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Going concern contingent capital by alicejenny

VIEWS: 8 PAGES: 19

									The role of contingent capital in the
       regulatory framework




                    Aldo Stanziale
                    Banca d’Italia
           Vigilanza bancaria e finanziaria
      Servizio Normativa e politiche di vigilanza

                   Milan, 21 March 2011
                      Agenda

1. The new regulatory capital regime: an outline

2. The going concern contigent capital: a work in
   progress

3. Bail-in debt: a work in progress
The new regulatory capital regime: an outline


What the BCBS has already done:

• Basel III: A global regulatory framework
  for more resilient banks and banking
  systems – December 2010
  • Raising   the   quality,   consistency               and
    transparency of the capital base
     • Harmonised definition of capital (CET, AT1, T2)
     • Harmonised deductions
     • Predominance of CET
  • The new buffers: the capital conservation
    buffer and the countercyclical capital buffer
The new regulatory capital regime: an outline


• Minimum requirements to ensure loss
  absorbency at the Point of non viability
  – January 2011
  • All non common T1 and T2 must either be
    converted into common equity or written off at
    the PoNV
  • Trigger event: the erlier of: 1) a decision that a
    write off is necessary of the relevant authority; ii)
    the decision to make a public sector injection of
    capital
The new regulatory capital regime: an outline

            Calibration of the Capital Framework
   Capital requirements and buffers (all numbers in percent)
                                    Common
                                   Equity (after           Tier 1 Capital               Total Capital
                                    deductions)
Minimum                                  4.5                       6.0                          8.0
Conservation buffer                      2.5

Minimum plus                             7.0                       8.5                         10.5
conservation buffer

Countercyclical buffer                0 – 2.5
range*
    *   The Committee is reviewing the question of permitting other fully absorbing capital beyond
        common equity tier 1 and what form it would take. Until it has issued further guidance, this buffer
        should be met with CET1 only
The new regulatory capital regime: an outline


• Common equity: DONE

• Additional Tier 1 instruments classified as equity: DONE

• Additional Tier 1 instruments classified as liabilities:
  DONE?

• Tier 2 instruments: DONE

• Going concern contingent capital: work in progress

• Bail-in debt: work in progress


  Hierarchy of buffers, interaction of triggers,
 6
  etc..
The new regulatory capital regime: an outline

        Potential use of contingent capital
              in the regulatory framework
                 MRC      CCB     Macro-    Systemic
                                  buffer    surcharge
 Common           OK       OK       OK         OK
 equity
 Additional       OK       NO       NO         tbd
 going
 concern
 tier 1
 Going           NO        NO       ?           ?
 concern
 co.co.
The contingent capital: a work in progress
The FSB recommendations on SIFIs
Higher loss absorbency

• The Basel Committee is asked to complete by mid-2011 a study
  of the magnitude of additional loss absorbency that G-SIFIs
  should have, along with an assessment of the extent of going-
  concern loss absorbency which could be provided by the various
  proposed instruments.

• The FSB and its members, will examine the legal, operational,
  market capacity and other issues bearing on the viability of
  contractual and statutory bail-in and monitor the ongoing
  capacity of markets for these instruments. They will report on
  their findings by mid-2011.

• Drawing on the above analyses, the FSB, in consultation with
  the BCBS, will recommend an additional degree of G-SIFI loss
  absorbency and the instruments by which these can be met by
  December 2011.
The contingent capital: a work in progress


     Contingent capital. What?
         Contractual arrangements that provide a pre-
         specified form and amount of new or higher-
         quality regulatory capital, conditional upon
         the realisation of a pre-specified “trigger”
         event (other than the mere passing of time).




 Key driver: transformation of its economic
 substance

 9
The contingent capital: a work in progress


Policy issues
• When? Going vs gone concern

• Who/What triggers     it?   Rules   governing    the
  transformation

• What is it before? The host instrument

• What   is  it   afterwards?      The    post-trigger
  instrument

• How? Conversion     and     principal   write   down
  features

• How much? Conversion rate and size of haircuts
 10
The contingent capital: a work in progress

  There is no single policy answer
 Gone concern                                        Going concern



Regulatory capital             Regulatory capital
(MRC).                         (MRC)                        Additional loss absorbency
Other liabiities?              (Additional tier 1)                (Going concern co.co)




                     Resilience of the                 Certainty of transformation
 Proxy for           issuer at all times :
 liquidation         • fully paid up                          when needed:

 • PoNV              • loss absorbency               • triggers
 trigger             • flexibility of payments       • rules governing transformation
                     • permanence                    • post-trigger instrument
  11
The contingent capital: a work in progress


       Co.Co. to meet the additional loss
       absorbency for Systemic surcharge

• What the rationale? The drivers for an
  assessmnet:
      • Loss absorbency
      • Cost and investors base
      • Incentives
      • Market information
      • Implementation challanges


 12
The contingent capital: a work in progress


The features
• The host: Do we need a new tier of
  capital?
• The trigger:
      • Reliable, timely, trasparent, no mkt manipulation,
        no regulatory forbearance
      • Automatic vs Discretionary
      • Market vs Regulatory
      • The “location” of the surcharge matters


 13
The contingent capital: a work in progress



• The conversion rate: Should we add greater
  regulatory clarity?
• The operational mechanism: we need
  common equity (but accounting and tax
  implications)
• Group treatment: Who can issue it? Who can
  issue the new shares?
• Implementation challenges: Can banks issue
  it? Is there any market out there?

 14
           Bail-in: a work in progress

  Why bail-in?
Bail in could be useful to:
• increase the contribution from the private sector during
  banking crises, i.e. from bail out to bail in reduction in
  moral hazard
• expand tools available to build up additional loss absorbency
  for SIFIs  reduction in probability and impact of SIFIs’ failure
• create an additional line of defence for ailing banks before
  resolution is needed     complement to crisis management
  tool-box
• possibly keep the firm as a going concern, generating lower
  losses to creditors than in a liquidation procedure
…but also here complex issues arise in implementation
           Bail-in: a work in progress
Key challenges:
• Purpose: not limited to liquidation, but late trigger is
  needed
• Status: contractual and statutory bail-in are not
  necessarily mutually exclusive
• Scope: Limited scope vs impact on business
  practices and arbitrage opportunities
• Legal issues:
  – High responsibility for resolution authorities (when?, size of
    haircuts)
  – Impact on ranking of creditors, particularly tricky in a cross-
    border context
  – Criteria for pulling the trigger – and need for harmonisation
  – Impact on investors’ behaviour in front of rumours on the
    firm’s viability
  – Effect on cost and availability of funding
                    Bail-in debt


• The host: Where should we draw the line? (Impact
  on business practices and arbitrage opportunities)

• The trigger: PoNV?

• The conversion rate: Should we add greater
  regulatory clarity?

• The operational mechanism: we need common
  equity (but accounting and tax implications)

• Group treatment: Who can issue it? Who can
  issue the new shares?

• Implementation challenges: Can banks issue it?
  Is there any market out there?
17
Bail in and contingent capital: a work in
                progress

     Equivalence rates

• Common equity vs contingent capital

• Common equity vs bail-in debt




 Key drivers:
 • impact on probability of default
 • different degrees of loss absorbency



18
                   Conclusions


• Work is on track within the Basel Committee to
  deliver on the range of tools that can be used
  to meet the additional loss absorbency

								
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