CFM37820 - Loan relationships: hybrid capital instruments: glossary
Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
Additional Tier 1
Additional Tier 1 capital, in line with Basel III, must be perpetual, may permit certain call options for the issuer, and must carry fully discretionary and non-cumulative dividends/coupons.
B
Bail-in
A bail-in allows the resolution authority to make sure that shareholders and creditors of a firm bear the costs of failure, without recourse to public funds.
Basel III
International banking regulations developed by the Bank for International Settlements in order to promote stability in the international financial market. For more details see https://www.bis.org/bcbs/basel3.htm
C
CoCo
These are Contingent Convertible instruments, an industry name for bond-type instruments which convert into ordinary share capital on the occurrence of certain trigger events.
E
External MREL
External MREL instruments are issued from a “resolution entity” in a group. External MREL helps to ensure that when a bank fails the firm’s own financial resources can be used to absorb losses and recapitalise the business. This allows the bank to continue to provide critical functions without relying on public funds.
F
Financial Stability Board
Promotes financial stability by coordinating national financial authorities (regulators and supervisors) and international standard-setting bodies, for example the Bank for International Settlements.
G
Global systemically important bank (G-SIB)
A bank whose systemic risk profile is deemed to be of such importance that the bank’s failure would trigger a wider financial crisis and threaten the global economy.
H
Hybrid capital
This is a general term referring to capital of a company that has both debt and equity (or other non-debt) characteristics.
Hybrid Capital Instrument (“HCI”)
This is the statutory term for loan relationships that meet certain conditions - see CFM37840.
I
Internal MREL
Internal MREL instruments are issued from legal entities in a group that are not the ‘resolution entity’. They are issued directly or indirectly to the ‘resolution entity’ and are designed to be written down or converted to equity to recapitalise the entity that issues them without the need to use resolution powers on that entity. This means the entity can continue to provide critical financial services. Internal MREL instruments have the effect of passing losses within the group so that they can then be absorbed by the shareholders and creditors of the resolution entity through use of the resolution tools. The Bank of England directs the amount of internal MREL to be issued by UK subsidiaries of both UK and overseas banking groups.
M
MREL
The minimum requirement for own funds and eligible liabilities (“MREL”) is a requirement for banks and building societies to maintain a minimum amount of loss absorbing resources. Global systemically important banks (G-SIBs) and a number of other UK banks and building societies are required to hold sufficient own funds and eligible liabilities to ensure that, should they fail, the resolution authority (in the UK, the Bank of England) can use the bank’s own financial resources to absorb losses and recapitalise the business so it can continue to provide critical functions without the need to rely upon public funds. Resources counting towards MREL can take the form of regulatory capital (own funds) and certain types of debt liabilities (eligible liabilities) that the Bank of England would expect to write down and/or convert to equity if a firm fails.
P
Perpetual debt - no right to repayment
True perpetual instruments where the holder has no right to repayment in any circumstances are not loan relationships as they do not give rise to a money debt.
Perpetual debt - contingent
Perpetual instruments where a right to repayment arises as a result of a contractual clause providing for the return of principal in the event of a liquidation are contingent perpetual debt. These are loan relationships.
PRA
The Prudential Regulation Authority is the vehicle through which the Bank of England supervises financial services firms.
R
Resolution authority
The body responsible for making sure that a bank that is failing does so in an orderly way. In the UK, the resolution authority is the Bank of England.
Resolution entity
A resolution entity is a company to which, in case of a bank failure, the resolution authority will apply its resolution powers in accordance with the resolution strategy for that bank.
The resolution strategy for a UK or overseas headquartered bank may depend on resolution powers being applied to more than one entity within the banking group. Each of these will be a resolution entity.
Restricted Tier 1
Restricted Tier 1 capital, in line with Solvency II, must be perpetual, may permit certain call options for the issuer, and must carry full discretionary and non-cumulative dividends/coupons.
S
Solvency II
A risk-based capital regime that sets out a single set of prudential and supervisory requirements for all but the smallest European insurance and reinsurance companies. For more details see https://www.bankofengland.co.uk/prudential-regulation/key-initiatives/solvency-ii
T
Tier 1 capital
Shareholder funds, certain types of reserves and hybrid capital instruments. This is going concern capital. See CFM14120.
Tier 2 capital
Subordinated debt. This is gone concern capital. See CFM14120.