“The big four banks are trying to convince the prudential regulator to reconsider its proposal to force them to raise an additional $75 billion of so-called Tier II bonds to meet “too big to fail” capital requirements.” ~ Jonathan Shapiro, Australian Financial Review
What is APRA thinking? They are deluding themselves if they think that Tier II bonds will shore up capital.
Imagine the panic in financial markets if bond-holders take a haircut. It could lead to a Lehman-style meltdown.
The same applies to Tier I hybrids which banks are happily flogging to retiree investors. Convert their investments into near worthless bank scrip after a financial meltdown and nan and pops will turn up in Melbourne Docklands and Darling Harbour, demanding their money back. I suspect regulators would rather face Ned Kelly.
The only true capital is Common Equity (CET1). Anything else is simply putting lipstick on the pig.
Aussie taxpayers are being duped if they believe that they are covered if there is a financial meltdown and that banks carry enough capital to absorb potential losses.
I would rather see legislation that calls it like it is and provides for government to backstop the banks in the event of a crisis. But at a price that makes their eyes water, as the Swedes did in 1992. It’s the best way to keep the banks honest.