Silent capital, backdoor Basel | FT Alphaville

Silent capital, backdoor Basel

Two months after Basel III formally landed and the lobbying has intensified.

According to Euro Intelligence — citing an FT Deutschland story — it’s not the banks pushing for some tweaks, but the sovereigns guaranteeing them. Quite a reversal.

From the Thursday report:

Germany pushes for recognition of silent capital through the backdoor

Germany is seeking to circumvent the Basel III agreement by pushing the European Commission to ignore what has been agreed in Basel to suit Germany’s own interest. Germany lost out in the Basel III negotiations, because the agreement would force German banks to raise large amounts of real capital. The German government is now pushing the European Commission to draft a directive to recognise silent capital – a form of preference shares – as part of a bank’s core capital, independent of the legal status of the banks. FT Deutschland says that the real danger about Basel III is that each jurisdiction will end up removing unwelcome bits of the agreement to suit its own competitive interests. The Basel III proposals envisaged that only equity and retained earnings count as core tier 1 capital, while Germany wanted to recognise silent capital as well. Without the use of silent capital, Germany’s morose banking system would implode. The entire Landesbanken sector would disappear. Large parts of the German banking system are not merely undercapitalised. They are effectively un-capitalised.

(H/T Marcus Ashworth at Espirito Santo)

Silent capital is the stuff Wolfgang Münchau once described as “essentially a hybrid debt security with bond-like characteristics that entitle the holder to an interest rate cash flow.” It counts as Tier 1 under current Basel rules, but should be stripped out of the category under Basel III definitions, as part of regulators’ war on hybrid capital.

Most of the German government’s capital injections into the bailed-out Landesbanks came in the form of the silent stuff — not equity, or any of the more loss-absorbent, Basel III-friendly, types of capital. Small wonder they’re lobbying.

Related links:
The German Trump – FT Alphaville
Basel III compromise on the cards – Euro Intelligence
Was “Basel III” bringt: Mehr Eigenkapital für die Banken –