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Thursday, 2 April 2009

A poor joke from the FSA?

Various sources report that "European Banks" (read mostly RBS and LLoyds and a French bank or two) are buying back their subordinated debt, which is currently trading at a substantial discount. This say the reports is a "good thing" because the discount, typically 25% of the face value of the liability, can be booked as a profit and hence enhances Tier 1 capital.

But hang on a minute, the buyback extinguishes 100% of the face value worth of Tier 2 capital, because these so-called equity-debt hybrids were previously counted as part of the banks' regulatory capital.

"Oh no", say the regulators (well the FSA mostly), "we don't count that hybrid paper any more. Only the real McCoy equity like the stuff we keep telling the banks to raise and then ponying up ourselves really counts."

"But hang on", the private shareholders might well say, "this sub debt looks as though it is sort of equity-ish, because it is still out there and trading at a discount to face value. We have paid over the odds for hybrid debt for the last 15 years on the understanding that it counted as part of our regulatory capital, and now after all these years you tell us that all extra cost was pointless? How do you explain that?"

"Err, um... April Fool?!?!"

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