Regulatory Alerts2022-05-17
Capital review - The role of preference shares in the capital regime
The Financial Stability Office recommends classifying both redeemable and non-redeemable preference shares as Tier 2 capital rather than Tier 1 following feedback that banks lack investor appetite for non-redeemable instruments. This decision reflects the analysis that preference shares are unlikely to absorb losses on a going concern basis and that their redeemable nature introduces instability risks unsuitable for higher-quality capital tiers. The memorandum also notes that while this approach may diverge from Basel III standards regarding contingent triggers, it aligns with the practical issuance patterns of New Zealand bank subsidiaries.
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