An international group of banking regulators on Tuesday clarified that some new financial instruments may be counted as Tier 1 capital.
In an interpretation of the 1988 capital accords, the Basel Committee on Banking Supervision said so-called special purpose vehicles and step-ups are acceptable Tier 1 components. These instruments permit foreign banks to issue preferred stock for their subsidiaries in U.S. dollars and at terms favorable to investors.
The interpretation is unlikely to have much effect on U.S. banks, which generally do not use these instruments. "This is mostly directed at foreign institutions," said Richard Whiting, general counsel at the Bankers Roundtable. "It is an expansion of what types of instruments may be treated as capital."
The Basel Committee imposed numerous restrictions on the use of these capital instruments. They may not exceed 15% of Tier 1 capital, must be easily understood by investors, and must be disclosed publicly.
The new interpretation is not effective unless adopted by a bank's home country supervisor.