Basel III Capital Proposals: Basel Committee Issues Proposal to Ensure Loss Absorbency of Regulatory Capital at the Point of Bank Non-Viability

Sullivan & Cromwell LLP - September 9, 2010

Further to its December 2009 consultative document entitled “Strengthening the resilience of the banking sector,” the Basel Committee on Banking Supervision issued a new consultative document on August 19, 2010 setting forth a proposal to address the lack of an “internationally consistent mechanism by which all capital instruments at all internationally active banks can be made to suffer a loss in the event that a failed or failing institution is rescued through a public sector capital injection.” The “Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability” would require all non-common Tier 1 and Tier 2 regulatory capital instruments issued by subject banking institutions to be written-off or converted into common shares of the banking institution or its holding company, as applicable, at the earlier of (i) a decision to provide public sector support without which the banking institution would become non-viable and (ii) a decision by a relevant authority that a write-off, without which the banking institution would become non-viable, is necessary.