HM Treasury written question – answered on 7th April 2016.
To ask Her Majesty’s Government whether they will review the contribution of contingent convertible bonds to financial stability and, in particular, the risk of adverse feedback loops and the contribution thereto of the absence of standardised terms.
In December 2015, the Bank of England set out its medium-term capital framework for UK banks and building societies. The Bank’s analysis suggested that the optimal risk-based going-concern capital requirement for the system as a whole is between 10% and 14% of risk weighted assets.
The majority of this capital is made up of the highest quality, common equity tier 1 (CET1) capital. However, a small part (up to 1.5 percentage points) can be made up of additional tier 1 (AT1) capital, such as contingent convertible bonds.
The Financial Policy Committee confirmed that only ‘high-trigger’ AT1 instruments would count towards a bank’s AT1 capital in respect of non-risk-based leverage ratio requirements.
This capital framework ensures that the UK’s banks and building societies are able to absorb losses and thereby reduce the risks to the stability of the UK financial system.
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