IFR Editor-at-large Keith Mullin’s blockbuster: Not coming to a cinema near you.
IFR’S ANNUAL BANK Capital Conference took place last Thursday in London. I’ve been chairing this event for years and it’s always a hoot. We’ve been hosting it for 13 straight years and before that we did a few in the 1990s, so I reckon that means we can plausibly lay claim to owning this space.
It also speaks to the enduring and all-encompassing topic that bank capital has become over the years – and, of course, especially since the financial crisis. It’s a theme that’s got it all: smoldering politicians seeking vengeance for the global financial crisis, the future stability of the global economic and financial ecosystem, regulatory in-fighting, lack of regulatory clarity, jurisdictional contradictions and collaborative double-talk, uncertain product innovation driven by bespoke issuer-derived solutions, a slightly nervous will-they-won’t-they approach to investor receptivity, modelling complexities and pricing guesswork.
This has all the hallmarks of a blockbuster movie. If only the subject matter were, well, a bit more appealing for the masses. I guess we could throw in some gratuitous sex as a back story – nerdy capital structurer meets desperate bank treasurer running low on capital, their eyes meet late one night over the documentation of a low-trigger permanent writedown Additional Tier 1 security that’s going to restore the bank’s Core Tier 1 capital position. Nice…or maybe some violence as a grumpy investor ignores the health warnings, gets bailed in to zero and takes out a hit on the issuer or the bookrunner. OK, maybe not…
Huge uncertainties around bank capital do remain, even if the direction of travel is clearer
BUT ON A serious note, huge uncertainties around bank capital do remain, even if the direction of travel is clearer. I guess that’s partially why IFR’s event has become a must-attend, not just for the relatively small circle of capital structuring glitterati working for investment banks but for all those perplexed by the incredibly convoluted evolution of the bank capital securities debate, people seeking transparency and a steer on what the hell is going on.
That latter group is huge, but to be honest, I’m not sure we were able to provide too many answers. That’s because there aren’t really any answers. And that, in turn, is because the various regulatory bodies actively engaged in defining their respective rules haven’t provided complete and incontrovertible clarity on every aspect of bank capital, which, let’s not forget, is being developed along with broader solvency issues, including liquidity and leverage.
12-and-20
The accepted wisdom is moving towards standards of 12 and 20, ie. core capital of 12% and total capital of 20%. But as this point, this is a tale of multiple moving parts. I think it was David Marks, chairman of FIG DCM at JP Morgan, who mentioned on our inaugural panel that there are something like 60 regulatory initiatives in play, all in various stages of finality.
And if that weren’t confusing enough, the latitude for regulators to change their mind and alter the basis on which they calculate capital or just move the bar higher is ever-present. And then there’s the ratings agencies. Banks looking to preserve their credit ratings and issuing capital for ratings agency credit (Societe Generale and Danske Bank) only for S&P, to change its mind and remove equity credit rendering issued securities either redundant or expensive for capital purposes is not a trivial issue.
YET FOR ALL of the uncertainties, bankers at the conference spoke of AT1 evolving over time into a discrete asset class, with US$100bn–$150bn in issuance and sitting in their own bespoke hybrid capital indices. I’m not sure how quickly this is going to happen. Bank funding people are increasingly looking at possible structures but with less than a handful of AT1 deals out there – each of which is sporting tailor-made features – and at a time when the jury is still out on the buyside, my sense is that it’s going to take some time even with a tailwind of ultimate regulatory clarity and inter-agency collaboration that I don’t think will ever come.
The investor panel at the conference was almost wholly negative on the concept of securities that have coupon deferral or cancellation language and where there are still uncertainties over point of non-viability, who actually calls it and how and what happens to securities that get caught up in the maelstrom of bad news, deteriorating share prices, rapidly shrinking capital buffers and multi-notch pre-emptive ratings downgrade actions. Georg Grodzki at Legal & General Investment Management called them equity without the voting rights.
Part of the answer here is that a separate class of institutional buyers away from fixed-income funds is expected to pick up a lot of the slack in the hybrid market – retail won’t be the targeted buyer base – creating differentiation between buyers of senior and junior debt. Well, that’s the theory; it remains to be seen how, if and when that will happen.
The notion of bail-in no longer causes consternation or angst. That ship has long since set sail. It’s now an accepted part of the landscape. But senior debt investors still want to be protected by a layer of supplementary capital. The idea of Tier 3 or short-dated subordinated debt sitting below them still has currency as the need to differentiate between capital and funding remains paramount.