The next obstacle to banking reform is coming after the U.S. President Barack Obama and other leaders of the Group of 20 adopted by the Basel Committee on Banking Supervision new standards in South Korea last week, the bond market.
Regulators around the world, trying to protect the taxpayers have to foot the bill for bank bailouts to cushion future and major lenders in times of stress, now turn their attention to preventing the collapse of systemically important financial firms. Among the tools being considered are equity instruments that would require investors in bank debt to bear the cost of a rescue by slashing the value of its bonds or to convert the equity in a crisis.
That does not sit well with bond buyers bank high level of certainty prize that will be repaid in full. The 201 members of the world of Morgan Stanley Capital International Index Banks need investors to help refinance $ 3,000,000,000,000 in debt coming due at the end of next year.
"The regulators want flexibility and predictability that my investors want to seem irreconcilable," said John Hale, manager of investment affairs at the headquarters in London, the Association of British Insurers. "Basel III changes the rules of the game." UK insurers on managing 1.5 trillion pounds ($ 2.4 billion).
Merkel's Plea
The debate over whether the bondholders must suffer when lenders did not rise last week in Seoul, when German Chancellor Angela Merkel, said that the creditors should be more than the cost of bailing out banks and nations.
"There may be a conflict between the interests of world financial and political interests," Merkel said. "You can not always explain to our constituents that taxpayers have to be on the hook to certain risks, rather than those who do a lot of money taking these risks."
During the financial crisis, bond investors in New York, Lehman Brothers Holdings Inc., were not rescued, sending shockwaves through the global financial system after the firm declared bankruptcy in September 2008. Investors in bond issues high European lenders have paid the nominal value of their investments, as well as in Icelandic banks, according to an Oct. 15 note written by analysts at Morgan Stanley as credit strategist Carlos Egea.
Wholesale funding - funds that banks have to refinance bond investors, buyers of commercial paper and other debt providers - 32 percent of the European Bank for July, according Egea. The exact extent of borrowing from bond investors is not known because the information is not disclosed by all banks, he said. U.S. lenders holds 13 percent of its funding from wholesale markets since July, most of which consists of $ 1.7 billion in bonds, Egea said.
Ireland, Greece
Irish and Greek lenders, struggling to access the bond markets themselves are funding through the European Central Bank. Irish banks loans ECB raised by 7.3 percent in October to 130 million euros (177 billion U.S. dollars) a month earlier, according to the central bank of Ireland. Greek banks' dependence on the ECB is decreasing, the lenders provide a total of 92.4 million euros in October, compared with € 94,300,000,000 in the previous month.
G-20 adopted the rules of the Basel Committee to triple capital banks need to maintain high quality and liquidity requirements for the amount of cash and easy to sell the assets needed to meet liabilities short-term and long term. The committee, which comprises central bankers and regulators from 27 countries, delayed implementation of the rules of liquidity until 2015 at the earliest.
'Disappear'
"The Basel Committee can say he wants the issue over the long term to meet liquidity requirements, but that does not sit well with senior bond investors concerned to be eliminated if the bank that lends to the values, Oliver said Judd, a credit analyst in London at the investment unit of insurer Aviva Plc, which oversees about 250 million pounds.
In addition to adopting the Basel rules, leaders including Obama and Chinese President Hu Jintao said in a November 12 statement that banks and other institutions whose collapse could damage the financial system should have "greater capacity to absorb losses. "
The Basel Committee is working with the FSB to develop additional capital standards for banks larger than might include "debt rescue", which requires bondholders to take a default loss when the collapse of a lender .
Switzerland CoCos
The board, the G-20 established last year to find a way to control the largest financial institutions in the world after the worst financial crisis since the Great Depression, said November 12 that will determine which companies will be subject to stricter rules in the middle of next year and the amount of an additional cushion to be the end of 2011.
National regulators may select from a menu of options, including direct capital charges, rescue and contingent capital instruments, debt that automatically converts the population under stress.
Swiss regulators suggested in October that the country's two largest banks, UBS AG and Credit Suisse Group AG, both based in Zurich, consider issuing contingent convertible bonds, or coconut, the debt becomes capital when there is a triggering event such as a reduction of share capital of the issuer or its shares fall to a predetermined price.
"Would you invest?"
Banks transform the money they receive from the capital markets and depositors that make loans to companies and households. Bond investors that banks will pay more to offset the risks of contingent capital instruments, the former Bank of England deputy governor John Gieve said in an interview.
"Having a systemic banking model in which bonds have become a trigger pre-agreed course has not been tried before," said Gieve, is now a consultant with London-based hedge fund GLG Partners Inc., 3 November. "We know how difficult it will ensure that investors in this market. At first you might expect there would be a very big premium on the finances of traditional bonds."
The new securities convertible into capital that is considered in Switzerland have qualities that make it the capital of the debt, "said Roger Doig, Credit Analyst at Schroders Plc, Europe's largest publicly traded fund management company by market value .
"We as quasi-equity instruments, no debt," said Doig. "As such, it is only to participate in the coupon was high enough to provide income and equity."
"Balance Point"
Hale, of the Association of British Insurers, also says that the new instruments would not be attractive to bond investors.
"It might be more attractive to equity investors," said Hale. "I would not put it beyond the wit of the investment bankers who could create something acceptable, but if you were a bond investor, and who volunteered to be converted into capital or who have a haircut, which is invested? "
Regulators and bond investors may take six months to two years trying to find a "balance point of gold," said Douglas Elliott, a type of economics at Washington-based Brookings Institution and a former banker at JPMorgan Chase & Co ..
"You need a tool that will become protect banks and trust funds," said Elliott. "At the same time, you need a sufficiently low probability of conversion and of sufficient clarity about when the conversion would occur for bond investors are willing to buy securities without charging an exorbitant interest rate."
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