Novel recapitalisation the answer for Lloyds

In November, Lloyds Banking Group ushered in a new era for bank capital when it exchanged a raft of tier one and upper tier two hybrid capital securities for a new instrument, called enhanced capital notes by Lloyds but known to the market as contingent capital. Contingent capital is now seen by regulators as a vital tool for ensuring that capital helps keep banks as going concerns in a crisis, while banks also hope the instrument will be an efficient form of capital as restrictions on the use of hybrid instruments increase. The £7bn exchange was part of a record-breaking capital raising, including a £13.5bn rights issue, which allowed Lloyds to pass the Financial Services Authority’s stress tests, free itself from the government’s expensive and operationally burdensome Asset Protection Scheme and hopefully to put the financial crisis behind it once and for all. In an interview with EuroWeek, Thomas Murphy, head of the structured transactions group at Lloyds Banking Group, explains how the idea for contingent capital came into being and the hurdles that had to be overcome in its implementation.