"Understanding” Hybrids

Posted by Mike H on 22 November 2016 | Comments

This blog Title is a teaser really.

http://australiancentre.com.au/wp-content/uploads/2016/09/2016-03-FPB-Bail-in-Securities-Is-the-Game-Worth-the-Candle.pdf

 

This article from Professor Kevin Davis (Monash University) explains why Hybrid risks are so difficult to understand. Trouble is, it is heavy reading in its own right

Introduction

“The complex design of these securities makes it extremely difficult to assess the risks involved and the appropriate compensation for investors bearing such risks. And will they ultimately work to ensure orderly resolution of troubled financial institutions as hoped for? In this FPB, Professor Kevin Davis, ACFS Research Director, argues that the regulatory inducement for banks to issue such complex securities warrants reconsideration.”

And a couple of Quotes

There are typically only a handful of investors who subscribe to more than about $4 million each and might thus be seen as “institutional investors”. 

“In the UK, the Financial Conduct Authority has had sufficient concerns about the opacity and complexity of risks involved with such securities that in 2014 it temporarily banned issuance to retail investors and in mid-2015 imposed very strict limitations on marketing and sales of such securities.”

Adding insult to injury Professor Davis suspects will not work particularly well for banks in a crisis either!

 

Regards

Mike H

 

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