The composition of the capital of Kiwibank, and thus the sufficiency of the bank's capital, has been thrown into confusion by disclosures yesterday from the bank over the compliance, or otherwise, of its hybrid capital instruments with national rules.Kiwibank late on Tuesday left its debt investors in the dark on the reasons for a last minute decision to renege on plans to borrow A$175 in ten year senior, unsecured debt. Investors were due to settle with the bank yesterday.The bank shed some light, but not a lot, on the matter early yesterday in a pair of statements, the second of which provided an assurance "the [three New Zealand public sector] shareholders will ensure that the bank will be in no worse capital position."Seemingly as recently as this week, Kiwibank's management and board learned of the "preliminary decision in respect of capital issuances from Kiwibank to Kiwi Capital Funding Limited" by the country's banking regulator, the Reserve Bank of New Zealand.In the first of two statements yesterday Kiwibank said it had "been informed by the Reserve Bank of New Zealand that the RBNZ has formed a preliminary view, which they have yet to finalise, that the Kiwibank Bonds do not comply with certain requirements" of the capital adequacy framework.The bank has NZ$150 million in subordinated bonds and NZ$107 million in capital notes on issue, the former dating from 2012 and the latter from 2014.As at December 2016, NZ$208 million of the subordinated debt qualified as tier 2 capital for capital adequacy calculation purposes.Banking Day's efforts to clarify with the RBNZ on when it reached its views on Kiwibank's hybrids saw the central bank pointing us back to the bank's minimalist statements.Lindsay Skardoon, principal at Spectrum Asset Management in Sydney, sketched out ramifications for the bank among its debt investors."This is a real mess [and] could be very damaging for the issuer," Skardoon wrote in an email."The next [bond] issue could go way above previous levels. It will take a lot of PR to fix this. "There could be legal ramifications as well. Traders and funds could have sold bonds to hedge the allocation. Those bonds are now short with no asset on the other side. "So some traders could have unintentionally broken limits, and they are short, swap contracts could have been entered into. The more you delve the worse it could become. I am optimistic the worst won't happen, but who knows."The bank explained the issue as relating to "a technical interpretation matter and in Kiwibank's view does not in any way affect the quality of the capital represented by the Kiwibank Bonds."