Preparing the Way

Mar 1, 2012

Banco do Brasil has broken new ground with a Basel III-compliant hybrid perp. Did it act too soon, or will this instrument be a model for others to follow?

by Mariana Santibáñez

When Banco do Brasil issued its hybrid perpetual in January, it became the first Latin American financial institution to test drive an instrument that may act as a model for others seeking Tier 1 capital ahead of the implementation of Basel III rules.

By issuing a deeply subordinated instrument that adjusts with changes in the regulatory landscape, Brazil’s largest bank was certainly forging new ground. But it was also taking risks with what arguably was a premature step in tapping the loss absorbing Tier I capital that policymakers hope will form part of a stronger global regulatory system going forward.

How the Brazilian central bank will adapt local regulations under the Basel III framework is still a big unknown, which is precisely why Banco do Brazil’s flexible structure makes sense. It is true that Brazilian banks will likely need to adjust their capital base to the...

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