Reuters: Bankruptcy News: Denmark sets sights on 7% CoCo trigger

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Denmark sets sights on 7% CoCo trigger Feb 19th 2013, 17:15 Tue Feb 19, 2013 12:15pm EST * Regulatory committee prepares to publish SIFI bank recommendations * Danish regulator considers Barclays CoCo as template * Market talk of Swedish CoCo collaboration By Aimee Donnellan LONDON, Feb 19 (IFR) - Danish banks planning to sell contingent convertible securities (CoCos) to meet stringent new capital regulations could be required to set a 7% trigger on the instruments, the Danish financial watchdog told IFR on Tuesday. Denmark's Financial Supervisory Authority said its capital requirements will initially be filled with Common Equity Tier 1, but they could be satisfied with contingent capital instruments provided certain requirements are met. "CoCos could - with a sufficiently high trigger - be used to meet a bank's Pillar II requirement," said Anders Balling, head of the FSA's banking analysis division in Copenhagen. Since the financial crisis, a number of European banks have addressed new capital rules with CoCos - bonds that can turn into equity when a bank's capital drops below an agreed level - a potentially cheaper solution than issuing new equity. Recent CoCo issuance by Belgium's KBC and the UK's Barclays had the backing of domestic regulators, and both took advantage of extremely strong investor demand to sell permanent write-down structures where, if triggered, investors' principal evaporates. "We have looked at the Barclays 7% trigger but have made no plans on whether we will favour a permanent write-down or conversion structure." Bank capital experts had been expecting the FSA to favour a high trigger to ensure the write-down takes place during the early stages of financial difficulty. Denmark's regulator is preparing its recommendations on the country's banking system along with defining how Systemically Important Financials Institutions (SIFI) - Danske Bank, Nykredit, Jyske Bank and Sydbank - should be treated. CAPITAL WRITE-DOWN Investors have eyed Danish banks with caution since 2011 when losses were imposed on senior bondholders. That led to a 100bp widening in bank spreads and spooked the wider market, restricting Spain and Ireland from following suit. From now on, Denmark's FSA plans to take a more patient approach to the application of solvency requirements, as long as a bank's capital ratio is above 8%. Under a new approach to bank solvency, the country's financial institutions will not be forced to raise capital in difficult markets as the watchdog plans to take a "counter cyclical" approach to the implementation of banking requirements. This will mean restrictions on bank distributions of profit, payments on Tier 1 and Tier 2 instruments, and restrictions on early repayment of capital. The Danish regulator will reserve the right to withdraw a bank's license even though its capital ratio is above 8% if the institution hasn't made sufficient progress towards capital restoration. SWEDISH COLLABORATION Meanwhile, market experts have told IFR that the Swedish and Danish regulators are seeking to set up a task force that would help to put CoCos on the agenda for the region's banks. Sweden already has some of the toughest capital rules in Europe. Its financial regulator wants banks to hold 12% core capital by 2015 to cushion taxpayers against the cost of any future banking crisis. To that end, Swedish banks have been eyeing the CoCo product for the past few years. Swedbank won clearance from its shareholders to issue up to SEK10bn (USD1.5bn) in contingent convertible bonds in March 2012 when regulations covering CoCo bonds are finalised. "It would make sense for Nordic regulators to reach an agreement on how CoCos will be treated in an overall bank capital agenda," said a Danish banker. "However, at this stage we just want some clarity on capital requirements and collaboration with Sweden may delay that." (Reporting by Aimee Donnellan; Editing by Alex Chambers and Julian Baker) Link this Share this Digg this Email Reprints

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