The recent surge in issuance of Basle III-compliant bank capital securities in Europe seems to reflect growing investor confidence in these bonds – previously confined to the most exotic corners of the capital markets. However, as European banks lick their lips at the prospect of billions of euros of cheap new capital, doubts remain that alternative tier 1 (AT1) securities can necessarily make it as an asset class.
One of the profound conceptual changes brought about by the new regulatory framework has been that fixed-income investors, previously insulated from the most exposed rungs of the capital structure, must pull their weight in protecting taxpayers from institutional bankruptcies. That has been achieved by the inclusion of conversion features and write-downs in contingent convertibles (CoCos), areas of risk previously reserved for shareholders.
The Basle rules represent a basic standard, and in recent weeks national regulators have implemented their own rules, with the UK’s Prudential Regulation Authority requiring that big UK banks and building societies meet a 7% core equity tier 1 capital ratio and a 3% tier 1 leverage ratio from January 1 2014.
Confirmation of the rules has spurred a recent surge of AT1-compliant issuance, with Barclays and Credit Suisse at the vanguard.