SINGAPORE (May 25): Banks have found themselves back in the spotlight as the coronavirus pandemic unfolds. While the ghosts of the aftermath of the global financial crisis (GFC) continue to lurk in investors’ and the public’s memories, the reality is that banks will be a key element of the economic solution to the present predicament. Most important of all, perhaps, is that regulators have been quick to recognise this.

One of the most emphatic statements to this effect from a senior central banker so far came on May 13, in a lengthy published interview with Andrea Enria, chair of the supervisory board of the European Central Bank.

Investors in all forms of bank capital would be wise to take note of the detailed implications of Enria’s comments. From the perspective of those of us who invest in contingent capital bonds or “cocos”, as they are often called, the most reassuring remark in the interview was: “There were some concerns that we might also consider other restrictions, including on additional Tier 1 instruments. Let me be clear: we are not planning to put any constraints on payments of such instruments. Restrictions on payments  of these instruments will be automatically triggered only if banks hit certain capital levels set out in the legislation — but as of today, banks still have significant buffers to use before reaching that point.”

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