Upper tier two hybrids could have scarcity value, says RBC

RBC Capital Markets says that upper tier two securities could offer good value relative to other bank hybrid capital securities. In a research comment published on Friday, the bank says that the latest Basel Committee consultation document on bank capital could lead issuers to call their upper tier two bonds and replace them with other tier two securities. The committee has called for tier two capital to be simplified, with de minimus requirements for tier two instruments that are more akin to current lower tier two requirements.

The committee has also proposed dropping a current restriction that tier two cannot exceed tier one capital. If regulators require banks to increase their level of tier two securities, adds the report, this will probably lead to a big increase in issuance of securities that resemble current lower tier two hybrids. This will increase the scarcity value of outstanding upper tier two bonds.