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
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
We summarise the key requirements below.
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 lexis.com 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.