What the hybrid market has been waiting for is finally about to happen. All things being well, Rabobank should price the first hybrid tier one with permanent loss-absorption features this week. Hopes are high that investors will warm to the deal.
Rabobank, in typical fashion, has decided to grab the bull by the horns and show the way. But while the Dutch bank is an unusually strong name, it needn’t be the only one to test investor appetite for this type of instrument. It is about time that other issuers took the plunge.
Yes, there are important details still to be hammered out: the exact details of the European implementation of the Basel framework are yet to come. But there is enough definition out there for a real market to be created.
Issuers and their advisers appear to have been spending a lot of time reading between the lines and trying to interpret what regulators want and don’t want. But regulators must not be alone in setting the agenda and can’t operate in a vacuum. The more issuance there is, the more that regulators will be able to respond to it.
Concepts like non-viability might never be fully defined to everyone's satisfaction. But hard definitions are not the answer to all problems — and are rarely necessary for sufficient understanding. As Justice Potter Steward said in his famous assessment on the subject of pornography, "I know it when I see it".
The same might well apply to non-viability. If a bank is obviously well capitalised, strict definitions won't much matter.
The future of hybrid capital means loss-absorption: there is no doubt about that. But only by showing some initiative can borrowers hope to guide the hand of the regulators.