Stepping up to the plate

14 October 2010 By George Hay Follow @gfhay

Standard Chartered s $5.2 bln rights issue will help it exceed new regulatory standards. But Barclays is actively exploring using contingent capital to fill the gap. If it succeeds, other UK banks may be able to meet the targets without slashing dividends or tapping shareholders.

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Barclays is working on a new capital instrument that would allow it to meet regulators' capital demands without issuing equity, according to a person familiar with the situation.

The UK bank is examining a debt instrument that has been dubbed a "step down, step up" bond. If the bank's core Tier 1 ratio fell below 7 percent, holders would suffer a haircut of as much as 30 percent.

Barclays' incoming chief executive, Bob Diamond, recently told a Bank of America Merrill Lynch conference that the bank did not need to issue new equity capital as things stood.

The bond is one of several options being investigated by UK banks to raise capital if the Financial Services Authority demands that they hold additional buffers to protect themselves from future crises. Standard Chartered, the emerging markets lender, on Oct. 13 launched a rights issue to raise $5.2 billion after expenses which will strengthen its capital reserves.

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