Morrison & Foerster News Bulletin: The Minimum “Bail-in” Criteria for Regulatory Capital

Morrison & Foerster News Bulletin: The Minimum “Bail-in” Criteria for Regulatory Capital


Further to the 16 December 2010 publication of the final Basel III rules, as reported in our client alert "Basel III: The (Nearly) Full Picture," on 13 January 2011 the Basel Committee on Banking Supervision ("BCBS") announced the minimum requirements to ensure that all regulatory capital instruments are capable of fully absorbing losses at the point a bank becomes non-viable. In its December 2010 papers, BCBS stated that it would be developing more detailed eligibility criteria for contingent capital to address issues of loss absorbency at the point of a bank's non-viability. Therefore, the minimum requirements set out in the 13 January 2011 paper are additional to the criteria for Tier 1 and Tier 2 capital instruments set out in its December 2010 papers.

BCBS incorporates into the new requirements all of the specific proposals (the "gone-concern" proposals) set out in its consultative document on the matter, which we discussed in our client alert dated 25 August 2010.

We summarise the key requirements below.

Post-trigger Instrument

Any compensation to the instrument holders as a result of the write-off must be (i) paid immediately and (ii) in the form of common stock (or its equivalent in the case of non-joint stock companies). The issuing bank must maintain all prior authorisations necessary under applicable national company laws and its articles of association (e.g., authorised share capital) in readiness for this contingency.

BCBS has not proposed a single method of calculating the number of shares to be issued upon such write-off or conversion. Based on its consultative document, it appears that BCBS intends that each country should be free to impose a suitable method in that country's own national context.

Please click on the Attachment: link at the top of the post to view or download the entire article

For more legal analysis in financial industry regulation, visit Morrison & Foerster LLP's online resources. If you are a subscriber, watch for our upcoming Dodd-Frank area of law page.

© Copyright 2011 Morrison & Foerster LLP. The views expressed in this article are those of the author only, are intended to be general in nature, and are not attributable to Morrison & Foerster LLP or any of its clients. 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.