The Basel Committee has surprised banks by proposing to include tier two capital in its regulatory reforms, a move that could threaten the class’s viability. Lawyers are split on the move, but agree that conversion triggers are a more pressing concern.
In its latest consultation document, entitled “Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability”, the Committee expands on its plan that forces banks to convert certain debt classes into equity, or write them down, if necessary to shore up struggling balance sheets.
But while previous drafts focused on tier one - the traditional core of a bank’s capital adequacy - the new proposals also include tier two instruments, including subordinated debt.
“The really surprising thing is that this would apply to not only future tier one issues but also all tier two capital issues going forward,” said Stephen Roith,...