CP29/15: boring name, stupid idea
It will have been easy to overlook CP29/15, a consultation paper from the UK's Prudential Regulatory Authority published in August. After all, it hardly sounds like a summer blockbuster.
And with the mountains of financial regulation that has come bulging from the depths in the form of thousands of pages of lawspeak in the last months, even the most astute financial regulations specialist may have missed it.
But, if it comes into effect, it could kill UK financial institutions' ability to flexibly issue the capital required by regulators.
The market for subordinated debt capital is a volatile one, and UK banks and insurance companies still have billions of pounds of it to to raise in a limited timeframe.
So why the PRA has proposed, among other things, to make firms regulated under the Capital Requirements Regulation get approval for changes to any of the terms of even pre-approved capital issuance programmes, is unclear.
Firms would have to give the PRA one month's notice to amend any capital issuance terms from a pre-approved shelf, as well as one month's notice for every common equity tier one deal.
Under the proposal even ordinary shares with voting rights, with no new features, would be subject to a one month approval process.
Anyone in the capital markets knows that terms can change at the last moment, depending on what investors want at any given time.
So adding another layer to the process, and one with a significant amount of lag time, seriously threatens financial firms' ability to carefully and strategically build capital. If it is coming from a fear that capital issuance may somehow not really be capital, then surely existing stringent pre-approval programmes already ensure that deals meet the appropriate standards.
Insurance capital issuers say their pre-approval programmes limit changes to little more than coupon and maturity, for example.
And if the proposal comes from a desire to protect investors, then it is redundant: the market for debt capital is completely institutional.
Only the equities market has a significant retail investor base. So if that is the worry, maybe we should just make it illegal to sell retail investors stocks. It would actually make more sense.