Hybrid capital is not a new concept for most US and European banks but the role it is playing and the structures employed have undergone considerable evolution since the first wave appeared in the US in the mid-to-late 1990s. Driven by a rapidly changing banking landscape, including the impending provisions of the Basel II Accord and IAS accounting, hybrid capital has now entered a new phase.
At its outset, hybrid capital was something of a revolutionary concept. The appeal of a product that enabled banks to raise non-dilutive capital with a tax-deductible servicing cost is clear. By satisfying regulatory capital requirements in a way that enhanced return on equity and avoided the potentially thorny task of approaching existing shareholders with a rights issue, it is not surprising the product found instant support.
