The New Capital Ratios

noodler

What exactly is the difference between the 8% and 7% rates?

7% must be held in equity but what does the other 1% consist of?

Économiste Monétaire

http://www.boards.ie/vbulletin/showthread.php?t=2055870090

Retained earnings. Are you talking about core tier 1?

noodler

I am.

I read that statment yesterday and undertsnad it to mean that 7 of the 8% must be in equity.

My vague understanding is that the other 1% is riskier as it is stock/bonds or whatever that can be redeemed at short notice. Just wondering if anyone could shed any light on that.


However, I guess you have answered my question, it is simply the cash (profits) which the institution makes that is pumped back into the compnay the following year. (Although is it likely any of the banks will make a yearly profit in the near future?).

EDIT: Oh its just income - not profit.

Économiste Monétaire

noodler wrote: »

I am.

I read that statment yesterday and undertsnad it to mean that 7 of the 8% must be in equity.

My vague understanding is that the other 1% is riskier as it is stock/bonds or whatever that can be redeemed at short notice. Just wondering if anyone could shed any light on that.


However, I guess you have answered my question, it is simply the cash (profits) which the institution makes that is pumped back into the compnay the following year. (Although is it likely any of the banks will make a yearly profit in the near future?).

EDIT: Oh its just income - not profit.

Net income, i.e. profit. Whatever profit the firm makes that it doesn't return to shareholders as dividends.

EM, being an economics demi-god, can you clear something up for me?

The 7%, is that of actual current market value or the nominal?
I ask as with AIB share prices tending towards zero, that 7% requirement (in real terms) would lower if the current market value is used.

Économiste Monétaire

Deleted User wrote: »

EM, being an economics demi-god, can you clear something up for me?

The 7%, is that of actual current market value or the nominal?
I ask as with AIB share prices tending towards zero, that 7% requirement (in real terms) would lower if the current market value is used.

The 7% is equity capital as a percentage of the total assets. Basically, assets - liabilities = equity capital. The current market value of the stock doesn't effect this number.

Actually that wasn't very clear . Imagine you start a bank, and you issue common stock in return for $10 million, the share price is $1. If the share price doubles, you don't double the $10 million in equity capital just because the current stock price doubled.

I thought share capital formed a large chunk of assets?
Though I haven't done balance sheet accounting in years so I could be way off!

Économiste Monétaire

Deleted User wrote: »

I thought share capital formed a large chunk of assets?

Nope, look at page 47/81 on this:

http://www.bankofireland.com/includes/investor/pdfs/interim_statement_041109.pdf

Total assets = 194,116

Total liabilities = 187,203

Total equity = 194,116 - 187,203 = 6,913

Cool - makes more sense now!

Économiste Monétaire

Deleted User wrote: »

Cool - makes more sense now!

It's a common mistake, one I made quite a bit too! That 7% has to be in common stock (those things traded on the stock market), so BOI will need something around €7-9bn in common stock equity capital. This is why banks can keep issuing stock to the government at multiples of what their current market value is (price of stock times number of shares in issue).

noodler

While we are on these subjects..

BOI, it is widely reported, plans to raise €1bn of its capital need by converting some of the preference shares the gov bought back in Feb (with the €3,5bn recapitalisation).

So are we to understand that the €3.5bn injected in Feb wasn't used and it simply an option to use now (some or all of it)?

I guess the crux of my question centres around the initial reaction I had when I read it - "is that €1bn on top of the €3.5bn?". I mean how does the gov already have a 15.4% stake in BOI if the bank didn't already take and use that 3.5bn?

Hope that makes a degree of sense.

Économiste Monétaire

noodler wrote: »

While we are on these subjects..

BOI, it is widely reported, plans to raise €1bn of its capital need by converting some of the preference shares the gov bought back in Feb (with the €3,5bn recapitalisation).

So are we to understand that the €3.5bn injected in Feb wasn't used and it simply an option to use now (some or all of it)?

I guess the crux of my question centres around the initial reaction I had when I read it - "is that €1bn on top of the €3.5bn?". I mean how does the gov already have a 15.4% stake in BOI if the bank didn't already take and use that 3.5bn?

Hope that makes a degree of sense.

BOI couldn't pay the 8% coupon on the government's preference share holding, so they issued common stock to the government instead, hence the 15% ownership. Converting the preference shares to common stock raises the common stock number and fulfils the new regulatory requirements. The preference shares were 'used', they just don't count as common stock.

noodler

Économiste Monétaire wrote: »

BOI couldn't pay the 8% coupon on the government's preference share holding, so they issued common stock to the government instead, hence the 15% ownership. Converting the preference shares to common stock raises the common stock number and fulfils the new regulatory requirements. The preference shares were 'used', they just don't count as common stock.

Okay so the €3.5bn as common stock were only equivalent to 15.4% in ownership.

Once converted share rises dramatically? Thanks.

I assume it is the exact same situation in AIB? Does anybody know the Government's current stake in AIB is in lieu of the €3.5bn? (before it is converted)

Économiste Monétaire

noodler wrote: »

Okay so the €3.5bn as common stock were only equivalent to 15.4% in ownership.

Once converted share rises dramatically? Thanks.

I assume it is the exact same situation in AIB? Does anybody know the Government's current stake in AIB is in lieu of the €3.5bn? (before it is converted)

No, 8% of €3.5bn is 15% ownership. Today, BKIR has a market cap of €1.8 to €1.9bn, so €280 million was due in coupon payments, but they couldn't pay it so they issued stock instead. That €280 million (3.5*(0.08) = 280 million) in terms of their stock gave the government a holding of 15%. If they converted their preference holding of €3.5bn, the current stock in issue would be massively diluted.

Économiste Monétaire

I may have confused you with what I said above. So, hopefully this is a clear summary

Equity tier 1: Assets - Liabilities = Common Stock + retained earnings.

Core tier 1: Equity tier 1 + non-cumulative preference shares (what the government owns in the banks).

Tier 1 = Core tier 1 + 'hybrid debt'.

The regulator announced that Equity capital must be 7% of total assets (technically, risk-weighted assets (RWA)) and Core tier 1 must by 8% of RWA. Hybrid debt is a mixture of debt and equity, it basically gives the benefit of a tax shield to a bank (tax break on debt payments) and the regulator counts this as tier 1 capital.

noodler

Thanks, it was quite a good explanation actually.

So does the government currently own an 8% share of AIB as well or is it larger? i.e. would that conversion of the €3.5bn give the Gov the touted 70% on its own or is it on top of existing shares owned in the bank?

Économiste Monétaire

noodler wrote: »

Thanks, it was quite a good explanation actually.

So does the government currently own an 8% share of AIB as well or is it larger? i.e. would that conversion of the €3.5bn give the Gov the touted 70% on its own or is it on top of existing shares owned in the bank?

15% ownership of BOI, not 8% . 8% was the coupon rate (interest rate) on the €3.5bn. This meant interest payments of €260 million (8% of €3.5bn). Instead of paying 260 million in cash, they gave shares in the bank to the value of 260 million, which gave the government a 15.7% ownership. I think AIB's coupon payment is due in May, and I'm not sure how much that will mean in government ownership if shares are issued in lieu of cash payment.

noodler

Oh ok. I thought the gove already had ordinary shares in AIB to some tune.

Thanks.

Économiste Monétaire

noodler wrote: »

Oh ok. I thought the gove already had ordinary shares in AIB to some tune.

Thanks.

Nope. Well, not yet . You probably read about a 25% indirect stake in the bank from the €3.5bn in preference shares, which gave the government certain privileges like appointing board members of the bank. Common stock is an 'ownership' claim on the bank, with voting rights etc., preference shares don't have this.

noodler

While we are on this

A level of 8 per cent of core tier 1 capital to be attained by the end of this year is to be applied. This level of capital must be met after taking account of all future losses, from both NAMA and non-NAMA portfolios. This capital will be principally in the form of equity – a 7 per cent equity requirement. Equity is the highest quality form of capital, and the emerging international standard. In addition, further amounts, specific to each institution, are to be added on in the calculation of future loan losses. The new requirements also mean that banks cannot go below a level of 4% core tier 1 capital in a severely stressed scenario.

So the requirement is now 8% coer tier 1 capital. Does anybody know what the general requirement was prior to the Regulator's announcement?

Économiste Monétaire

I thought you might be interested in this, noodler.

Discussions on our restructuring plan with the European Commission (EC) are ongoing and are being conducted in conjunction with the Department of Finance. At the request of the EC, AIB has agreed not to make discretionary coupon or dividend payments on certain of its securities. As a result, the annual dividend on the NPRFC's €3.5bn preference shares, amounting to €280m, due today 13th May, will not be paid in cash. Under AIB's articles of association, it is required to issue ordinary shares to the NPRFC equal in value to the amount of the dividend that would otherwise have been payable. As a consequence of this, AIB will issue 198,089,847 ordinary shares to the NPRFC by way of bonus issue. This number of shares is equal to the aggregate cash amount of the annual dividend of €280m on the NPRFC's holding of preference shares, divided by the average price per share in the 30 trading days prior to today's date. Application will be made in due course for the listing of these new shares. This issue of shares increases the ordinary shares of AIB in issue to 1,080,845,303, of which the 198,089,847 shares to be issued to the NPRFC represents 18.33%, bringing the NPRFC total ownership of AIB ordinary shares to 18.61% (excluding any shares which the NPRFC would be allotted if it were to exercise its warrants over ordinary shares granted to it when it subscribed for the preference shares in 2009).

http://www.ise.ie/app/announcementDetails.asp?ID=10490402

Via Karl Whelan on the IE blog.

noodler wrote: »

So the requirement is now 8% coer tier 1 capital. Does anybody know what the general requirement was prior to the Regulator's announcement?

4% tier 1 ratio and 8% tier 1 + tier 2, if I recall correctly.

noodler

Saw that, thanks.

This bit particularly worrying:

The Minister explained:

“The €280 million in ordinary shares issued to the Fund will count towards the additional €7.4 billion equity capital requirement determined by the Financial Regulator so that AIB will meet the new base case capital standards.”


Karl Whelan: "I’m not sure I understand this. The state is not putting any extra funds in, just receiving shares that dilute the existing ownership. Can the issuance of these pieces of paper in exchange for no money really raise regulatory capital? If this trick works, why can’t the bank’s ownership just issue a few million more shares to themselves for free? Then reaching the €7.4 billion target will be no bother."

Me neither Karl - me neither.

noodler

It appears the Government (or NPRF) already held a 0.3% stake in AIB. This I did not know.

Anyone know why?

Flamed Diving

Well, I'd imagine that the NPRF simply didn't keep their money locked in a vault.

noodler

Flamed Diving wrote: »

Well, I'd imagine that the NPRF simply didn't keep their money locked in a vault.

Good point.

I am just a little surprised I hadn't seen it written in the media over the course of the last few months.

I wonder if there are many other non-recapitalisation investments by the NRPF in any of the other 4 Nama banks?

You'll have to forgive me FD, I just find this stuff particularly interesting.

Flamed Diving

No bother, I wondered myself for a while when you mentioned it.

Try this:

http://www.nprf.ie/Publications/AnnualReport2008.pdf

use the search feature, perhaps.

noodler

Cheers,

Took me a few minutes to differentiate the €3.5bn from the other investments.

From what I can see there is a negligable amount in Anglo of around 240K and 1.5m in BOI.
Although they are/were market values.

A good argument against burning the bondholders then? I mean taking into account the foreign Pension funds invested in Anglo for example.

Scarab80

noodler wrote: »

Saw that, thanks.

This bit particularly worrying:

The Minister explained:

“The €280 million in ordinary shares issued to the Fund will count towards the additional €7.4 billion equity capital requirement determined by the Financial Regulator so that AIB will meet the new base case capital standards.”


Karl Whelan: "I’m not sure I understand this. The state is not putting any extra funds in, just receiving shares that dilute the existing ownership. Can the issuance of these pieces of paper in exchange for no money really raise regulatory capital? If this trick works, why can’t the bank’s ownership just issue a few million more shares to themselves for free? Then reaching the €7.4 billion target will be no bother."

Me neither Karl - me neither.

It won't necessarily add to the equity capital but it won't reduce it. If the coupon had been paid in cash equity capital would have been reduced through the decrease in retained earnings. This decrease in retained earnings is now offset by the payment being reinvested into the common stock of the company.