On August 16, 2012, speaking at a webinar hosted by the Global Association of Risk Professionals (GARP), three panellists gave a perspective on the changes Basel III would wreak on capital instruments. Click here for Part 1.
The second speaker, April Frazer, Director of Client Solutions Group at Wells Fargo, gave an overview of the impact of the US Basel III proposal on market dynamics. Due to regulatory limitations that she is subject to as a member of a financial institution, her talk is not reported on here.
Steve Sahara, Global Head of DCM Solutions and Hybrid Capital, Crédit Agricole Corporate and Investment Bank, was the third and final speaker. Across the Atlantic, it’s the same rules, but a different Basel game, he said, drawing a memorable analogy with a football versus soccer comparison. He summarized how the Basel III guidelines have been translated in the European environment. European regulators are working on optimizing a multi-component capital securities structure, requiring a balance between rating agencies, regulators, accounting (GAAP and IFRS), tax, and legal domains. The aim, he said, is to develop one harmonized rulebook under CRD4.
“Despite complexity, we have seen successful issuance in clever and creative ways,” said Sahara. He gave specific examples of eight new securities at leading financial institutions. Sahara outlined three types of Tier 1 structuring alternatives and gave mechanisms and considerations for each: (i) permanent write-down, (ii) temporary write-down with discretionary write-up, and (iii) conversion to common equity. He covered Tier 2 structuring alternatives, with and without specification of the point of non-viability.
All told, Sahara said, Basel III involves a risk paradigm shift, with more investor risk factors than before. New instruments must be developed carefully. It’s challenging, but there is indeed a market for these new securities, he noted. It is worth it. ª
The webinar presentation slides can be found at: http://event.on24.com/view/presentation/flash/EventConsoleNG.html?uimode=nextgeneration&eventid=501727&sessionid=1&username=&partnerref=&format=fhaudio&mobile=false&flashsupportedmobiledevice=false&helpcenter=false&key=BB2BCDA3C03C38EFC8833D06AC6AAA3E&text_language_id=en&playerwidth=1000&playerheight=650&overwritelobby=y&eventuserid=67720035&contenttype=A&mediametricsessionid=54710146&mediametricid=929886&usercd=67720035&mode=launch#