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French Banking Federation (FBF) Summary on CEBS Consultation Paper CP27 - Hybrid Capital Instruments

Core Content

The French Banking Federation (FBF) has provided detailed comments on the CEBS Consultation Paper CP27 regarding Hybrid Capital Instruments. The FBF represents over 450 commercial, cooperative, and mutual banks in France, including both French and foreign-based organizations. The comments focus on ensuring that the guidelines are consistent with the broader regulatory framework and do not negatively impact the Tier 1 fixed income market, which is a critical source of capital for banks, especially for cooperative and mutual banks.

Main Views

Support for Harmonization

• The FBF supports CEBS's objective to harmonize the treatment of hybrid instruments across Europe.
• However, it emphasizes the need for CEBS to await decisions from the Basel Committee before finalizing the guidelines, as the current understanding of the Tier 1 fixed income market is insufficient.

Flexibility and Investor Confidence

• Banks require more flexibility and stable rules to manage capital efficiently in volatile markets.
• The FBF is concerned that overly prescriptive guidelines could reduce investor confidence and potentially lead to the disappearance of the Tier 1 fixed income market.

Key Issues and Recommendations

Question 1: Incentive to Redeem

• Clarity of Guidelines: The FBF believes the definition of "moderate step up" should be adjusted to reflect current market practices, including the use of mid-swap rates.
• Redemption Limits: Instruments with an incentive to redeem should be allowed in the 35% limit if not called, rather than being restricted to the 15% limit.
• Cap on Conversion Ratio: The FBF argues that a cap of 150% on the conversion ratio for stock settlement is too restrictive and could deter investors. It suggests a cap on potential dilution instead.

Question 2: Buy Back

• Clarity of Guidelines: The FBF considers the current guidelines on buy-backs to be unclear and overly prescriptive.
• Flexibility in Buy-Backs: It recommends removing the five-year restriction and mandatory replacement requirement, as these could be misused by banks during periods of declining credit quality.
• Time Limit for Consent: A one-month time limit for prior regulatory consent is suggested.
• Solvency Data Requirement: The FBF proposes reducing the timeframe for solvency data from 3 to 5 years to a maximum of 3 years.

Question 3: Dividend

• Clarity of Guidelines: The FBF finds the guidelines on dividend pushers and stoppers to be less investor-friendly than current rules.
• Impact of Restrictions: It warns that the restriction on dividend pushers and stoppers could increase the cost of hybrid capital and reduce investor interest.
• Proposed Amendments: The FBF suggests that the "major part" definition should be removed and that regulatory intervention should be limited to situations where the institution risks breaching capital requirements or experiencing major adverse changes.

Question 4: ACSM (Adjustable Coupon Securities Mechanism)

• Clarity of Guidelines: The FBF believes the definition of "without delay" should be deleted or clarified.
• Flexibility in ACSM: It supports the idea that banks should have full discretion over the payment of coupons, subject to dividend pushers and stoppers.
• Timing of ACSM: The FBF recommends that the timing of ACSM should be left to the discretion of the issuer, possibly within a 3-year window, to align with rating requirements.

Question 5: Loss Absorbency

• Clarity of Guidelines: The FBF finds the guidelines on loss absorbency in going concern to be broadly clear and principles-based.
• Recommendations: It recommends removing paragraphs 114 to 117, as they are overprescriptive and may deter investors. The FBF also argues that conversion or write-down mechanisms are unnecessary and counterproductive.
• Impact on Recapitalization: The FBF warns that mandatory conversion mechanisms could lead to significant dilution and negatively impact recapitalization efforts.

Question 6: Limits

• Clarity of Guidelines: The FBF believes the assignment of hybrid instruments to one of the three capital limits should be clarified.
• Mandatory Convertibility: It does not support the requirement to define "emergency situation" in the contractual terms of hybrid instruments, as it may limit flexibility and create unintended consequences.
• Confidentiality: The FBF cautions against disclosing the terms of higher regulatory limits, as this could compromise confidential discussions between institutions and regulators.

Question 7: SPV (Special Purpose Vehicle)

• Clarity of Guidelines: The FBF agrees that hybrid instruments issued through a SPV should be treated the same as direct issues for prudential purposes.
• Consistency: It supports the idea of consistent treatment of SPV-issued hybrids to ensure a level playing field.

Conclusion

The FBF advocates for a balanced, flexible, and investor-friendly approach to the regulation of hybrid capital instruments. It emphasizes the importance of maintaining the Tier 1 fixed income market and aligning with the Basel Committee's decisions. The FBF's recommendations aim to enhance the attractiveness of hybrid instruments while ensuring they meet the necessary prudential requirements.