Reuters: Bankruptcy News: BoE barking up the wrong tree

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BoE barking up the wrong tree Sep 28th 2012, 09:28 By Helene Durand Fri Sep 28, 2012 5:28am EDT LONDON, Sept 28 (IFR) - The Bank of England Financial Policy Committee's call for UK financial institutions to take advantage of the improvement in market conditions to raise outside capital is the right one. Sadly, it will likely remain unanswered, and for once, the banks won't be the guilty parties. The committee notes in its report that recent improvements in market conditions should help banks raise capital externally, and suggests that banks should look at options such as debt conversion or the issuance of suitable contingent capital instruments, as well as conventional equity. That all sounds great on paper, but there's a catch. Banks would love to look at debt conversion or issuing "suitable contingent capital instruments", but they simply can't, because the Financial Services Authority continues to drag its feet. All European banks have very little clarity on what they can and can't do when it comes to hybrid bank capital, despite dialogue with the authorities. In the UK, however, hybrid structurers complain the regulator is not willing to engage in discussions, leaving them even further in the dark. The fact that European banks have raised over EUR8bn-equivalent of Tier 2 capital since the beginning of July and UK banks have yet to make an appearance in the capital space this year gives an indication of the FSA's inertia. At least some European regulators are prepared to show their hands when it comes to less racy instruments, the FSA has not even done that. Given the high coupons banks have to pay - ABN Amro, for example, paid 7.125% for Tier 2 debt in the euro market - banks can't blamed for being reluctant to pull the trigger if there is a risk the deal will not count as capital at some point in the future. And the FSA's lack of engagement as it waits for Europe to finalise the Basel guidelines into European law is just one issue. HM Revenue and Customs created another in July when it questioned the tax-deductibility of future bank capital instruments. HMRC has said it will only provide clarity once CRD4 has been enacted, leaving banks to wait longer. So, this leaves UK banks with the option of raising pure equity, which at current valuations does not make sense. If there was ever an example of disjointed policy making, then this is it: the left arm does not know what the right arm is doing. The BoE's aims are laudable, and from early next year it will be in sole charge of UK bank regulation and able to ensure they actually happen. (Reporting by Helene Durand, Editing by Alex Chambers, Julian Baker) Link this Share this Digg this Email Reprints

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