Reuters: Bankruptcy News: 'Attractive' CoCos could help plug UK bank capital hole - FSA

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'Attractive' CoCos could help plug UK bank capital hole - FSA Oct 17th 2012, 13:00 By Aimee Donnellan Wed Oct 17, 2012 9:00am EDT LONDON, Oct 17 (IFR) - Contingent capital, or CoCos, could be an attractive way for UK banks to raise capital, their watchdog told a conference held by Britain's leading bank lobby group on Wednesday. Andrew Bailey, head of the FSA's prudential business unit, made the claim while discussing the best means of plugging the capital hole in UK banks' balance sheets at the annual British Bankers' Association conference in London - whose attendees faced a handful of protesters, some dressed as Robin Hood, outside the Northumberland Avenue venue. Uncertainty surrounding the size and cause of the capital gap in UK banks is seriously restraining new lending, he said, and, as a result, innovative capital raising tools are being considered. CoCos, a type of hybrid debt that converts to equity when a bank becomes stressed, could be used to prevent some of the shareholder dilution that is associated with raising new capital through a rights issue. "I am quite attracted to CoCos," Bailey said. "The attraction is that existing shareholders will retain some of any upside though they will pay via lower returns for the risk premium on the cost of CoCos." The Bank of England has in the past expressed concerns about CoCos. In June, it published a paper that said policymakers designing a regulatory regime for contingent convertible capital instruments should consider their potential risks when constructing them. The BoE highlighted the risk that holders of contingent capital instruments would try to sell ahead of a conversion, and of bank management or equity holders manipulating ratios to avoid triggers, saying that market participants in a competitive system will respond to these economic incentives. The paper's authors marshalled evidence from 60 academic and policymaker sources to consider the case for and against CoCos. They also examined existing issues from Credit Suisse, three Irish banks, Lloyds TSB Bank, Newcastle Building Society and Rabobank (which includes a write-down rather than equity conversion) - all of which have triggers related to some measure of core capital. Market participants who spoke to IFR on the sidelines of the conference seemed unsure about whether or not CoCos are a panacea for banks that are looking to increase their capital buffers while enhancing lending to the real economy. "There is still something of an open debate on CoCos," said one. "They seem like a sensible option for banks, as a number of issuers have gone down this route but we haven't seen a lot of volume as of yet." In the past, certain banks have been unwilling to invest in CoCos. They say they are unable to hold equity and think it is unfair that as the potential holder of CoCos they might lose money in an irrecoverable fashion, whereas equity holders would still have the upside. LACK OF TRUST Conference discussions did not just centre on bank capital. As the scandal about manipulation of the BBA-administered Libor rate continues to cast a shadow over the reputation of the industry, the pertinent issue of trust weighed heavily on the minds of attendees, who were unanimous in the view that the culture and behaviour of banks in the City needs to change. In his welcome address, Andrew Browne, chief executive of the BBA, said the banking industry needs to be seen not only as the cause of the financial crisis but also the route out of this troubled economic state. Steven Maijoor, chair, European Securities and Markets Authority (ESMA) said: "A lack of transparency and unrealistic promises resulted in large compensation being paid to investors." Bill Michael, UK head of financial services at KPMG, called for a bankers code to be introduced to restore trust in the financial system. "The industry is in need of a groundbreaking shift in culture and behaviourUnfortunately, today, bankers are being shut out of the future shape of banking, which will ultimately be to the detriment of us all." On the topic of bank bail-in, the Bank of England's deputy governor, Paul Tucker, said European plans to impose losses on bondholders will put banks back into the market economy. "We have to get to a position where banks can fail in an orderly way without the help of taxpayer money," he said. The European Crisis Management Directive (CMD), due to come into force in 2015, will give regulators greater powers to impose losses on bondholders. One of the key elements of the Directive is the introduction of the bail-in tool, which could apply to senior debt, although that will not be implemented until 2018. Link this Share this Digg this Email Reprints

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