Basel, Switzerland (People Port)- The Basel Committee issued minimum requirements yesterday, to ensure all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss.
These requirements were endorsed by the Committee's oversight body, the Group of Governors and Heads of Supervision, at its 10 January meeting. Members agreed that under certain conditions, including a peer review process and disclosure, the proposal's objective could be met through a statutory resolution regime if it produces equivalent outcomes to the contractual approach.
During the financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity and other forms of Tier 1 capital. While this had the effect of supporting depositors it also meant that Tier 2capital instruments (mainly subordinated debt), and in some cases Tier 1 instruments, did not absorb losses incurred by certain large internationally-active banks that would have failed had the public sector not provided support.
In order for an instrument issued by a bank to be included in Additional (Example: non-common) Tier 1 or in Tier 2 capital, it must meet or exceed minimum requirements set out in the attached annex. These requirements are in addition to the criteria detailed in the Basel III capital rules that were published in December 2010.
Annex
Minimum Requirements To Eensure Loss Absorbency At The Point Of Non-Viability Scope and Post Trigger Instrument
1. The terms and conditions of all non-common Tier 1 and Tier 2 instruments issued by an internationally active bank must have a provision that requires such instruments, at the option of the relevant authority, to either be written off or converted into common equity upon the occurrence of the trigger event unless:
a. The governing jurisdiction of the bank has in place laws that (i) require such Tier 1 and Tier 2 instruments to be written off upon such event, or (ii) otherwise require such instruments to fully absorb losses before tax payers are exposed to loss.
b. A peer group review confirms that the jurisdiction conforms with clause (a); and
c. It is disclosed by the relevant regulator and by the issuing bank, in issuance documents going forward, that such instruments are subject to loss under clause (a) in this paragraph.
2. Any compensation paid to the instrument holders as a result of the write-off must be paid immediately in the form of common stock (or its equivalent in the case of non-joint stock companies).
3. The issuing bank must maintain at all times all prior authorisation necessary to immediately issue the relevant number of shares specified in the instrument's terms and conditions should the trigger event occur.
Trigger Event
4. The trigger event is the earlier of: (1) a decision that a write-off, without which the firm would become non-viable, is necessary, as determined by the relevant authority; and (2) the decision to make a public sector injection of capital, or equivalent support, without which the firm would have become non-viable, as determined by the relevant authority.
5. The issuance of any new shares as a result of the trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted.
Group Treatment
6. The relevant jurisdiction in determining the trigger event is the jurisdiction in which the capital is being given recognition for regulatory purposes. Therefore, where an issuing bank is part of a wider banking group and if the issuing bank wishes the instrument to be included in the consolidated group's capital in addition to its solo capital, the terms and conditions must specify an additional trigger event. This trigger event is the earlier of: (1) a decision that a write-off, without which the firm would become non-viable, is necessary, as determined by the relevant authority in the home jurisdiction; and (2) the decision to make a public sector injection of capital, or equivalent support, in the jurisdiction of the consolidated supervisor, without which the firm receiving the support would have become non-viable, as determined by the relevant authority in that jurisdiction.
7. Any common stock paid as compensation to the holders of the instrument must be common stock of either the issuing bank or of the parent company of the consolidated group (including any successor in resolution).
Transitional Arrangements
Instruments issued on or after 1 January 2013 must meet the criteria set out above to be included in regulatory capital. Instruments issued prior to 1 January 2013 that do not meet the criteria set out above, but that meet all of the entry criteria for Additional Tier 1 or Tier 2 capital set out in Basel III: A global regulatory framework for more resilient banks and banking systems, will be considered as an Instrument That No Longer Qualifies As Additional Tier 1 Or Tier 2 and will be phased out from 1 January 2013 according to paragraph 94(g).
Other Changes:
On Monday:
BIS Board Appoints Masaaki Shirakawa As Vice-Chairman
Mr Shirakawa has been on the Board since May 2008 and is Chair of the BIS Asian Consultative Council. His appointment as Vice-Chairman is for a period of three years from 10 January 2011.
Mr Shirakawa succeeds Hans Tietmeyer who had held the post from 1 July 2003 until he stepped down as a BIS director at end-December 2010. The BIS Board expressed their gratitude to Mr Tietmeyer for his eminent services to the BIS.
José De Gregorio Appointed Chair Of The BIS Consultative Council For The Americas
The Board of Directors of the Bank for International Settlements (BIS) announces the appointment of José De Gregorio as Chair of the BIS Consultative Council for the Americas (CCA). Mr De Gregorio is Governor of the Central Bank of Chile.
Mr De Gregorio's appointment is for a term of two years from 10 January 2011. He succeeds Henrique de Campos Meirelles, Governor of the Central Bank of Brazil until end-December 2010, as CCA Chair. The BIS Board and CCA Governors thank Mr Meirelles for his leadership during his time as Chair.
The CCA comprises the Governors of the BIS member central banks in the Americas region 1 . It was established in May 2008 to facilitate communication between the members of the BIS in the Americas and the Bank's Board and Management on matters of interest and concern to the central bank community in the region. The BIS Representative Office for the Americas provides the Secretariat for the CCA.
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