Defining Hybrid Capital

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In the current environment of bank recapitalisations, it has never been more important for banks to know what

capital-raising tools are at their disposal. However, despite the implementation of Basel II in Europe by the

introduction of the Capital Requirements Directive (“CRD”), a common approach to the definition and treatment

of eligible hybrid capital has eluded European member state regulators.

This in turn means that a level playing field for European banks as they compete for new capital is some way off.

One of the main purposes of the European Commission’s recent Public Consultation on possible changes to the

CRD is to provide clarity and uniformity as to the treatment of hybrid capital. It builds on the 1998 public

statement on hybrid Tier 1 capital by the Basel Committee on Banking Supervision, known as the Sydney Press

Release, and follows on from the “Proposal for a common EU definition of Tier 1 hybrids” published in April 2008

by the Committee of European Banking Supervisors (“CEBS”), which was commissioned by the European Commission on this subject.

The proposed changes to the CRD are to introduce criteria that need to be fulfilled by hybrid capital instruments

in order for these instruments to be eligible as Tier 1 capital of credit institutions. The criteria focus on three main eligibility criteria of hybrid capital instruments - permanence, flexibility in payments and loss absorption.

In addition to establishing these criteria, the proposed changes also set quantitative limits on the use of different

types of hybrid capital instruments towards satisfying a credit institution’s Tier 1 capital requirements.

The proposed changes also provide for a “grandfathering” clause with regard to instruments already issued and

prescribe a transitional period before compliance with the amended CRD provisions will be mandatory for European credit institutions.

Please see full News Bulletin for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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