Basel tightens rules on bank hybrid debt

GLOBAL bank regulators yesterday laid out rules to make clear holders of hybrid bank debt will take losses if a lender becomes insolvent, so that taxpayers aren’t left to foot the bill.

One of the biggest controversies of the financial crisis was how holders of subordinated bank capital debt escaped liability for bank failures even when public funds were being used to shore-up faltering institutions.

“The Basel committee today issued minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss,” the committee said.

The global banking watchdogs’ rules were in line with last August’s draft proposal. The committee will publish a keenly awaited draft later this year for dealing with a bank’s bonds when capital levels move below minimum requirements but the lender’s problems are not yet terminal.

“Tier 2 capital instruments [mainly subordinated debt], and in some cases Tier 1 instruments, did not absorb losses incurred by certain ... banks that would have failed had the public sector not provided support,” the committee added.