Expand / Investors have very bad memory when central banks offer support.
The junior bank debt rallied strongly since Mario Draghi, President of the European Central Bank, offered his support last week. UBS sold this week the first bonus additional capital Tier 1, with a demand that exceeded five times the size of the deal.
The risk posed is that excessive support for the asset class mine the purpose of this form of bank capital: absorb losses in times of stress. This reinforces the argument that the only capital that deserves the name is pure capital.
These junior bonds, sometimes called convertible quotas or CoCos, suffered strong sales in January and February before the fear that some banks would be forced to suspend coupon payments due to their weak capital positions. Deutsche Bank was one of the most affected, but the debt issued by well-capitalized banks like UBS was also affected.
Banks need to reduce or eliminate the coupons when their capital falls below the minimum requirements . They should also cut or eliminate dividends to shareholders and bonuses in this situation.
But in the case of bondholders, they lose a coupon, do it forever, while shareholders and bankers and executives can charge more in future years, which seems unfair. Within the ECB, some people consider it as one of the factors of recent sales. Therefore, Draghi last Thursday showed a report of the European Commission, which establishes two forms of aid.
The first theory is uncontroversial and equate the eurozone with British regulators. However, it could reduce all purposes the capital requirements of banks in the eurozone, against the efforts of recent years.
All supervisors require banks to hoard more capital than their risk models suggest that it is necessary to deal with not reflected risks, such as the models can be wrong
But in the UK this addition of supervisors is divided into two parts. a severe requirement based on specific rules, which determines whether you can pay dividends, bonuses and coupons, and other softer and not disclosed to the risks that are difficult to quantify. The latter is important in the stress test, but can be infringed without immediate consequences.
In the eurozone, the two are grouped into a single severe target. But this treatment is considered harder for eurozone banks, has not translated on requirements of higher capital compared to their British rivals.
The second suggestion of the Commission seems more controversial . He proposes giving coupons for a different junior bonds dividends to the bondholders do not lose payments as quickly as shareholders treatment.
This raises a difficult situation. First, some bankers also push for the case of different bonuses form. The argument is that these are intended to encourage people who earn money, without which any bondholder or shareholder would receive a penny.
Second, such a change enturbiaría the idea that this kind of junior bonds are really capital. In the latest crisis, similar equity was a poor substitute for real capital. Could not absorb losses and led to larger public bailouts
The truth is that volatility and the higher cost of these bonds today are the price guarantees that will fulfill its role in future crises. If you do not behave as pure or suffer as capital capital we can bet that they are not.
Read the original article in The Wall Street Journal How the ECB Wants to Help Risky Bank Bonds
More information www.europe.wsj.com
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SPAIN: How wants to help the ECB to bank risk bonds
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