Europe’s painful phase-out of old-style capital instruments

Matthew Attwood in Financial News reports on the difficulties that European banks face when replacing pre-crises capital instruments by Basel III compliant instruments.

This was a small disaster waiting to happen, as Bazel III rules made it clear, pretty much from the outset, that it wanted to see the back of “old-style” instruments sooner rather than later.

See page 29 of the Bazel III rules published December 2010, expecting a date of coming into force of 1 January 2013, now postponed:

For an instrument that has a call and a step-up between 12 September 2010 and 1 January 2013 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in Tier 1 or Tier 2, it will be fully derecognised in that tier of regulatory capital from 1 January 2013.

This is publicly known information for 2.5 years now, therefore, I am a bit surprised by the surprise.

However, my guess is that those who know don’t speak, but instead trade on the knowledge aquired by having done homework some years ago.