The Basel Committee on Banking Supervision issued minimum requirements Thursday for global banks’ Tier 1 and Tier 2 capital to ensure loss absorbency in the event of a crisis.
The committee’s oversight body, the Group of Governors and Heads of Supervision, endorsed requirements at its Jan. 10 meeting to ensure that an internationally active bank has provisions that would require such noncommon instruments to either be written off or converted into common equity in the event of a trigger.
During the financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity and other forms of Tier 1 capital, the committee said.
While this had the effect of supporting depositors it also meant that Tier 2 capital instruments, and in some cases Tier 1 instruments, did not absorb losses incurred by certain large internationally active banks that would have failed had the public sector not provided support.
The committee said that in order for an instrument to be included as additional Tier 1 or as Tier 2 capital it must meet or exceed minimum requirements. Instruments issued on or after Jan 1, 2013, would be required to meet those criteria. All those instruments issued before that date, but conforming to the criteria under Basel III, would be phased out starting Jan. 1, 2013.
