling, head of bank oversight at the FSA in Copenhagen, lenders will probably favor the 7 percent trigger as a more reliable gauge of when conversion will occur.
“The CET1 trigger could be the preferred option for banks since it is independent of the individual solvency requirement,” Balling said in an interview. “But both options work from our perspective since the principal aim is to make the capital loss-absorbing in a going concern.”
The FSA’s proposal, which Balling said is based on discussions with bank industry representatives, marks a softening of the regulator’s approach, according to Jesper Berg, senior vice president and head of regulatory affairs at Nykredit Realkredit A/S. Denmark has previously singled itself out as a pioneer in banking reform, enforcing the European Union’s first bail-ins in 2011 and this year moving ahead with too-big-to-fail designation before the EU.
That history makes this week’s proposal “very much an appreciated step in terms of moving toward a more conform practice,” Berg said in an interview. “We need to make fully sure that the modalities are consistent with market practices so that we don’t yet again have another special Danish instrument, but I think we are definitely taking a great leap in the right direction.”
The regulator said last month it will allow banks the option of using contingent capital, or debt that converts to equity at regulator-determined triggers, to help the industry fulfill stricter reserve requirements. For the country’s six biggest banks, led by Danske Bank A/S (DANSKE) and Nykredit, lawmakers are still debating where trigger levels should be set.
The 7 percent trigger “is a decent level and shows that the FSA has listened to the financial industry,” Thomas Hovard, head of credit research at Danske Bank Markets, a unit of Danske Bank, said in an interview. “It doesn’t change the landscape for Sifis, of course.”
Banks have until June 19 to send their responses to the FSA’s proposal.
“We’re pretty confident this proposal is a sensible one,” Balling at the FSA said. “The 7 percent target is very close to what we know is used elsewhere in Europe, in Switzerland, for example. We expect this proposal to go through pretty quickly.”
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