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European Banks’ Regulation: A New Opportunity in Credit? 

July 11, 2014
Jorgen Kjaersgaard, AllianceBernstein, ValueWalk

European banks are issuing new subordinated bonds that can be written off in a crisis. For investors who are willing to take the risk, our analysis suggests these bonds may provide a way to beat the low returns in today’s corporate bond market.

These subordinated bonds were drawn up as part of new Basel III regulations. They’re a response to the 2008 financial crisis, which saw taxpayers mainly foot the bill for bank bailouts while bondholders were left largely untouched. These new bonds are designed to soak up losses by converting to equity, or being written off entirely, if a bank’s capital ratio were to fall below a predetermined level.

In other words, bondholders would assume a healthy share of the losses, unlike the last time around. In theory, this development should help banks keep their operations going in a crisis while safeguarding the stability of the financial system.

Read More: ValueWalk

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