Q.why does the bank need to improve its capital base?
A.Global regulators are cracking down on hybrid capital, so the bank is shedding its hybrid capital in favour of stronger equity-based capital. Under Basel III, banks will no longer be allowed to consider hybrid capital as Tier 1 – the core funds that the lender might need during a financial crisis.
Q.what’s wrong with hybrid capital?
A.In short, it failed to act as an adequate buffer during the financial crisis. Hybrid capital has characteristics of debt and equity, making it stronger than pure debt. Interest payments can get suspended during “bad” times, yet the stresses seen in the past few years could prove too much.
Q.has Commerzbank done enough?
A.Not yet. The bank has certainly boosted its strength, although a €640m increase is not huge for a big lender. Its new Tier 1 capital ratio will be upped to around 10.25 per cent, up from 9.89 per cent. There could be further capital optimisation to come.