Basel spells out new limits of hybrids

Regulators will have the right to determine when hybrid capital instruments such as preferred shares and subordinated debt must either be written off or converted into ordinary shares under rules published by the Basel Committee on Friday.

The new rules apply to "internationally active banks" and APRA, may, in turn, adopt them for Australia's banks. The new rules apply from 2013 to hybrids securities issued from that time.

Hybrids issued before 2013 that do not meet the new tests will be phased out over 10 years.

Public sector rescues of banks and insurers offshore during the financial crisis of 2008 did not always lead to losses by investors in hybrid capital securities in spite of the actual or near insolvency of banks at the time. One aim of the present regulatory reform agenda is to correct that flaw.

The Basel Committee on Friday said that a trigger event that allows a regulator to convert hybrids to ordinary shares would be either "a decision that a write-off, without which the firm would become non-viable, is necessary" or a decision to make a public sector injection of capital, or equivalent support, "without which the firm would have become non-viable".