The lack of clarity as to how the bail-in regime will function with NVCC creates uncertainty for potential investors in NVCC instruments because after their instruments are converted into common shares, their position may be significantly diluted further if the bail-in debt trigger is breached. In contrast with other capital innovations over the years, there is no "first mover advantage" for the issuer of NVCC instruments. In fact, it is widely expected that the first issuances of NVCC instruments will require a significantly higher dividend coupon or interest rate to compensate investors for the perceived additional risk over existing instruments.
Over time, it is expected that this risk premium will decrease as the market becomes more reassured that the possibility of the trigger event occurring is remote.
Therefore, no economic incentive exists for any institution to be the first to spend time and money developing and marketing this new form of capital. There was some hope in the industry that OSFI might be willing to revisit the contractual NVCC requirements given the refusal of other major jurisdictions most notably the United States to impose a contractual NVCC requirement and the linkage between NVCC and bail-in debt which is expected to be imposed in Canada and other jurisdictions on a statutory basis.
The industry continues to have serious concerns about the possibility of market manipulation and death spirals created through the terms and conditions of NVCC instruments. Ideally a single structure would be adopted by the industry, which would allow for better understanding and transparency with investors. In our view, it is unlikely that there will be any issuances of NVCC instruments until at least the fall of this year and possibly not until We also anticipate that, with the generous phase-out provisions for the existing non-conforming capital and the increased focus on common share equity, it will be a long time before the NVCC instruments will come close to matching the amount of non-common capital outstanding today.
Capital instruments issued after September 12, that do not meet one or more of the Basel III criteria for regulatory capital other than the NVCC requirement were excluded from regulatory capital effective January 1, Click here to download the PDF.
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To discuss these issues, please contact the author s. This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
Basel III | Insights | Torys LLP
For permission to republish this or any other publication, contact Janelle Weed. All rights reserved. Print Share Email. These rules could be tougher than those imposed in Europe and elsewhere in the world. In totality, the combined rules and the current economic reality are forcing banks to rethink their business models, which clients they serve, which services they provide and in which geographies they operate.
Banks will try to increase their prices and fees, change their business mix towards those areas needing less capital and generating higher returns, while focusing on customers who need less capital and give the bank more business. In many countries, companies with strong credit ratings will still enjoy liquidity in the bank markets and bond markets.
Others, such as some smaller-to-mid-sized companies may suffer. Banks in the US and Europe have already started to be more selective in their clients and the products and services they provide.
Further, the combination of the weak economy, increased regulatory charges and concerns over impending regulations has made a number of capital markets less efficient because of lower liquidity. In the US bond markets, for example, inventories of primary dealers have fallen 75 per cent from their peak. From a corporate perspective, it adds up to a reduced set of financial services that cost more. Although there are some factors, such as an increased investment in information technology, that can help lower costs, it is likely there will remain less flexibility in financial services.
Responses from banks will include investing in technology to provide more automation in order to drive down costs, while companies will look to emerging non-bank providers of financial services.
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