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Barclays Bank plc Response to CEBS Consultation Paper CP27 Summary

Core Content

Barclays Bank plc and Barclays Capital have responded to the European Banking Authority's (CEBS) Consultation Paper (CP) 27, which outlines implementation guidelines for hybrid capital instruments. The response highlights the importance of a level European playing field for these instruments and emphasizes the need for clarity, flexibility, and transparency in regulatory frameworks.

Main Views and Key Points

General Comments

• Support for Level Playing Field: Barclays supports CEBS in providing guidelines for hybrid instruments, believing that a level playing field is essential.
• Disclosure Importance: They stress the need for clear and transparent disclosure of hybrid instrument features and statutory/contractual mechanisms to ensure stakeholders are well-informed.
• Principles-Based Regulation: Barclays advocates for a principles-based approach, which allows for flexibility while maintaining regulatory consistency across Europe.
• Concerns on Permanence: They argue that the emphasis on the permanence of capital is excessive and may hinder market access for institutions in need of hybrid instruments.
• Regulatory Flexibility: They believe that some flexibility is necessary due to the differing legal, tax, and accounting regimes across European countries.

A. Permanence

1.1 Incentive to Redeem

• Definition Ambiguity: The term "incentive to redeem" is not clearly defined, leading to potential misinterpretations.
• Market Examples: Recent market conditions show that instruments with step-ups may be more likely to be called, depending on timing and credit spreads.
• Recommendation: Barclays suggests that CEBS should consider a different solution for defining "moderate" incentives to redeem, possibly through BCBS.

1.2 Conversion Ratio Cap

• Impact of Cap: A cap of 150% on the conversion ratio may reduce the incentive to redeem.
• Evidence: Lloyds and RBS instruments with principal stock settlement mechanisms are trading at higher prices, indicating a strong expectation of redemption.
• Recommendation: Barclays encourages CEBS to review the cap in the future, considering market cycles and real-world testing.

B. Flexibility of Payments

2.1 Buy-Backs

• Clarity Needed: The guidelines on buy-backs are not sufficiently clear.
• Voluntary Nature: Buy-backs are voluntary for investors, unlike redemptions or calls.
• Discounted Instruments: Buy-backs of instruments tendered or exchanged at a discount may be justified for creating core tier 1 capital.

2.2 Buy-Backs Before Five Years

• Potential Justification: Buy-backs may be necessary when banks reduce risk-weighted assets or improve profitability.
• Prudential Concerns: Some CEBS members are concerned that allowing early buy-backs could compromise the permanence of hybrid instruments and create incentives for capital depletion during credit stress.

2.3 Repurchased Instruments Limit

• Limit Concerns: A 5% limit on repurchased instruments reduces flexibility for capital management.
• Market Impact: Such a limit may not generate sufficient core tier 1 benefits, especially in the context of the 2008/9 crisis.

C. Loss Absorbency

5.1 Pari Passu Ranking

• Market Certainty: Barclays supports the idea that instruments within the same bucket should rank pari passu to avoid uncertainty and confusion.
• Transparency: They emphasize the need for more transparency in instrument terms to establish clear rankings.

5.2 Loss Absorbency Definition

• Agreement with Definition: They agree with the definition of loss absorbency in going concern as stated in paragraph 105a).
• Concern with Restrictiveness: They find paragraph 105b) unduly restrictive and suggest that it should not prevent the auditor from reflecting unexpected losses or loss of creditor confidence in the going concern assessment.

5.3 Flexibility for Loss Absorbency Mechanisms

• Innovation and Flexibility: Barclays supports a principles-based approach to allow innovation in loss absorbency mechanisms.
• Examples of Mechanisms: They suggest that write-downs and conversion into equity are just examples and should not be considered exhaustive.
• Negative Consequences: They highlight potential negative impacts, including loss of tax deductions, capital gains volatility, and complexity under IFRS.

5.4 Ranking in Liquidation

• Pari Passu Preference: Barclays prefers that all hybrids within the same bucket rank pari passu to each other in liquidation to avoid confusion and uncertainty.

D. Limits

6.1 Assignment to Limits

• Dated Instruments: Instruments within the 15% limit, such as 30-year dated instruments with no call option, may be difficult to market.
• 35%-50% Bucket: CEBS recommends no call options for instruments in this bucket, which could lead to mandatory conversion upon trigger points.
• Transparency and Consistency: They stress the need for transparency in trigger points and consistent application of limits across jurisdictions.

6.2 Mandatory Convertibles

• Definition Clarity: There is confusion around the term "mandatory convertible" as it may be misinterpreted.
• Accounting and Regulatory Treatment: Mandatory convertibles should not be conflated with capital instruments that are converted under emergency situations.
• Accretion Concerns: Accretion in the case of convertibles leads to double counting, which is inefficient for capital management.
• Step-Up Calculation: They recommend that step-ups for mandatory convertibles and instruments with warrants be calculated based on the "unsweetened" or implied gross credit spread, not the reduced coupon.

E. Hybrid Instruments Issued through SPVs

• Indirect Issuance: Barclays has no specific comments on the issuance of hybrid instruments through SPVs.
• Call for Clarification: They encourage further clarification on the transitional measures for hybrid instruments, particularly regarding the lack of additional guidance on the CRD text and potential arbitrage.

Summary of Key Recommendations

• Clarity on Incentive to Redeem: Define "moderate" incentives to redeem more clearly.
• Flexibility on Buy-Backs: Allow buy-backs before five years under prudential conditions.
• Transparency in Instrument Terms: Improve clarity on pari passu and junior ranking instruments.
• Avoid Double Counting: Consider filters to remove accretion from interest payments.
• Revisit Conversion Ratio Cap: Review and possibly adjust the 150% cap on conversion ratios.
• Clarify Mandatory Convertibles: Use a different term to avoid confusion with capital instruments.
• Enhance Market Access: Ensure that hybrid instruments remain marketable and tax-deductible in the UK.

Conclusion

Barclays emphasizes the importance of a principles-based, flexible regulatory approach to hybrid capital instruments, while ensuring transparency and market certainty. They highlight the potential negative impacts of overly restrictive rules and stress the need for clarity and consistency across European jurisdictions.