EU ticks box on bank capital

Thu Mar 28, 2013 1:43pm EDT

Related Topics

* Final version of bank capital text

* EBA gets sweeping powers

* Certainty could drive deal pipeline

LONDON, March 28 (IFR) - The compromise text of the European Union's new bank regulation, CRD IV, published on Thursday, appears to bring the market for bank capital closer to the end of its long journey to structural certainty, but ducks tough decisions on some aspects.

The compromise text is a harmonisation of Council of Ministers and European Parliament revisions to the European Commission's text implementing Basel III in Europe.

Basel III was published in draft form in December 2010, while the Commission published its CRD IV draft in July 2011.

This final version delegates technical decision-making to the European Banking Authority. The EBA has been working on the details of its capital regime in parallel with the progress of CRD IV, and is expected to publish its technical standards once the final CRD IV hits the statute book in April.

The EBA has to fill in what happens when hybrids are written back up after a temporary write down - once it has absorbed losses, but when an institution returns to health. Details of who gets the benefit of a bank's return to health have been controversial, pitting equity against hybrid debt investors.

Other crucial decisions have been delayed for later regulatory rounds. The definition of "point of non-viability" -where a bank is not a viable institution, but is not strictly insolvent - has been left for the European recovery and resolution regime, expected in 2015. For subordinated debt, this is a crucial point because this can determine when the instruments take losses.

Capital structuring bankers seem divided on how this will impact deal flow. One banker said he expected strong flow in the second quarter, with some banks starting deal marketing even before the rules have been through their final vote, aiming to pull the trigger as soon as details were confirmed.

Another banker though said deals would be later, since banks would wait for confirmation before starting structuring. Deals could come in Q2, but would be more likely further out.

The compromise text leans more heavily on the Capital Requirements Regulation (which must be implemented immediately) than the Directive (where implementation is delegated to local authorities).

But the Regulation, in the latest draft, contains room for national flexibility as well. All Additional Tier 1 (AT1) will need a 5.125% ratio conversion trigger - but national authorities are empowered to set their own triggers as well.

This may be to deal with the UK's desire for a "super-equivalent" capital regime - though the UK was the only country to vote against the Regulation in the Council of Ministers.

The EBA has also been given other sweeping powers, including drafting standards on capital of bank subsidiaries, what qualifies as a liquid asset, results reporting frequency and standards, calculation of mortgage risk weights, rating agencies, which capital modelling should be used, margining, FX, VaR, correlation trading, CVA risk, large exposures.

Many of these technical definitions, fortunately, are already under consultation or drafted. (Reporting by Owen Sanderson, editing by Alex Chambers, Gareth Gore)

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