audit Participant 
of PRAXITY,  AISBL,
a Global Alliance
of Independent Firms
    ua  ru     Home Search Site map Send a message

20.04.2012: European banks trying to follow new capital requirements – at the expense of their clients

Now it is the moment when all European banks are doing their best to improve their positions to meet new capital requirements. That’s a positive moment, of course. The bad thing is that they are doing that at the expense of direct investors and capital markets. In its turn, this may lead to the market’s disruption.

During the last half a year large banks like BNP Paribas, Commerzbank, RBS, and UniCredit have proposed their clients to sell or exchange secured bonds and hybrid debt securities with a premium above their market values. Total value of those proposals is a multibillion amount. Steps like that will allow banks to convert debts into Tier 1 capital without having to turn into manipulations with shareholders capital.

Experts say that it is all happening because of the debt crisis in the Eurozone and the fact that the European Banking Authority (EBA) demanded from banks to increase their capital ratios to 9%. Not all banks in Europe were successful in overcoming consequences of the financial crisis of 2009, which is why they started to use various schemes with debt instruments to hide their losses.

Not all experts agree with that, however. For example, Andrew Burton, co-head of liability management at Credit Suisse, says that manipulations with debt market instruments are no longer seen as the instrument of problematic banks. The main reason for that is creation of capital, while the whole process brings more positive rather than negative effects if prices go down (because with lower prices for debt instruments, liability management is becoming the best instrument to raise capital).

At the same time, some other experts claim that such liability managements leads to negative consequences like shrinking of the bank capital market which is already half dead as a result of the debt crisis. Certain statistics shows that the volume of bank capital instruments has decreased by 20% since the beginning of the year. It is now 400 billion euro. Prices for debt instruments are, on the other hand, increasing, lowering attractiveness of liability management as the instrument to raise capital.

Despite all that, banks have repurchased debt instruments for more than 40 billion euro. Experts predict that in the nearest future those transactions will start to slow down because the pool of available bonds is also decreasing at a high speed.

The investors’ point of view is uncertain. On the one hand, they don’t like it when they get less than what they give to banks. This means that aforementioned offers made by large banks are in fact profitable for investors, if ratings of debt instruments are low, and there is no liquidity on the secondary market. On the other hand, they are ready for some losses (as a result of exchanging for a price lower than nominal) because they really want to decrease their involvement with the banking sector. That’s quite logical because today banks are just trying to cover their financial drains at the expense of their investors, leaving the latter nothing else to do.

 

Original source: Companion online

Also in the news
[23.12.2024]
Season's greeting from Kyiv Audit Group!

[28.04.2023]
Kyiv Audit Group prepared The Transparency Report for 2022

[07.07.2022]
Praxity Global Alliance Awarded Highly Commended for Association of the Year 2022

[29.04.2022]
Kyiv Audit Group prepared The Transparency Report for 2021

[23.12.2021]
Season's greeting from Kyiv Audit Group!

[11.11.2021]
It's a hat-trick! Praxity Global Alliance has regained its crown as the Association of the Year and gets triple award

[17.09.2021]
Kyiv Audit Group awarded Leader of the Branch 2021

[16.07.2021]
Happy Accountant's and Auditor's Day

[12.05.2021]
Happy Birthday - Kyiv Audit Group - 25th Anniversary

[21.04.2021]
Kyiv Audit Group prepared The Transparency Report for 2020