How could it be in the interest of any bank regulators to have CoCos with unclear and haphazard conversion terms?

Sir, I refer to Thomas Hale’s, Martin Arnold’s and Laura Noonan’s discussion on the regulatory uncertainty that exists, “Coco trade seeks to emerge from dark period” February 24.

I am amazed. If I was a bank regulator and I had signaled that one way for banks to cover for the capital regulators required were the CoCo’s, I would want these to be as clear and transparent as possible. That not only to make sure banks could raise these funds in the most competitive terms, but also to be sure I covered my own share of responsibility in the disclosure process.

Something must have gone seriously wrong if there is still such huge regulatory uncertainty. I mean I could not for a second believe that any regulator would want to withhold such information on purpose.

In April 2014 I sent you a letter that asked “Can bank regulators keep silence on the conversion to equity probabilities of cocos?" 

In it I wrote: “Do regulators have any moral or formal duty to reveal to any interested buyers of cocos if they suspect the possibilities of these having to be converted into bank equity being very high? I say this because if so, and if they keep silent on it, that would make them sort of accomplices of bankers. Would it not?... Of course banks need capital, lots of it, but tricking investors into it, does not seem like the right way for getting it.”

In May 2014 I wrote you a letter asking “Is it ok for a regulator, like EBA, to withhold information from 'experienced investors'?"

In it I asked “What would be the legal responsibility of bank regulators, towards any coco-bond investors, if they withheld important information with respect to the possibilities of those bonds being converted into bank equity?”... and also:“Britain´s regulator, the Financial Conduct Authority, has said it plans to consult on new rules to ensure cocos are only marketed to experienced investors…Would that imply that a regulator can withhold important information from “experienced investors”? If so, just in case, for the record, I have no knowledge about investments whatsoever.

And then in August 2014 I wrote you a letter that alerted: “The investors had priced market risks of CoCos, not the risks of bankers´ or regulators´ whims.”

But then again regulators might also have decided it was better to go and fly a kite J

@PerKurowski ©

The investors had priced market risks of CoCos, not the risks of bankers´ or regulators´ whims.

Sir, I refer to Christopher Thompson´s “CoCo sell-off uncovers high yield bargains” August 15, and which title surprises a bit as I did not know FT provided specific investment recommendations.

But that said, whenever we read about “underlining investor willingness to shoulder more risk in their hunt for higher-yielding bank assets” you can be absolutely sure that all risks have not been disclosed by the seller of that asset… so what the investor is really willing to shoulder is a little bit more of uncertainty or looked at it from the other angle, or just willing to trust his advisor a little bit more.

What has happened to CoCos is clear. Investors had priced in the risk that deteriorating market conditions could force the conversion of CoCos into bank capital… what they had not priced was the fact that conversions could happen as a result of bankers´ and regulators´ whim playing around with the current capital requirements for banks. In fact, regulators had not thought of this, and also just recently woke up to that fact.

PS. In case you do not remember I hereby send you the link to what George Banks had to say about CoCos.

http://subprimeregulations.blogspot.com/2014/07/mr-george-banks-asked-about-cocos.html

Can bank regulators keep silence on the conversion to equity probabilities of cocos?

Sir, I have one question in reference to Alice Ross’ and Christopher Thompson’s “German banks line up to join coco party”, April 24.

Do regulators have any moral or formal duty to reveal to any interested buyers of cocos if they suspect the possibilities of these having to be converted into bank equity being very high? I say this because if so, and if they keep silent on it, that would make them sort of accomplices of bankers. Would it not?

Of course banks need capital, lots of it, but tricking investors into it, does not seem like the right way for getting it.

With respect to increasing bank capital we need banks and regulators to be partners, not enemies.

Sir I refer to Gina Chon and Camilla Hall’s “Fed looks beyond bank’s financial targets” March 27.

As a result of regulators falling for the risk-weights’ trick, banks are now, ate least when compared to pre-Basel Committee history, dramatically undercapitalized. It behooves everyone in the economy to see that capital increased substantially so that bank credit is not unduly blocked.

I have no idea of what the Fed saw in Citibank when performing its stress testing and that caused it to reject its capital plan for dividends and share buybacks, but I do know that if the word “punishment” describes it appropriately, the Fed is on the wrong track.

If the real economy is going to get out of this mess… and it is a mess… the Fed and the banks must be partners in finding lots of new bank capital in a credible way. And bank capital will not be raised sufficiently by mistreating the shareholders of banks… nor by fooling some investors into buying Coco bonds, suspecting the probabilities for these to be converted, are knowingly underrepresented.

In fact the Fed and other regulatory authorities must tread on the issue of Coco bonds with extreme care, less they also be liable for withholding information and misrepresentation. And for this I refer to “Flurry of Coco bonds sends yields tumbling” by Christopher Thompson.

If I buy a Coco today and become converted into a bank shareholder three years from now I guess I cannot complain... but what if that happens three weeks from now?

Are bank regulators being painted into a corner by the Cocos?

Sir, Patrick Jenkins refers to Barclays’ $3bn issue of contingent capital bonds “which simply wipe out investors if the bank’s core tier one capital ratio falls below the new 7 percent minimum specified by international rules”, “Coco’s flavor raises investor appetite for wipeout bond”, February 5. 

But the big wipe out could also happen because of changes in regulations, like for instance if regulators decided to require the banks to hold some more capital when lending to “infallible sovereigns”, in order to decrease the distortions in the market and the discrimination of “the risky”. What would happen in that case? Would the investors sue the regulators? Have the regulators now been painted into a corner by the Cocos?

Has someone really gone bonkers with Barclay’s contingent capital notes?

Sir, I refer to Mary Watkins’ “Barclays’ total loss bond poses test for ‘coco’ markets” November 23, as well as to Patrick Jenkins’ “Banks unnerved by BoE’s extreme focus on capital” November 20.

There is something I cannot figure out about these bonds, perhaps you can help me, or perhaps it is just one of those “blind spots” to which Gillian Tett refers to in “Investors must search for the next financial blind spot” November 23.

It states that under the terms of the deal, that the bonds will be automatically written down to zero if the bank's Common Equity Tier 1 ratio falls below 7% , and I assume that this is on a risk-weighted basis since I Barclay surely holds less than 7 percent in capital against all its assets.

If so, what happens if Barclays’ management decides, own its own, to move some assets with low risk-weights, “The Infallible”, which require holding little capital, into assets with a higher risk-weight, “The Risky”, and which therefore require holding more capital, and therefore cause the bank’s Common Equity Tier 1 ratio to fall below 7%?

Or, alternatively, what happens if the regulators decide to change the risk-weights and thereby Barclay's Common Equity Tier 1 ratio to fall below 7%? 

If it is as I do not want to believe it is then management (or regulators) can, without Barclays losing a cent on its assets, get all these bonds written off. Sounds crazy! And, if so, would management be able to collect a bonus on that very real profit?

PS. Will shareholders require management to adjust the bank portfolio in such a way that Barclay's Common Equity Tier 1 ratio falls below 7% and it does not have to repay the bondholders? 

PS. Will bondholders require management to adjust the bank portfolio in such a way that Barclay's Common Equity Tier 1 ratio stays over 7%, so that they will be repaid? 

PS. Have regulators now been de-facto impeded to change the risk-weights? 

PS. Who is going to sue who?